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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K/ A

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended January 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

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 No.)
|                                                                  
|305 Main Street, Redwood City, CA                                  |  | 94063                                   
|(Address of principal executive
    offices)                       |  | (Zip Code)                              

Registrants telephone number, including
area code:

(650) 298-4600


Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $0.0001 par
value

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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K.     o

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

The aggregate market value of the common stock
held by non-affiliates of the registrant as of July 31,
2002, the last business day of the registrants most
recently completed second fiscal quarter, was approximately
$16,676,505 (based on the last reported sale price of $2.50 on
July 31, 2002).

The number of shares outstanding of the
registrants common stock as of June 30, 2003 was
11,921,440.

DOCUMENTS INCORPORATED BY REFERENCE

NONE



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TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Legal Proceedings                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|Part II      
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|              | Item 6. Selected Consolidated Financial Data                                                 
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|              | Item 8. Financial Statements and Supplementary Data                                          
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                  
|              | Item 11. Executive Compensation                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13. Certain Relationships and Related Transactions                                      
|              | Item 14. Controls and Procedures                                                             
|PART IV      
|              | Item 15. Exhibits, Financial Statement Schedules and Reports on 8-K                          
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 23.01
|EXHIBIT 99.01
|EXHIBIT 99.02



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TABLE OF CONTENTS

|               |  |                                                                                           |    |      |    | 
|-------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                           |    | Page
|               |  |                                                                                           |    |     
|PART I        
|Item 1.        |  | Business                                                                                  |    |      | 2  | 
|Item 2.        |  | Properties                                                                                |    |      | 13 | 
|Item 3.        |  | Legal Proceedings                                                                         |    |      | 13 | 
|Item 4.        |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 13 | 
|PART II       
|Item 5.        |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |    |      | 14 | 
|Item 6.        |  | Selected Consolidated Financial Data                                                      |    |      | 15 | 
|Item 7.        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 16 | 
|Item 7A.       |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |      | 33 | 
|Item 8.        |  | Financial Statements and Supplementary Data                                               |    |      | 34 | 
|Item 9.        |  | Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure  |    |      | 63 | 
|PART III      
|Item 10.       |  | Directors and Executive Officers of the Registrant                                        |    |      | 63 | 
|Item 11.       |  | Executive Compensation                                                                    |    |      | 65 | 
|Item 12.       |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |      | 71 | 
|Item 13.       |  | Certain Relationships and Related Transactions                                            |    |      | 74 | 
|Item 14.       |  | Controls and Procedures                                                                   |    |      | 75 | 
|PART IV       
|Item 15.       |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |    |      | 75 | 
|Signatures     |  |                                                                                           | 78 |     
|Certifications |  |                                                                                           | 79 |     

FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. A word
such as expects, anticipates,
intends, believes or similar language
identifies forward-looking statements. These forward-looking
statements include, among other things, statements about the
trends we see in our business and the markets in which we
operate, the features, functionality and market acceptance of
our products and our expectations for our future operating
results and cash flows. Forward-looking statements involve risks
and uncertainties. Our actual results may differ materially from
those contemplated by the forward-looking statements. Factors
that might cause or contribute to these differences include, but
are not limited to, those discussed in the section entitled
Item 1: Business  Factors That May Affect
Future Results and in other document filed with the SEC
under similar caption. You are cautioned not to place undue
reliance on the forward-looking statements, which speak only as
of the date of this report. We undertake no obligation to
publicly revise or update any forward-looking statements to
reflect events or circumstances after the date of this report.

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PART I






|        |         
|------- | --------
|Item 1. | Business

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

We were incorporated in January 1998. We are
headquartered in Redwood City, California and conduct operations
worldwide directly and through our wholly-owned subsidiaries.
Unless otherwise specified, references to Niku,
we, our, us, or the Company
are references to Niku and its consolidated subsidiaries. We
operate in one industry segment: software.

Products

Our flagship product is Niku 6. Niku 6
manages individual projects, project and program portfolios, and
related resources, linking them in a single repository with the
views necessary to categorize and assess current and future
projects in the context of business imperatives. Niku 6
offers functionality for project and program management,
resource management, financial management (billing and
charge-backs), as well as portfolio analysis (categorization and
ranking of initiatives) and process improvement (methodologies
and templates for project portfolio assessment).

Niku 6 is composed of a base module as well
as specific functional modules. The base module, Niku Projects,
is required for all installations and includes project
management, collaboration, business intelligence, workflow and
integration functionality. Six optional modules, which may be
licensed individually or as an integrated suite, add advanced
functionality. The seven Niku 6 modules are described below.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Niku Project.Niku 6 Project helps
    organizations manage projects from origination to completion.
    The Niku 6 Project module provides complete functionality
    for planning, estimating, scheduling, time capture and analysis,
    collaboration, workflow and reporting, as well as bi-directional
    integration with Microsoft Project.                                                                                                                                                                                                                      
|
| |  | Resource Planner.Niku 6 Resource Planner
    offers capabilities to ensure that the right people are working
    on the right things at the right time. Included in the module
    are capacity planning and demand management, as well as
    functionality for resource requisition, resource allocation and
    resource evaluation. Using this functionality, customers can
    view and manage resource schedules and can reserve and allocate
    resources in real time while tracking employee backgrounds and
    levels of experience in different specialties.
|
| |  | Portfolio Manager.Niku 6 Portfolio Manager
    allows customers to manage groups of projects, to aggregate them
    into programs and to analyze project portfolios on a return on
    investment, benefits stream and balanced scorecard basis. The
    module also offers a customizable portfolio dashboard that
    provides visibility into the key metric tracking portfolio
    performance.                                                                                                                                                                      
|
| |  | Financial Manager.Niku 6 Financial Manager
    offers project-based financial planning capabilities. Included
    in the module are project budgeting, forecasting and analysis
    functionality, as well as full support for costing and billing,
    as well as interdepartmental and intercompany chargebacks
    allocations.                                                                                                                                                                                                                                       
|
| |  | Niku Workbench.Niku 6 Workbench is a desktop
    application for project scheduling and management that enables
    project managers to create work breakdown structures with tasks
    and milestones, set baselines, schedule project plans with
    dependencies, assign resources to tasks, and                                                                                                                                                                                                                                                                      

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | adjust the schedule as actual work is recorded.
    All Niku 6 Workbench activities are integrated with the
    other modules of Niku 6.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Niku
    Studio.Niku 6 Studio
    contains an authoring environment. Using Niku 6 Studio,
    customers can create custom pages, modify user interfaces and
    develop portlets tailored to their specific needs. Niku 6
    Studio also includes editing functionality for both menus and
    charts.                                                                                                                                                                                                                                                                          
|
| |  | Niku Author.Customers wishing to create or
    customize project-based methodologies may license the
    Niku 6 Author. This module contains delivery templates
    including forms, training documents and worksheets, task and
    role planning capabilities and best practice creation and
    modification tools. Niku offers an of-the-shelf Six Sigma
    methodology that includes tasks and forms supporting the DMAIC
    model. Six Sigma is a management methodology that seeks to
    improve an organizations profitability by decreasing its
    cost of quality.

In addition to Niku 6, we continue to offer
and support Niku Portfolio Manager, an established project
management product.

Technology and Architecture

The technology underlying Niku 6 is based
upon a web services architecture. This architecture supports
enterprise class scalability and security, as well as
integration with other systems. Key elements of Niku 6
technology include the following:

Three-Tier Architecture.Within Niku 6s data
tier, all of the tables and data are housed in a standard
relational database geared for high performance and scalability.
In the middle tier, an application server enables the java-based
application to be deployed across multiple application servers
to easily accommodate global deployments. The application can
also be externalized through the corporate firewall to allow
internet access to the application. The client tier is a web
browser that provides the interface between the user and the
application. The client tier also includes traditional Windows
clients for specialized functions such as complex project
scheduling that are more easily performed with client software.

Web Services Standards.Niku 6 is designed to support
leading web services standards. The software we use for the
server computers that deliver our applications is written in the
most robust version of the Java programming language, Java Two
Platform Enterprise Edition (J2EE). We also support web services
protocols such as extensible markup language (XML), extensible
stylesheet language (XSL) and simple object access protocol
(SOAP). As a result, data such as projects, human resource
profiles, and financials may be shared with both up-stream and
down-stream applications such as enterprise resource planning
and customer relation management systems, regardless of
architecture. Our support of open standards allows customers
with disparate computer systems and networks to utilize our
applications without the need to upgrade computer systems,
software or equipment.

Scalability.Niku 6 is designed to provide
horizontal scalability. The components which make up the product
can be placed on separate servers allowing customers maximum
flexibility in configuring hardware infrastructure for
supporting global implementations.

Security.Niku 6 offers substantial
data security. Niku 6 provides multilevel security,
security enabled organizational breakdown structures (OBS),
secure socket layer (SSL) support and lightweight directory
access protocol (LDAP) Integration.

Internationalization.All Niku 6 modules support
dynamic language and locale switching. This means that a user
can enter and view data in multiple languages and see it
displayed by a locales date, time and currency format.

Multi-Platform Support.Niku 6 accommodates our
customers various vendor relationships, information
technology budgets, and legacy experience. In particular, the
product has been designed to support the major platforms of Sun
Solaris, Windows 2000 and HP-UX along with database support for
both Oracle and Microsoft SQL Server.

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We have technology relationships with hardware
and database server vendors because our customers run our
product on various hardware and database servers. We incorporate
third party technologies into our products for functionalities
such as reporting engines, application servers, synchronization
engines and search engines. Royalties are calculated based on
(1) a percentage of license revenue, (2) the number of
seats sold, or (3) the number of servers on which our
customers have installed our software. Each of these vendors
provides functionalities available from multiple other vendors
and that we could develop ourselves. As a result, we do not
believe that we are substantially dependent on any of these
vendors.

Customers

Our customers include the following companies,
all of whom accounted for at least $150,000 of license revenue
in the year ended January 31, 2003:

|                                                                                                                                                              |  |                                                                                                                                                                      |  |                                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------
|3M Company
    Affiliated Computer Services (ACS)
    Allmerica
    Banco Popular
    Bank of America
    Barclaycard
    Best Buy
    Blue Cross Blue Shield |  | BT (British Telecom)
    Cendant
    DST
    Dynegy
    Eastman Chemical
    Emerson Process
    (Fisher Controls International)
    Equant
    Nationwide Insurance |  | Openwave Systems
    Overture
    Quest Diagnostics
    Sony Pictures
    Standard Chartered Bank
    Target
    Toyota

No customer accounted for more than 10% of our
total revenue in fiscal 2003, 2002 and 2001. See Note 15 to our
consolidated financial statements for disclosure regarding our
international revenue.

Research and Development

Research and development expenses were
$11.9 million, $34.9 million and $37.0 million in
fiscal 2003, 2002 and 2001, respectively. In prior years, our
research and development efforts focused on a large number of
products. In fiscal 2003, these efforts were concentrated on
Niku 6 and to a lesser extent Niku Portfolio Manager. In
April 2003, we are releasing Niku 6.1, the most recent
version of our Niku 6 product.

Sales and Marketing

Sales and marketing expenses were
$23.1 million, $70.9 million and $68.0 million in
fiscal 2003, 2002 and 2001, respectively. We conduct our sales
activities principally through our direct sales force, which
includes account executives and pre-sale engineers who are
organized in regions in the United States and Europe. In
addition, we have a telesales organization based in Redwood
City, California. In certain international markets, we offer our
products indirectly through channel partners.

Services and Support

Our professional services consultants assist in
the implementation and use of our software products. Our
consultants provide assistance in all aspects of the
implementation process, including requirements assessment,
implementation planning and design, content design and creation,
data migration, systems integration, deployment and training. We
offer multiple customer support options, with customer support
professionals on call daily from 8 a.m. to 5 p.m.
local time, Monday through Friday in the United States and in
Europe. We also offer a technical account manager who can
oversees all support issues and drive resolution for the
customer.

Competition

The market for our products and services, the
enterprise portfolio management market, 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

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competing software vendors and products that have
been developed by potential customers in-house development
and IT organizations. Competing software vendors include:




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

We do not believe that any one company has a
dominant position in the enterprise portfolio management market,
although we believe that we are a market leader. However, we may
not be able to maintain our competitive position against current
or potential competitors, especially those with significantly
greater financial, marketing, service, support, technical and
other resources mentioned above. 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 our
market continues to develop. We may not be able to compete
successfully against current and future competitors. The
principal basis of competition in our market include product
functionality, pricing, financial strength of the vendor and
customer references. We compete primarily based on the various
functionalities of our products described under the section
entitled Products.

Intellectual Property

We regard substantial elements of our products as
proprietary, and protect them by relying primarily on copyright,
trade secret, patent, trademark and service mark laws and
restrictions, as well as confidentiality procedures and
contractual provisions.

We license rather than sell all our software
products and require our customers to enter into license
agreements that impose restrictions on their ability to utilize
the software or transfer the software to other users.
Additionally, we seek to avoid disclosure of our trade secrets
through a number of means, including, but not limited to,
requiring those persons with access to our proprietary
information to execute confidentiality agreements with us and
restricting access to our source code.

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.

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.

Employees

As of January 31, 2003, we had a total of
203 employees, including 68 employees in sales and marketing, 61
employees in services and support, 46 employees in research and
development and 28 employees in general and administrative
functions. Of these, 147 employees were located in the United
States and 56 employees were located outside the United States.
None of our employees is represented by a collective bargaining
agreement, nor have we experienced any work stoppage. We
consider our relations with our employees to be good.

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Available Information

We are subject to the informational requirements
of the Securities Exchange Act of 1934. We therefore file
periodic reports, proxy statements and other information with
the Securities and Exchange Commission. Such reports may be
obtained by visiting the Public Reference Room of the SEC at
450 Fifth Street, NW, Washington, D.C. 20549, or by calling
the SEC at 1-800-SEC-0330. In addition, the SEC maintains an
internet site (http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding
issuers that file electronically.

Our internet address is www.niku.com. We make
available, free of charge, through our internet website copies
of our annual report on Form 10-K and quarterly reports on
Form 10-Q and amendments to those reports, if any, filed or
furnished pursuant to Section 13 (a)or 15 (d) of
the Exchange Act, as soon as reasonably practicable after filing
such material electronically or otherwise furnishing it to the
SEC.

FACTORS THAT MAY AFFECT FUTURE
RESULTS

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

We have a limited operating history, a history
of losses and an accumulated deficit of $499.7 million.
Continued losses could deplete our cash resources and may cause
us to be unable to implement our business plan.

We were incorporated in January 1998 and began
licensing our software in December 1998. Until recently, we
experienced GAAP losses for almost every quarter of our history,
and have not yet been profitable on an annual basis. We had net
loss of $37.8 million in the year ended January 31,
2003. We had an accumulated deficit of $499.7 million as of
January 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 operating history is limited and
our business and the market in which we operate is changing
rapidly and we have limited visibility into our future revenue,
especially license revenue, because revenue historically has
been heavily concentrated in the third month of each quarter. If
we fail to meet expectations, our stock price will likely
decline.

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

Other factors that could affect our quarterly
operating results include:



| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in the pricing of our products and
    services or those of our competitors or the announcement or
    introduction of new products or services by us or our
    competitors;
|
| |  | the renewal or non-renewal of annual maintenance
    contracts to our customers;                                                                                                     

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| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | the demand for professional services to implement
    our products and our efficiency in rendering such services;
|
| |  | variability in the mix of our product and
    services revenue in any quarter;                                   
|
| |  | the amount and timing of operating expenses and
    capital expenditures relating to the business; and           
|
| |  | changes in restructuring accruals based on
    changes in sublease estimates for lease facilities we vacated.    

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

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

Our total revenue was $48.4 million in
fiscal 2003, compared to $67.5 million in fiscal 2002. Our
license revenue was $18.7 million in fiscal 2003, compared
to $32.0 million in fiscal 2002. While we cannot
specifically correlate the impact of macro-economic conditions
on our sales activities, we believe that the economic conditions
and international conflicts have contributed to a decrease in
demand in our market, and in particular, have increased the
average length of our sales cycles and decreased the size of our
license transactions. To the extent that the current economic
climate remains depressed or worsens, or international conflicts
develop or worsen, the demand for our products and services, and
therefore future revenue, may be further reduced. We may not be
able to respond to future revenue reductions in a sufficiently
timely manner to avoid increases in 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.

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Because the application of our product is
complex, our products 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 other
liabilities.

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

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

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

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

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

Rapidly changing technology and standards may
impede market acceptance of our products and services. Our
business relies primarily on our licensing the rights to 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.

8



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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 fiscal 2003, international revenue represented
36.5% of our total revenue, compared to 47.5% in fiscal 2002.
International license revenue represented 26.6% of our total
license revenue in fiscal 2003, compared to 47.6% in fiscal
2002. Even with these reductions in the percentage of
international revenue and international license revenue,
international activities remain a significant part of our
business.

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



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

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

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



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

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

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

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

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

As of January 31, 2003, we had cash and cash
equivalents of $16.7 million, including bank borrowings
under a term loan of $4.75 million as of January 31,
2003, of which $250,000 plus interest was repaid in March 2003
and $250,000 plus interest was repaid in June 2003. In addition,
in the first quarter of fiscal 2004, we completed a private
placement with net proceeds to us of approximately
$10.2 million. We believe that cash from operations and
existing cash will be sufficient to meet our current
expectations for working capital and expense requirements for at
least the next twelve months based on, among other things, our
current revenue and expense projections. However, we may require
additional financing. If we were unable to raise capital in the
event of ongoing losses and depletion of our available cash
resources, the absence of funding would have a material adverse
effect on our business. If we issue additional equity
securities, stockholders will experience additional dilution and
the new equity securities may have rights, preferences or
privileges senior to those of the then existing holders of our
common stock.

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

We may continue to incur stock-based compensation
expense in future periods, which represents non-cash charges
incurred as a result of the repricing of our stock options and
the issuance of stock and stock options below fair market value.
On November 12, 2001, our board of directors, acting
pursuant to existing terms of our stock option plans, approved
the repricing of approximately 890,000 outstanding stock options
with exercise prices above $7.50. The exercise prices of all
such stock options were repriced to $7.50, which was the fair
market value of our stock on November 12, 2001. There were
no changes to the vesting schedules of the repriced options.
Options held by our former chief executive officer, former
executive vice president of strategy and planning, board of
directors and non-employees were not repriced. We are accounting
for the repriced options using variable accounting whereby the
aggregate intrinsic value of the repriced options is
continuously remeasured and amortized to stock-based
compensation expense over the vesting periods. Based on the
stock price as of January 31, 2003, we recorded
$4.8 million in recovery of stock-based compensation for
stock-based compensation recognized in fiscal 2002 relating to
these repriced stock options, offset by $1.2 million in
other stock-based compensation in fiscal 2003. As of
January 31, 2003, deferred stock-based compensation
relating to these repriced options was zero, reflecting the
intrinsic value of unexercised repriced options as of
January 31, 2003. To the extent that our stock price
increases above $7.50 in future periods for options that were
repriced but not tendered pursuant to the voluntary stock option
exchange program described below, we will need to record
additional stock-based compensation expense.

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 option exercisable for 1.15 shares for each share subject to
the tendered 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

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as to the number of stock options that would have
been vested on such date had the old stock options not been
tendered plus the number of shares that would have been vested
had the old option been exercisable for 15% more shares. Our
chief executive officer, chief financial officer and members of
the board of directors are not eligible to participate in the
program. The stock options 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 if and to the extent that our stock
price increases above $7.50.


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

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

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

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

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

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

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

11



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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 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 in control of the business that may be in the best
interests of other stockholders.

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

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

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##### Table of Contents






Item 2.     Properties

Our principal executive office occupies
approximately 37,247 square feet in Redwood City, California
under a lease that expires in June 2005. We also occupy other
leased facilities in the United States and Europe under leases
that expire at various times through April 2009.

As part of our restructuring program in fiscal
2002 and 2003, we vacated various facilities and ceased to pay
rent on these facilities. As a result of negotiations with the
landlords, we terminated the leases for most of these
facilities. We are currently seeking to sublease the remaining
facilities or terminate the leases for these facilities. We may
be unable to sublease these remaining facilities or terminate
these leases on acceptable terms.

We believe that our current facilities will be
adequate to meet our needs for the foreseeable future.




Item 3.     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 our initial public
offering (the IPO), Niku, and certain of our
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 our
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 Goldman, Sachs and Co.,
Dain Rauscher Wessels, U.S. Bancorp Piper Jaffray and Thomas
Weisel Partners, 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 officers and directors 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 officers and directors. By order dated
October 8, 2002, the Court dismissed our 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 us and
the other issuers and underwriters were not dismissed as a
matter of law. A proposed settlement between the plaintiffs and
issuer defendants is in the process of being negotiated and
approved. These cases remain at a preliminary stage and no
discovery proceedings have taken place in relation to the
issuers. We believe that the claims asserted against us in these
cases are without merit and we intend to defend vigorously
against them. These cases seek compensatory damages in
unspecified amounts as well as other relief.




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

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



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

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



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

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

13



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Part II




Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters

Market Information for Common Stock

On November 21, 2002, we effected a
one-for-ten reverse stock split of our outstanding common stock.

On December 3, 2002, we transferred the
listing of our common stock from the Nasdaq National Market to
the Nasdaq SmallCap Market, where it is traded under the symbol
NIKU. The table below represents the high and low
closing sales prices for our common stock as reported by the
Nasdaq National Market or Nasdaq SmallCap Market for each
quarter in fiscal 2003 and 2002. The price per share has been
adjusted to give effect to our reverse stock split.

|                 |  |                       |        |     |  |   |       | 
|---------------- |  | --------------------- | ------ | --- |  | - | ----- | 
|                 |  |                      
|                 |  | Price Range Per Share
|                 |  |                      
|                 |  | High                  |        | Low
|                 |  |                       |        |    
|Quarter Ended:   |  |                       |        |     |  |   |       | 
|January 31, 2003 |  | $                     | 7.80   |     |  | $ | 3.57  | 
|October 31, 2002 |  | $                     | 3.90   |     |  | $ | 1.00  | 
|July 31, 2002    |  | $                     | 11.50  |     |  | $ | 2.50  | 
|April 30, 2002   |  | $                     | 35.70  |     |  | $ | 9.90  | 
|January 31, 2002 |  | $                     | 29.40  |     |  | $ | 5.50  | 
|October 31, 2001 |  | $                     | 9.00   |     |  | $ | 4.70  | 
|July 31, 2001    |  | $                     | 27.10  |     |  | $ | 8.00  | 
|April 30, 2001   |  | $                     | 108.10 |     |  | $ | 11.20 | 

Our present policy is to retain earnings, if any,
to finance future growth. We have never declared or paid any
cash dividends on our capital stock and have no present
intention of paying any cash dividends in the foreseeable future.

Sales of Unregistered Securities

In February 2002, we issued 40,000 shares of our
common stock to founders of ABT Corporation, a company we
acquired in August 2000. These shares were valued at $21.80 per
share based on our stock price on the date of their issuance.
These shares were issued in a private placement exempt from
registration under the Securities Act of 1933 pursuant to
Section 4(2) of the Act. On April 9, we filed a
Registration Statement on Form S-3 (No 333-85918) to
register these shares. The Securities and Exchange Commission
declared the Registration Statement, as amended, effective on
June 4, 2002.

In May 2002, we issued 4,841 shares of our common
stock to former employees of Proamics Corporation, a company we
acquired in December 1998. These shares were valued at $7.70 per
share based on our stock price on the date of their issuance.
These shares were issued in a private placement exempt from
registration under the Securities Act of 1933 pursuant to
Section 4(2) of the Act. On June 11, we filed a
Registration Statement on Form S-3 (No 333-90224) to
register these shares. The Securities and Exchange Commission
declared the Registration Statement effective on June 28,
2002.

In July 2002, we issued a warrant to purchase
15,000 shares of our common stock with an exercise price of
$0.10 in connection with the termination of a facility lease in
Danville, California. The warrant was issued in a private
placement exempt from registration under the Securities Act of
1933 pursuant to Section 4(2) of the Act.

In October 2002, we issued a warrant to purchase
1,445,000 shares of our common stock with an exercise price of
$0.001 in connection with the termination of a facility lease in
Redwood City, California. The warrant was issued in a private
placement exempt from registration under the Securities Act of
1933 pursuant to Section 4(2) of the Act. The warrant was
exercised on November 27, 2002.

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In February 2003, we issued 1,549,735 shares of
our common stock at a price of $3.35 per share and issued
warrants to purchase 193,720 shares of our common stock at a
price of $0.40 per warrant share in connection with the initial
closing of a private placement. The aggregate offering price for
the securities issued in the initial closing was
$5.3 million, resulting in net proceeds of approximately
$5.2 million. The warrants have an exercise price of $3.40.
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.
In April 2003, we issued 1,538,495 shares of common stock at a
price of $3.35 per share and warrants to purchase 192,314 shares
of common stock at a price of $0.40 per warrant share in
connection with the subsequent closing of the private placement.
The aggregate offering price for the securities issued in the
subsequent closing was $5.2 million, resulting in net
proceeds of approximately $5.0 million. These warrants have
an exercise price of $3.40. 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. Total net proceeds from the
private placement were approximately $10.2 million.

Stockholders of Record

At March 31, 2003, we had approximately 800
holders of record of our common stock. This does not include the
number of persons whose stock is in nominee or street
name accounts through brokers.




Item 6.     Selected
Consolidated Financial Data

The following selected consolidated financial
data should be read in conjunction with our consolidated
financial statements and related notes to our consolidated
financial statements and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this annual report on Form 10-K. The
consolidated statement of operations data for each of the three
years ended January 31, 2003, 2002 and 2001 and the
consolidated balance sheet data as of January 31, 2003 and
2002 are derived from our audited financial statements included
in this 10-K. The consolidated statement of operations data for
the year ended January 31, 2000 and 1999 and the balance
sheet data as of January 31, 2001, 2000 and 1999 are
derived from our audited financial statements previously filed
with the SEC. Prior to fiscal 2003, we had a fiscal year that
ended on the Saturday preceding January 31. In fiscal 2003,
we changed our fiscal calendar to a calendar month end so fiscal
2003 ended on January 31, 2003. For presentation purposes,
fiscal years prior to fiscal 2003 refers to the periods
calendar month end.

Consolidated Statement of Operations
Data:

|                                                                  |  |                                       |         |      |  |      |          |      |  |      |          |   |  |   |         |   |  |   |        |  
|----------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | ------- | - |  | - | ------ | -
|                                                                  |  |                                      
|                                                                  |  | Years Ended January 31,              
|                                                                  |  |                                      
|                                                                  |  | 2003                                  |         | 2002 |  | 2001 |          | 2000 |  | 1999
|                                                                  |  |                                       |         |      |  |      |          |      |  |     
|                                                                  |  |                                      
|                                                                  |  | (In thousands, except per share data)
|Total revenue                                                     |  | $                                     | 48,410  |      |  | $    | 67,466   |      |  | $    | 68,922   |   |  | $ | 8,157   |   |  | $ | 15     |  
|Cost of revenue                                                   |  |                                       | 13,739  |      |  |      | 57,877   |      |  |      | 30,787   |   |  |   | 2,620   |   |  |   | 4      |  
|Gross profit                                                      |  |                                       | 34,671  |      |  |      | 9,589    |      |  |      | 38,135   |   |  |   | 5,537   |   |  |   | 11     |  
|Operating loss                                                    |  |                                       | (43,530 | )    |  |      | (294,014 | )    |  |      | (141,000 | ) |  |   | (37,036 | ) |  |   | (3,150 | )
|Net loss                                                          |  |                                       | (37,794 | )    |  |      | (291,546 | )    |  |      | (130,876 | ) |  |   | (36,487 | ) |  |   | (3,020 | )
|Basic and diluted net loss per share                              |  | $                                     | (4.96   | )    |  | $    | (39.20   | )    |  | $    | (19.57   | ) |  | $ | (56.08  | ) |  | $ | (6.19  | )
|Shares used in computing basic and diluted net
    loss per share |  |                                       | 7,618   |      |  |      | 7,437    |      |  |      | 6,687    |   |  |   | 651     |   |  |   | 488    |  

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Consolidated Balance Sheet Data:

|                                                        |  |                |          |      |  |      |          |      |  |      |          |   |  |   |         |   |  |   |        |  
|------------------------------------------------------- |  | -------------- | -------- | ---- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | ------- | - |  | - | ------ | -
|                                                        |  |               
|                                                        |  | January 31,   
|                                                        |  |               
|                                                        |  | 2003           |          | 2002 |  | 2001 |          | 2000 |  | 1999
|                                                        |  |                |          |      |  |      |          |      |  |     
|                                                        |  |               
|                                                        |  | (In thousands)
|Cash, cash equivalents and short-term investments       |  | $              | 16,670   |      |  | $    | 51,585   |      |  | $    | 138,892  |   |  | $ | 44,515  |   |  | $ | 5,147  |  
|Current portion of restricted cash                      |  |                | 229      |      |  |      | 4,665    |      |  |      |         |   |  |   |        |   |  |   |       |  
|Working capital                                         |  |                | 1,219    |      |  |      | 11,028   |      |  |      | 121,350  |   |  |   | 32,691  |   |  |   | 4,786  |  
|Restricted cash                                         |  |                | 1,108    |      |  |      | 9,822    |      |  |      | 14,487   |   |  |   |        |   |  |   |       |  
|Goodwill and other intangible assets, net               |  |                |         |      |  |      |         |      |  |      | 157,831  |   |  |   | 49,684  |   |  |   |       |  
|Total assets                                            |  |                | 30,563   |      |  |      | 101,575  |      |  |      | 393,067  |   |  |   | 112,525 |   |  |   | 6,555  |  
|Long-term accrued restructuring                         |  |                | 6,209    |      |  |      | 6,758    |      |  |      |         |   |  |   |        |   |  |   |       |  
|Long-term obligations, less current portion             |  |                | 3,750    |      |  |      |         |      |  |      | 268      |   |  |   | 1,725   |   |  |   |       |  
|Redeemable convertible preferred stock and
    warrants |  |                |         |      |  |      |         |      |  |      |         |   |  |   | 100,919 |   |  |   | 8,259  |  
|Accumulated deficit                                     |  |                | (499,723 | )    |  |      | (461,929 | )    |  |      | (170,383 | ) |  |   | (39,507 | ) |  |   | (3,020 | )
|Total stockholders equity (deficit)                    |  |                | (3,974   | )    |  |      | 31,557   |      |  |      | 318,393  |   |  |   | (12,269 | ) |  |   | (2,363 | )






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion should be read in
conjunction with the consolidated financial statements and notes
thereto and the pro forma financial data included elsewhere in
this prospectus.

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, integrate
easily with other applications through extensible markup
language (XML), and is scalable to support tens of thousands of
users.

Critical Accounting Policies, Methods and
Estimates

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

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

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

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

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

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

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

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We have never engaged in a transaction in which
we provided product licenses or services to a customer in
exchange for an equity interest. We recognized no revenue under
any type of reciprocal arrangements in fiscal 2003 or in fiscal
2002. Revenue recognized under reciprocal arrangements was
$16.4 million in the year ended January 31, 2001, of
which approximately $630,000 involved nonmonetary exchanges.

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 $7.2 million
and $12.8 million as of January 31, 2003 and 2002,
respectively. The allowances for doubtful accounts were
$1.0 million and $3.0 million as of January 31,
2003 and 2002, respectively. We regularly review the adequacy of
our allowance for doubtful accounts after considering the amount
of the aged accounts receivable, the age of each invoice, each
customers expected ability to pay and our collection
history with each customer. We review any invoice greater than
30 days past due to determine if an allowance is
appropriate based on the risk category using the factors
discussed above. In addition, we maintain a reserve for all
invoices by applying a percentage to aging categories based on
historical loss experience. The allowance for doubtful accounts
represents our best estimate, but changes in circumstances such
as our customers financial positions may result in a
requirement for additional allowances in the future.



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

We evaluate our long-lived assets, including
goodwill and identifiable intangibles, for impairment whenever
events or changes in circumstances indicate that the carrying
amount of these assets may not be recoverable. Factors we
consider important 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 fiscal 2003 except for an impairment charge of a strategic
equity investment made in April 2000. In April 2000, we
purchased 75,000 shares of the private companys
common stock at $6.67 per share. We regularly performed an
impairment assessment of this $500,000 investment. In
performing an impairment assessment, we considered 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 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. The carrying value of our
strategic equity investment was zero at January 31, 2003.

Asset impairment and other charges in fiscal 2002
were as follows: In the first quarter of fiscal 2002, we
performed an impairment assessment of our goodwill and other
intangible assets recorded in connection with our acquisitions
of Legal Anywhere, bSource.com, 600 Monkeys and Alyanza Software
due to a change in our product plan related to certain acquired
technologies. This assessment was based on the expected future
cash flows from goodwill and intangible assets over their
remaining useful lives. The determination of cash flows was
based on our decision to abandon certain product lines acquired
as part of the acquisitions of these companies, as a result of
our restructuring plan. As a result of this assessment, we
recorded $23.2 million in

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asset impairment charges. This amount included
$20.4 million to write down the net book value of certain
goodwill and other intangible assets from our acquisitions of
Legal Anywhere (excluding $1.3 million in core and
developed technologies), bSource, 600 Monkeys and Alyanza to
zero except for the carrying value of Legal Anywheres
goodwill and customer lists, which was reduced to their
estimated fair value of $1.8 million. In the second quarter
of fiscal 2002, we performed an additional impairment assessment
of goodwill and other intangible assets recorded in connection
with our acquisitions of ABT, Proamics and Legal Anywhere. This
assessment was triggered and performed primarily due to a
significant decline in our stock price, which resulted in the
net book value of our assets significantly exceeding our market
capitalization. As a result of this assessment, we recorded
$99.8 million in asset impairment charges in the second
quarter of fiscal 2002 which reduced the fair value of goodwill
and other intangible assets related to our acquisitions of ABT
(excluding $6.3 million in developed and core
technologies), Proamics (excluding $8.3 million in
developed and core technologies) and Legal Anywhere to zero.


There was no impairment of developed and core
technologies in fiscal 2003 or fiscal 2001. Impairment of
developed and core technologies was $15.9 million in fiscal
2002. In the first quarter of fiscal 2002, we performed an
impairment assessment of our developed and core technology in
connection with our acquisition of Legal Anywhere due to a
change in our product plan related to this acquired technology.
This assessment was based on expected future cash flows from
such developed and core technology over its remaining useful
life. The determination of cash flows was based on our decision
to abandon certain product lines acquired as part of the
acquisition of Legal Anywhere, as a result of our restructuring
plan. As a result of this assessment, we recorded
$1.3 million in impairment of developed and core
technologies charges in the first quarter of fiscal 2002 which
reduced the net book value of the developed and core technology
related to our acquisition of Legal Anywhere to zero. In the
second quarter of fiscal 2002, we performed an additional
impairment assessment of developed and core technologies
recorded in connection with our acquisitions of ABT and
Proamics. This assessment was triggered and performed primarily
due to a significant decline in our stock price, which resulted
in net book value of our assets significantly exceeding our
market capitalization. As result of this assessment, we recorded
$14.6 million in impairment of developed and core
technologies charge in the second quarter of fiscal 2002 which
reduced the fair value of developed and core technologies
related to our acquisitions of ABT and Proamics to zero.

The estimate of the fair value was based on the
estimated future discounted cash flows for the remaining life of
the goodwill and other intangible assets with a discount rate of
25% and an estimated terminal value. The assumptions supporting
the estimated cash flows, including the discount rate and an
estimated terminal value, reflected managements best
estimates. The discount rate was based upon the weighted average
cost of capital for comparable companies. In fiscal 2002, we
recorded $138.9 million in asset impairment charges,
consisting of $136.1 million relating to goodwill and other
intangible assets (including $15.9 million in developed and
core technologies), $1.9 million in accelerated
depreciation for internally used software and $874,000 to write
off fixed assets that we no longer utilized.



| |                                                         
| | --------------------------------------------------------
| | 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 and to the
extent that these estimates change due to changes in market
conditions, the ultimate restructuring expenses for vacated
leases could vary by material amounts. For example, we recorded
$2.4 million in net lease commitment costs on vacated
leases in fiscal 2003 related to restructuring activities in
fiscal 2002 primarily due to adjustments to estimated future
sublease income for certain facilities vacated in fiscal 2002.

Future lease payments, net of estimated sublease
income, relating to facilities that we vacated or terminated
(but had not yet paid as of January 31, 2003) pursuant to
our restructuring program, amounted to $3.5 million,
$609,000, $1.0 million, $928,000 and $1.3 million for
the twelve months ending January 31, 2004,

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2005, 2006, 2007 and 2008, respectively, and
$2.4 million thereafter. The $3.5 million in payments
mentioned above for the twelve months ended January 31,
2004 for leases we have either vacated or terminated (but had
not yet paid as of January 31, 2003) included the final
$2.0 million cash payment related to the termination of a
major lease in Redwood City, California. This $2.0 million
was paid in February 2003.


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 share in a 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 the issuance
of the remaining 1,538,495 shares of our common stock and
warrants to purchase 192,314 shares of common stock in
connection with the subsequent closing of this private placement
and we issued such common stock and warrants. Total estimated
net proceeds from the private placement approximated
$10.2 million. Total shares and warrants outstanding
following the private placement were approximately
11,853,646 (including options exercised subsequent to
January 31, 2003) and 405,617, respectively.

The following table sets forth our capitalization
as of January 31, 2003:



| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On an actual basis; and                                                                                                                                                                                                  
|
| |  | On a pro forma basis to reflect the issuance of
    3,088,230 shares of our common stock in connection with the
    private placement discussed above resulting in total net
    proceeds of approximately $10.2 million.

|                                |                                                                                                                                                                                                                                                                                                                                                  |                                                          |        |           |        |   |        |          |        | 
|------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------- | ------ | --------- | ------ | - | ------ | -------- | ------ | 
|                                |                                                                                                                                                                                                                                                                                                                                                  |                                                         
|                                |                                                                                                                                                                                                                                                                                                                                                  | January 31, 2003                                        
|                                |                                                                                                                                                                                                                                                                                                                                                  |                                                         
|                                |                                                                                                                                                                                                                                                                                                                                                  | Actual                                                   |        | Pro Forma
|                                |                                                                                                                                                                                                                                                                                                                                                  |                                                          |        |          
|                                |                                                                                                                                                                                                                                                                                                                                                  |                                                         
|                                |                                                                                                                                                                                                                                                                                                                                                  | (In thousands, except per                               
|                                |                                                                                                                                                                                                                                                                                                                                                  | share data)                                             
|Total current assets            |                                                                                                                                                                                                                                                                                                                                                  | $                                                        | 25,797 |           |        | $ | 36,097 |         
|Total assets                    |                                                                                                                                                                                                                                                                                                                                                  |                                                          | 30,563 |           |        |   | 40,863 |         
|Total current liabilities       |                                                                                                                                                                                                                                                                                                                                                  |                                                          | 24,578 |           |        |   | 24,578 |         
|Total liabilities               |                                                                                                                                                                                                                                                                                                                                                  |                                                          | 34,537 |           |        |   | 34,537 |         
|Stockholders equity (deficit): |                                                                                                                                                                                                                                                                                                                                                  |                                                          |        |           |        |   |        |         
|                                | Preferred stock: $0.0001 par value;
    10,000,000 shares authorized; no shares issued and
    outstanding                                                                                                                                                                                                                                       |                                                          |        |          |        |   |        |         |       
|                                | Common stock; $0.0001 par value;
    250,000,000 shares authorized, actual and pro forma, as of
    January 31, 2003 respectively; actual,
    9,380,760 issued and 8,761,076 issued and outstanding
    as of January 31, 2003; pro forma, 12,468,990 shares
    issued and 11,849,306 shares issued and outstanding as of
    January 31, 2003 |                                                          |        | 1         |        |   |        | 1        |       
|                                | Treasury stock, at cost: actual and pro forma,
    619,684 shares as of January 31, 2003                                                                                                                                                                                                                                                         |                                                          |        | (5,057    | )      |   |        | (5,057   | )     
|                                | Additional paid-in capital                                                                                                                                                                                                                                                                                                                       |                                                          |        | 500,981   |        |   |        | 511,281  |       
|                                | Deferred stock-based compensation                                                                                                                                                                                                                                                                                                                |                                                          |        | (107      | )      |   |        | (107     | )     
|                                | Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                                             |                                                          |        | (69       | )      |   |        | (69      | )     
|                                | Accumulated deficit                                                                                                                                                                                                                                                                                                                              |                                                          |        | (499,723  | )      |   |        | (499,723 | )     
|                                |                                                                                                                                                                                                                                                                                                                                                  |                                                          |        |           |        |   |        |         
|                                |                                                                                                                                                                                                                                                                                                                                                  | Total stockholders (deficit) equity                     |        |           | (3,974 | ) |        |          | 6,326  | 
|                                |                                                                                                                                                                                                                                                                                                                                                  |                                                          |        |           |        |   |        |         
|                                |                                                                                                                                                                                                                                                                                                                                                  | Total liabilities and stockholders
    (deficit) equity |        | $         | 30,563 |   |        | $        | 40,863 | 
|                                |                                                                                                                                                                                                                                                                                                                                                  |                                                          |        |           |        |   |        |         

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The share numbers above exclude:



| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 1,496,642 shares of our common stock subject to
    options outstanding as of January 31, 2003 at a weighted
    average exercise price of $9.74 per share.
|
| |  | Warrants to purchase 19,583 shares of common
    stock as of January 31, 2003 at a weighted average exercise
    price of $27.18 per share.                
|
| |  | Warrants to purchase 386,034 shares of
    common stock as noted above with an exercise price of
    $3.40 per share.                                      

The pro forma information has not been prepared
in accordance with GAAP or Article 11 of
Regulation S-X. The pro forma information has been provided
to demonstrate satisfaction of the continued listing requirement
of Nasdaq. Management believes the information is useful for
this purpose.

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 loss per share amounts in this annual report on
Form 10-K has been restated to reflect the reverse stock
split.

Repricing of Stock Options

On November 12, 2001, our board of
directors, acting pursuant to existing terms of our stock option
plans, approved the repricing of approximately
890,000 outstanding stock options with exercise prices
above $7.50. The exercise prices of all such stock options were
repriced to $7.50, which was the fair market value of our stock
on November 12, 2001. There were no changes to the vesting
schedules of the repriced options. Options held by our former
chief executive officer, former executive vice president of
strategy and planning, board of directors and non-employees were
not repriced. We are accounting for the repriced options using
variable accounting whereby the aggregate intrinsic value of the
repriced options is continuously remeasured and amortized to
stock-based compensation expense over the vesting periods. Based
on the stock price as of January 31, 2003, we recorded
$4.8 million in recovery of stock-based compensation in
fiscal 2003 for stock-based compensation recognized in fiscal
2002 relating to these repriced stock options, offset by
$1.2 million in other stock-based compensation in fiscal
2003. As of January 31, 2003, deferred stock-based
compensation relating to these repriced options was zero,
reflecting the intrinsic value of unexercised repriced options
as of January 31, 2003. To the extent that our stock price
increases above $7.50 in future periods for options that were
repriced but not tendered pursuant to the voluntary stock option
exchange program described below, we will need to record
additional stock-based compensation expense.

In October 2002, we cancelled options to purchase
55,000 shares of common stock held by our chief executive
officer and granted him 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 $4.19 on January 31,
2003, we recorded $96,000 in stock-based compensation in fiscal
2003. In addition, 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. On
May 23, 2003, our chief executive officer exercised all of
his repriced stock options to purchase 55,000 shares of common
stock and we recorded an additional $56,000 in stock-based
compensation in May 2003. As all repriced options were
exercised, we will no longer be required to record additional
stock-based compensation relating to these stock options in the
future.

On April 15, 2003, we announced a voluntary
stock option exchange program for our employees. Under the
program, our employees will be 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 option exercisable for 1.15 shares for each share subject to
the tendered 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

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


Pro Forma Financial Results

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

Results of Operations

|                 |                                               |                         |  |      |       |      |  |      |       |  |  |      |       | 
|---------------- | --------------------------------------------- | ----------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | ---- | ----- | 
|                 |                                               |                        
|                 |                                               | Years Ended January 31,
|                 |                                               |                        
|                 |                                               | 2003                    |  | 2002 |       | 2001
|                 |                                               |                         |  |      |       |     
|Revenue:         |                                               |                         |  |      |       |      |  |      |       |  |  |     
|                 | License                                       |                         |  | 38.7 | %     |      |  | 47.4 | %     |  |  | 69.1 | %    
|                 | Services                                      |                         |  | 61.3 |       |      |  | 52.6 |       |  |  | 30.9 |      
|                 |                                               |                         |  |      |       |      |  |      |       |  |  |     
|                 |                                               | Total revenue           |  |      | 100.0 |      |  |      | 100.0 |  |  |      | 100.0 | 
|                 |                                               |                         |  |      |       |      |  |      |       |  |  |     
|Cost of revenue: |                                               |                         |  |      |       |      |  |      |       |  |  |     
|                 | License                                       |                         |  | 2.0  |       |      |  | 12.1 |       |  |  | 19.2 |      
|                 | Services                                      |                         |  | 26.4 |       |      |  | 36.2 |       |  |  | 25.5 |      
|                 | Impairment of developed and core technologies |                         |  |     |       |      |  | 23.6 |       |  |  |     |      
|                 | Impairment of licensed technology             |                         |  |     |       |      |  | 13.9 |       |  |  |     |      
|                 |                                               |                         |  |      |       |      |  |      |       |  |  |     
|                 |                                               | Total cost of revenue   |  |      | 28.4  |      |  |      | 85.8  |  |  |      | 44.7  | 
|                 |                                               |                         |  |      |       |      |  |      |       |  |  |     
|                 | Gross profit                                  |                         |  | 71.6 |       |      |  | 14.2 |       |  |  | 55.3 |      
|                 |                                               |                         |  |      |       |      |  |      |       |  |  |     

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|                                                |                                                          |                          |      |      |       |      |      |       |        |    |      |      |        |   
|----------------------------------------------- | -------------------------------------------------------- | ------------------------ | ---- | ---- | ----- | ---- | ---- | ----- | ------ | -- | ---- | ---- | ------ | --
|                                                |                                                          |                         
|                                                |                                                          | Years Ended January 31, 
|                                                |                                                          |                         
|                                                |                                                          | 2003                     |      | 2002 |       | 2001
|                                                |                                                          |                          |      |      |       |     
|Operating expenses:                             |                                                          |                          |      |      |       |      |      |       |        |    |      |     
|                                                | Sales and marketing                                      |                          |      | 47.7 |       |      |      | 105.1 |        |    |      | 98.7 |       
|                                                | Research and development                                 |                          |      | 24.6 |       |      |      | 51.7  |        |    |      | 53.7 |       
|                                                | General and administrative                               |                          |      | 17.4 |       |      |      | 22.5  |        |    |      | 19.0 |       
|                                                | Asset impairment and other                               |                          |      | 1.0  |       |      |      | 182.3 |        |    |      |     |       
|                                                | Amortization of goodwill and other intangible
    assets |                          |      |     |       |      |      | 30.9  |        |    |      | 37.4 |       
|                                                | Restructuring and other                                  |                          |      | 78.3 |       |      |      | 36.1  |        |    |      | 2.8  |       
|                                                | Stock-based compensation                                 |                          |      | (7.5 | )     |      |      | 21.4  |        |    |      | 42.1 |       
|                                                | Merger related expenses                                  |                          |      |     |       |      |      |      |        |    |      | 6.2  |       
|                                                |                                                          |                          |      |      |       |      |      |       |        |    |      |     
|                                                |                                                          | Total operating expenses |      |      | 161.5 |      |      |       | 450.0  |    |      |      | 259.9  |   
|                                                |                                                          |                          |      |      |       |      |      |       |        |    |      |     
|                                                |                                                          | Operating loss           |      |      | (89.9 | )    |      |       | (435.8 | )  |      |      | (204.6 | ) 
|Interest income and other income (expense), net |                                                          |                          | 12.2 |      |       |      | 4.2  |       |        |    | 15.2 |     
|Interest expense                                |                                                          |                          | (0.4 | )    |       |      | (0.5 | )     |        |    | (0.5 | )   
|                                                |                                                          |                          |      |      |       |      |      |       |        |    |      |     
|                                                |                                                          | Net loss                 |      |      | (78.1 | )%   |      |       | (432.1 | )% |      |      | (189.9 | )%
|                                                |                                                          |                          |      |      |       |      |      |       |        |    |      |     

Comparison of Fiscal Years Ended
January 31, 2003, 2002 and 2001

Revenue

License.License
revenue consists of revenue from licenses of our software
products. License revenue was $18.7 million,
$32.0 million and $47.6 million in fiscal 2003, 2002
and 2001, respectively, decreasing 41.5% in fiscal 2003 from
fiscal 2002 and decreasing 32.8% in fiscal 2002 from fiscal
2001. The year-over-year decrease in license revenue in absolute
dollars was primarily attributable to a slowdown in corporate
information technology spending and the restructuring program we
implemented in fiscal 2003 and fiscal 2002, which reduced the
number of revenue-producing account executives. The slowdown in
corporate information technology spending was primarily due to
deteriorating results of our customers and their need to
implement previously purchased software from other vendors.
License revenue also decreased due to a decline in the average
size of license sales in part as a result of fewer seats being
purchased and in part as a reduction in per seat price.

Services.Services
revenue consists of revenue from the delivery of implementation
services and maintenance and support contracts. Services revenue
from implementation services in fiscal 2003, 2002 and 2001 was
$11.5 million, $14.8 million and $12.9 million,
respectively, decreasing 22.7% in fiscal 2003 from fiscal 2002
and increasing 14.9% in fiscal 2002 from fiscal 2001. The
decrease in services revenue from implementation services in
absolute dollars in fiscal 2003 from fiscal 2002 was primarily
attributable to a decrease in the size of the implementation
services organization pursuant to the restructuring program we
implemented in fiscal 2002 and 2003, which reduced
revenue-producing implementation services consultants and a
decrease in license revenue that led to a decrease in demand for
implementation services. The increase in services revenue from
implementation services in absolute dollars in fiscal 2002 from
fiscal 2001 was primarily attributable to an increase in
customer implementations. Service revenue from maintenance and
support contracts was $18.2 million, $20.7 million and
$8.4 million in fiscal 2003, 2002 and 2001, respectively,
decreasing 11.8% in fiscal 2003 from fiscal 2002 and increasing
145.6% in fiscal 2002 from fiscal 2001. The decrease in services
revenue from maintenance and support in absolute dollars in
fiscal 2003 from fiscal 2002 was primarily attributable to a
decrease in the number of supported users for maintenance
renewals and a decrease of $1.9 million in amortization of
deferred maintenance revenue we assumed from the ABT acquisition
in August 2000. The increase in services revenue from
maintenance and support contracts in absolute dollars in fiscal
2002 from fiscal 2001 was primarily attributed to new
maintenance contracts and maintenance renewals relating to a
larger installed base. We believe a decrease in license revenue
will cause services revenue to decrease.

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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, shipping
costs and amortization of developed and core technologies. Cost
of license revenue was $977,000, $8.2 million and
$13.2 million in fiscal 2003, 2002 and 2001, respectively,
representing 5.2%, 25.6% and 27.7% of total license revenue in
the respective year. The decrease in cost of license revenue in
absolute dollars in fiscal 2003 from fiscal 2002 was primarily
attributable to no amortization of developed and core
technologies in fiscal 2003 compared to $6.5 million in
fiscal 2002, a decline in license revenue and the introduction
of Niku 6 in fiscal 2002, which required lower royalties
due to third parties than certain prior products. There were no
amortization of developed and core technologies in fiscal 2003
as the related intangible assets were impaired in the first and
second quarter of fiscal 2002. The decrease in absolute dollars
in fiscal 2002 from fiscal 2001 was primarily attributable to a
decrease of $3.7 million in amortization of developed and
core technologies and a decline in license revenue that
decreased royalties due to third parties. Amortization of
developed and core technologies decreased in fiscal 2002 as the
related intangible assets were impaired in the first and second
quarter of fiscal 2002. Royalties were calculated and paid
quarterly based on among other things, the percentage of total
license revenue, the number of seats sold or the number of
servers on which our customers install our software.

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 $12.8 million,
$24.4 million and $17.6 million in fiscal 2003, 2002
and 2001, respectively, representing 43.0%, 68.8% and 82.5% of
total services revenue in each respective year. The decrease in
cost of services revenue in absolute dollars in fiscal 2003 from
fiscal 2002 was primarily attributable to a $5.7 million
decrease in salaries and benefits as a result of reductions in
headcount pursuant to the restructuring program we implemented
in fiscal 2002 and 2003, a $1.6 million reduction in costs
for third parties contracted to implement our products and
increased efficiencies within the implementation services
organization. The increase in cost of services revenue in
absolute dollars in fiscal 2002 from fiscal 2001 was primarily
attributable to an increase of $4.4 million in salary and
benefits in the first six months of fiscal 2002 compared to the
first six months of fiscal 2001, offset in part by a decrease in
salary and benefits in the second half of fiscal 2002 pursuant
to the restructuring program we initiated in fiscal 2002 and a
$1.5 million increase due to the reclassification of
$1.5 million for reimbursements of out of pocket expenses
in accordance with EITF No. 01-14. Cost of services revenue
as a percentage of total services revenue decreased in each
sequential year primarily as a result of the reductions in
headcount.

Impairment of developed and core
technologies.There was no impairment
of developed and core technologies in fiscal 2003 or fiscal
2001. Impairment of developed and core technologies was
$15.9 million in fiscal 2002. In the first quarter of
fiscal 2002, we performed an impairment assessment of our
developed and core technology in connection with our acquisition
of Legal Anywhere due to a change in our product plan related to
this acquired technology. This assessment was based on expected
future cash flows from such developed and core technology over
its remaining useful life. The determination of cash flows was
based on our decision to abandon certain product lines acquired
as part of the acquisition of Legal Anywhere, as a result of our
restructuring plan. As a result of this assessment, we recorded
$1.3 million in impairment of developed and core
technologies charges in the first quarter of fiscal 2002 which
reduced the net book value of the developed and core technology
related to our acquisition of Legal Anywhere to zero. In the
second quarter of fiscal 2002, we performed an additional
impairment assessment of developed and core technologies
recorded in connection with our acquisition of ABT and Proamics.
This assessment was triggered and performed primarily due to a
significant decline in our stock price, which resulted in net
book value of our assets significantly exceeding our market
capitalization. As a result of this assessment, we recorded
$14.6 million in impairment of developed and core
technologies charge in the second quarter of fiscal 2002 which
reduced the fair value of developed and core technologies
related to our acquisitions of ABT and Proamics to zero.

Impairment of licensed technology.There was no impairment of licensed
technology in fiscal 2003 or fiscal 2001. In fiscal 2002, we
determined that the carrying value of certain royalties that we
had prepaid for the right to third party licensed technology
would not be realized. We recorded $9.4 million in
impairment of

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licensed technology, including $8.5 million
from prepaid royalties and $850,000 from royalties paid in
fiscal 2002, in each case on third-party technologies which we
did not include with our products to the extent required under
the applicable contracts or at all due to a change in our
product plan.


Operating Expenses

Sales and marketing.Sales and marketing expenses consist
primarily of salaries, advertising, commissions, bonuses, travel
and bad debt expense. Sales and marketing expenses were
$23.1 million, $70.9 million and $68.0 million in
fiscal 2003, 2002 and 2001, respectively, representing 47.7%,
105.1% and 98.7% of total revenue in each respective year. The
decrease in sales and marketing expenses in absolute dollars in
fiscal 2003 from fiscal 2002 was primarily attributable to a
$15.3 million reduction in salaries and benefits and a
$2.6 million decrease in other employee related costs
resulting from reductions in headcount and salary reductions
effected pursuant to the restructuring program we implemented in
fiscal 2002 and 2003 and a decrease of $9.0 million in bad
debt expense resulting from an increase in collection rates.
Sales and marketing expenses also decreased due to a
$6.1 million decrease in commissions and bonuses, as a
result of a decrease in revenue. Sales and marketing further
decreased due to a $3.7 million decrease in advertising, a
$2.8 million decrease in travel and a $2.7 million
decrease in outside services as a result of our cost-cutting
initiatives. The increase in sales and marketing expenses in
absolute dollars in fiscal 2002 from fiscal 2001 was primarily
attributable to an increase of $6.6 million in bad debt
expenses necessitated primarily by the deterioration in the
credit of certain customer accounts caused by a significant
downturn in the industries in which we sell and a contraction of
the overall economy. Sales and marketing expenses in absolute
dollars in fiscal 2002 also increased from fiscal 2001 due to
$6.3 million in higher salaries attributable to higher
headcount in the first six months of fiscal 2002 compared to the
first six months of fiscal 2001 and increases of
$1.8 million in commissions and bonuses, offset in part by
later reductions in headcount and a decrease of
$9.7 million in advertising costs.

Research and development.Research and development expenses
consist primarily of personnel and related expenses associated
with the development of new products, the enhancement of
existing products and quality assurance and testing costs.
Research and development expenses were $11.9 million,
$34.9 million and $37.0 million in fiscal 2003, 2002
and 2001, respectively, representing 24.6%, 51.7% and 53.7% of
total revenue in each respective year. The decrease in research
and development expenses in absolute dollars in fiscal 2003 from
fiscal 2002 was primarily attributable to a $13.7 million
reduction in salaries and benefits and a $205,000 decrease in
other employee related costs resulting from reductions in
headcount and salary reductions effected pursuant to the
restructuring program we implemented in fiscal 2002 and 2003, a
$6.2 million decrease in facilities costs and a
$2.2 million decrease in outside services primarily related
to third-party development services. The decrease in research
and development expenses in absolute dollars in fiscal 2002 from
2001 was primarily attributable to a $2.2 million decrease
in outside services, a $1.3 million decrease in travel
costs relating to the development of our products, a $607,000
decrease in salaries and benefits and a $312,000 decrease in
other employee related costs resulting from reductions in
headcount, offset in part by a $2.8 million increase in
facilities and IT department costs.

General and administrative.General and administrative expenses
consist primarily of salaries and other related costs for
finance, human resource, information technology and legal
department employees, as well as professional services fees.
General and administrative expenses were $8.4 million,
$15.2 million and $13.1 million in fiscal 2003, 2002
and 2001, respectively, representing 17.4%, 22.5% and 19.0% of
total revenue in each respective year. The decrease in general
and administrative expenses in absolute dollars in fiscal 2003
from 2002 was primarily attributable to a $5.0 million
reduction in salaries and benefits and a $346,000 decrease in
other employee related costs resulting from reductions in
headcount and salary reductions effected pursuant to the
restructuring program we implemented in fiscal 2002 and 2003, a
$7.1 million decrease in facilities expense and a
$1.5 million decrease in professional services fees, offset
in part by a decrease in facilities allocation to other
departments. These decreases in absolute dollars in fiscal 2003
from fiscal 2002 were a result of our cost-cutting initiatives.
The increase in general and administrative expenses in absolute
dollars in fiscal 2002 from 2001 was primarily attributable to a
$2.0 million increase in salaries and benefits and a
$766,000 increase in bonus expenses, offset by a $617,000
decrease in other employee related costs.

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Asset impairment and other.In fiscal 2003, we performed an
impairment assessment of 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 considered 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 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 $500,000 in asset impairment charges.

In the first quarter of fiscal 2002, we performed
an impairment assessment of our goodwill and other intangible
assets recorded in connection with our various acquisitions due
to a change in our product plan related to certain acquired
technologies. This assessment was based on the expected future
cash flows from goodwill and intangible assets over their
remaining useful lives. The determination of cash flows was
based on our decision to abandon certain product lines acquired
as part of the acquisition of these companies, as a result of
our restructuring plan. As a result of this assessment, we
recorded $23.2 million in asset impairment charges. This
amount included $20.4 million to write down the net book
value of certain goodwill and other intangible assets from our
acquisitions of Legal Anywhere (excluding $1.3 million in
developed and core technologies), bSource, 600 Monkeys and
Alyanza to zero except for the carrying value of Legal
Anywheres goodwill and customer lists which was reduced to
their estimated fair value of $1.8 million. In the second
quarter of fiscal 2002, we also performed an additional
impairment assessment of goodwill and other intangible assets
recorded in connection with our acquisitions of ABT, Proamics
and Legal Anywhere. This assessment was triggered and performed
primarily due to a significant decline in our stock price which
resulted in the net book value of our assets significantly
exceeding our market capitalization. As a result of this
assessment, we recorded $99.8 million in asset impairment
charges in the second quarter of fiscal 2002 which reduced the
fair value of goodwill and other intangible assets related to
our acquisitions of ABT (excluding $6.3 million in
developed and core technologies), Proamics (excluding
$8.3 million in developed and core technologies) and Legal
Anywhere to zero. The estimate of the fair value was based on
the estimated future discounted cash flows for the remaining
life of the goodwill and other intangible assets with a discount
rate of 25% and an estimated terminal value. The assumptions
supporting the estimated cash flows, including the discount rate
and an estimated terminal value, reflect managements best
estimates. The discount rate was based upon the weighted average
cost of capital for comparable companies. In fiscal 2002, we
recorded $123.0 million in asset impairment charges,
consisting of $120.2 million relating to goodwill and other
intangible assets, $1.9 million in accelerated depreciation
for internally used software and $874,000 to write off fixed
assets that we no longer utilized.

Amortization of goodwill and other intangible
assets.There was no amortization of
goodwill and other intangible assets in fiscal 2003 because all
goodwill and other intangibles assets were written off in fiscal
2002. Amortization of goodwill and other intangible asset was
$20.8 million and $25.7 million in fiscal 2002 and
2001, respectively.

Restructuring and other.In fiscal 2003, we implemented a
restructuring program and recorded the following charges:



| |          
| | ---------
| | Severance

We restructured our operations and reduced our
workforce by approximately 147 employees in fiscal 2003. These
headcount reductions affected all of our functional groups. We
recorded $3.9 million in severance costs, of which
$1.0 million related to the severance and related charges
for our former chief executive officer and former executive vice
president of planning and strategy.



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Loss on Retirement of Property and Equipment
    and Other Assets No Longer in Use

We retired $8.6 million in property and
equipment in connection with vacating certain facilities. We
terminated an equipment lease and acquired the equipment for
$2.0 million, of which $1.1 million was written off as
a restructuring cost due to equipment no longer in use as a
result of reductions in headcount.

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| |                                                     
| | ----------------------------------------------------
| | Net Lease Commitment Costs on Vacated
    Facilities

We also vacated certain facilities and terminated
certain leases, including the lease for a significant facility
in Redwood City, California. The $23.0 million in net lease
commitments on vacated leases recorded in fiscal 2003 includes
$21.8 million related to the termination of the Redwood
City lease. The $21.8 million in termination costs include
lease termination payments of $7.4 million, the release to
the landlord of cash securing a $5.9 million letter of
credit that was previously classified as restricted cash, the
release of a $2.9 million security deposit and
$5.6 million in estimated fair value for warrant issued for
1,445,000 shares of common stock with an exercise price of
$0.001. We also recorded a $2.2 million credit in net lease
commitment costs related to previously recorded deferred rent
relating to the lease. The estimated fair value of the warrant
was determined using the Black-Scholes options pricing model
with a contractual life of five years, risk-free interest rate
of 1.70%, volatility of 150% and expected dividend of 0%. Our
future liabilities under the Redwood City lease prior to our
termination were approximately $121.7 million.

We also terminated a facility lease in Danville,
California. Our future liabilities under this lease, net of
estimated sublease income prior to termination, approximated
$2.7 million. The termination costs included a $534,000
security deposit released to the landlord, a cash payment of
$216,000 and warrants to purchase 15,000 shares of common
stock with an exercise price of $0.10 and a fair value of
$42,000. The value of these warrants was determined using the
Black-Scholes options pricing model with an expected life of
five years, risk-free interest rate of 1.70%, volatility of 150%
and expected dividend of 0%. We also terminated a facility lease
in Atlanta, Georgia for $481,000, consisting of lease
termination payment of $181,000 and the release to the landlord
of cash securing a $300,000 letter of credit that was previously
classified as restricted cash. We also terminated a facility
lease in Bellevue, Washington for $10,000, offset by $80,000 for
the reversal of future lease payments that had been previously
accrued relating to this lease.

We ceased to pay rent on a lease in New York, New
York for a facility we vacated in fiscal 2002, and the landlord
has drawn upon a letter of credit of $2.6 million secured
by a certificate of deposit. We also creased to pay rent on the
leases for certain other smaller facilities that we have
vacated. We are seeking to terminate these leases or sublease
these facilities.

In addition to above restructuring charges
relating to facility leases, we recorded $2.4 million in
net lease commitment costs on vacated leases in fiscal 2003
related to restructuring activities in fiscal 2002 primarily due
to adjustments to estimated future sublease income for certain
facilities vacated in fiscal 2002. We also terminated a facility
lease in Lincolnshire, Illinois for $388,000, consisting of a
lease termination payment of $63,000 and the release to the
landlord of cash securing a $325,000 letter of credit that was
previously classified as restricted cash. The Companys
future liabilities under this lease, net of estimated sublease
income prior to termination, approximated $692,000.



| |                        
| | -----------------------
| | Computer and Car Leases

We recorded $346,000 relating to lease payments
for computer equipment and car leases that are no longer being
utilized as a result of the reductions in headcount.



| |                            
| | ---------------------------
| | Other Restructuring Charges

We recorded a credit of $812,000 for the value of
40,518 escrow shares of our common stock recovered from escrow
accounts in which such shares had been placed in conjunction
with the acquisitions of ABT Corporation, bSource, Inc.,
Proamics Corporation and 600 Monkeys Inc. in fiscal 2001.

We also recorded a credit of $1.2 million
for the adjustment of stock-based compensation expenses related
to the reversal of previously recorded stock-based compensation
expenses for employees terminated pursuant to the restructuring
program.

We also recorded other restructuring costs
related primarily to legal and administrative costs for
liquidation of various foreign subsidiaries.

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We believe the effect of the restructuring
program we implemented in fiscal 2003 is to reduce approximately
$12.4 million in salaries, benefits and related employee
costs, approximately $10.0 million in facilities expenses
and approximately $3.0 million in depreciation expense on an
annual basis.



| |                             
| | ----------------------------
| | Restructuring in Fiscal 2002

In fiscal 2002, we initiated a restructuring
program. We restructured our operations and reduced our
workforce by approximately 665 employees and recorded
$7.5 million in severance and related charges. These
reductions in workforce affected all our functional groups. We
vacated 17 leased facilities and recorded $11.0 million in
net lease commitment costs. We also recorded $11.8 million
in loss on retirement of property and equipment and other
assets, including a $1.7 million write-off of prepaid
expenses associated with a consulting service arrangement due to
the reduction in headcount. We recorded an additional $725,000
in other exit costs to terminate this consulting service
arrangement, of which $225,000 represents the value of 300,000
shares of common stock that we issued as part of this
termination agreement. We recorded $8.6 million in
stock-based compensation adjustment related to the reversal of
previously recorded stock-based compensation expenses for
employees terminated pursuant to the restructuring program.

As a result of the restructuring program we
implemented in fiscal 2002, total salary and related employee
benefits decreased $39.5 million, other employee related
costs decreased $3.2 million, travel costs decreased
$3.3 million, depreciation expense decreased
$2.2 million and outside services decreased
$8.0 million in fiscal 2003 from fiscal 2002.

Stock-based compensation.Amortization of stock-based
compensation was $(3.6) million, $14.4 million and
$29.0 million in fiscal 2003, 2002 and 2001, respectively.
The recovery of stock-based compensation in fiscal 2003 was
attributable to variable accounting applied to our stock options
that were repriced in the fourth quarter of fiscal 2002, which
resulted in $4.8 million in recovery of stock-based
compensation in fiscal 2003, offset by $1.2 million in
other stock-based compensation. The decrease in amortization of
stock-based compensation in fiscal 2002 from fiscal 2001 was
primarily attributed to employee terminations and the effects of
having applied Financial Accounting Standard Board (FASB)
Interpretation No. 28, offset in part by additional
$5.4 million in stock-based compensation we recorded in
connection with the repricing of our stock options in the fourth
quarter of fiscal 2002. On April 15, 2003, we commenced a
stock option exchange program for 622,511 shares of common
stock which 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 the 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 if and to the extent that our stock
price increases above $7.50.

Stock-based compensation by functional group for
the years ended January 31, 2003, 2002 and 2001 are as
follows (in thousands):

|                           |  |                         |        |      |  |      |        |  |  |   |        | 
|-------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                           |  |                        
|                           |  | Years Ended January 31,
|                           |  |                        
|                           |  | 2003                    |        | 2002 |  | 2001
|                           |  |                         |        |      |  |     
|Services                   |  | $                       | (288   | )    |  | $    | 1,129  |  |  | $ | 991    | 
|Sales and marketing        |  |                         | (1,761 | )    |  |      | 5,042  |  |  |   | 16,860 | 
|Research and development   |  |                         | (1,541 | )    |  |      | 5,844  |  |  |   | 5,264  | 
|General and administrative |  |                         | (57    | )    |  |      | 2,387  |  |  |   | 5,930  | 
|                           |  |                         |        |      |  |      |        |  |  |   |        | 
|                           |  | $                       | (3,647 | )    |  | $    | 14,402 |  |  | $ | 29,045 | 
|                           |  |                         |        |      |  |      |        |  |  |   |        | 

Merger related expenses.Merger related expenses of
$4.3 million in fiscal 2001 were incurred in conjunction
with the acquisition and integration of ABT in August 2000.

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

Interest income and other income (expense),
net.Interest income and other income
(expense), net, consists of interest income and other
non-operating expenses. Interest income and other income
(expense), net was $5.9 million, $2.8 million and
$10.5 million in fiscal 2003, 2002 and 2001, respectively.
The net increase in absolute dollars in fiscal 2003 from fiscal
2002 was primarily attributable to a $5.0 million proceeds
from a legal settlement payment to us from Business Engine,
offset in part by lower interest income as a result of lower
invested cash balances. The net decrease in absolute dollars in
fiscal 2002 from 2001 was primarily attributable to lower
average invested cash and short-term investment balances, which
yielded lower interest income.

Interest expense.Interest expense was $202,000,
$324,000 and $311,000 in fiscal 2003, 2002 and 2001,
respectively. Interest expense decreased 37.6% in fiscal 2003
from 2002. This decrease in absolute dollars was primarily
attributable to higher balances on capital leases and other
loans outstanding in fiscal 2002. Interest expense remained
constant in fiscal 2002 from 2001.

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
January 31, 2003, we had cash and cash equivalents of
$16.7 million. We also had current portion of restricted
cash and restricted cash in the amount of $229,000 and
$1.1 million, respectively, in the form of certain
certificates of deposit securing letters of credit for two
leased facilities. We had bank borrowings under a term loan of
$4.75 million as of January 31, 2003, of which
$250,000 plus interest was repaid in March 2003 and $250,000
plus interest was repaid in June 2003. As of January 31,
2003, we had working capital of $1.2 million, compared to
working capital of $11.0 million as of January 31,
2002 and working capital of $121.4 million as of
January 31, 2001. The decrease in working capital as of
January 31, 2003 from January 31, 2002 was primarily
attributed to decreases in cash and cash equivalents, current
portion of restricted cash, net accounts receivable, and prepaid
expenses and other current assets, offset in part by decreases
in bank borrowings and accrued liabilities. The decrease in
working capital as of January 31, 2002 from
January 31, 2001 was primarily due to decreases in cash,
cash equivalents and short-term investments, net accounts
receivable and prepaid expenses and other current assets, offset
in part by a decrease in deferred revenue. From February 2001
through July 31, 2002, we initiated two restructuring
programs to reduce our expenses in response to the depletion of
our cash position and working capital. We believe the effect of
the restructuring program we implemented in fiscal 2003 is to
reduce approximately $12.4 million in salaries, benefits
and related employee costs, approximately $10.0 million in
facilities expenses and approximately $3.0 million in
depreciation expense on an annual basis. In the first quarter of
fiscal 2004, we improved our cash position and working capital
by raising $10.5 million in gross proceeds in connection
with a private placement described below. We believe that cash
from operations and existing cash, including the
$10.2 million net proceeds from the private placement, will
be sufficient to meet our current expectations for working
capital and expense requirements for at least the next twelve
months. Our belief is based in part on our realization of
quarterly operating profitability in the fourth quarter of
fiscal 2003. As of January 31, 2003, we had no material
commitments for capital expenditures.

In February 2003, we entered into a common stock
and warrant purchase agreement with various investors led by
Walden VC, providing for the issuance of
3,088,230 shares of our common stock at a price of $3.35
per share and warrants to purchase 386,034 shares of common
stock at a price of $0.40 per share in a 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 the issuance
of the remaining 1,538,495 shares of our common stock and
warrants to purchase 192,314 shares of common stock in
connection with the subsequent closing of this private placement
and we issued such common stock and warrants. Total estimated
net proceeds from the private placement approximated
$10.2 million. Total shares and warrants outstanding
following the private placement were approximately 11,853,646
(included options exercised subsequent to January 31, 2003)
and 405,617, respectively.

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The following table sets forth our capitalization
as of January 31, 2003:



| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On an actual basis; and                                                                                                                                                                                                  
|
| |  | On a pro forma basis to reflect the issuance of
    3,088,230 shares of our common stock in connection with the
    private placement discussed above resulting in total net
    proceeds of approximately $10.2 million.

|                                |                                                                                                                                                                                                                                                                                                                                              |                           |        |           |   |   |        |          |  
|------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------ | --------- | - | - | ------ | -------- | -
|                                |                                                                                                                                                                                                                                                                                                                                              |                          
|                                |                                                                                                                                                                                                                                                                                                                                              | January 31, 2003         
|                                |                                                                                                                                                                                                                                                                                                                                              |                          
|                                |                                                                                                                                                                                                                                                                                                                                              | Actual                    |        | Pro Forma
|                                |                                                                                                                                                                                                                                                                                                                                              |                           |        |          
|                                |                                                                                                                                                                                                                                                                                                                                              |                          
|                                |                                                                                                                                                                                                                                                                                                                                              | (In thousands, except per
|                                |                                                                                                                                                                                                                                                                                                                                              | share data)              
|Total current assets            |                                                                                                                                                                                                                                                                                                                                              | $                         | 25,797 |           |   | $ | 36,097 |         
|Total assets                    |                                                                                                                                                                                                                                                                                                                                              |                           | 30,563 |           |   |   | 40,863 |         
|Total current liabilities       |                                                                                                                                                                                                                                                                                                                                              |                           | 24,578 |           |   |   | 24,578 |         
|Total liabilities               |                                                                                                                                                                                                                                                                                                                                              |                           | 34,537 |           |   |   | 34,537 |         
|Stockholders equity (deficit): |                                                                                                                                                                                                                                                                                                                                              |                           |        |           |   |   |        |         
|                                | Preferred stock: $0.0001 par value; 10,000,000
    shares authorized; no shares issued and outstanding                                                                                                                                                                                                                                       |                           |        |          |   |   |        |         |  
|                                | Common stock; $0.0001 par value; 250,000,000
    shares authorized, actual and pro forma, as of January 31,
    2003 respectively; actual, 9,380,760 issued and 8,761,076 issued
    and outstanding as of January 31, 2003; pro forma,
    12,468,990 shares issued and 11,849,306 shares issued and
    outstanding as of January 31, 2003 |                           |        | 1         |   |   |        | 1        |  
|                                | Treasury stock, at cost: actual and pro forma,
    619,684 shares as of January 31, 2003                                                                                                                                                                                                                                                     |                           |        | (5,057    | ) |   |        | (5,057   | )
|                                | Additional paid-in capital                                                                                                                                                                                                                                                                                                                   |                           |        | 500,981   |   |   |        | 511,281  |  
|                                | Deferred stock-based compensation                                                                                                                                                                                                                                                                                                            |                           |        | (107      | ) |   |        | (107     | )
|                                | Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                                         |                           |        | (69       | ) |   |        | (69      | )
|                                | Accumulated deficit                                                                                                                                                                                                                                                                                                                          |                           |        | (499,723  | ) |   |        | (499,723 | )
|                                |                                                                                                                                                                                                                                                                                                                                              |                           |        |           |   |   |        |         
|                                | Total stockholders (deficit) equity                                                                                                                                                                                                                                                                                                         |                           |        | (3,974    | ) |   |        | 6,326    |  
|                                |                                                                                                                                                                                                                                                                                                                                              |                           |        |           |   |   |        |         
|                                | Total liabilities and stockholders
    (deficit) equity                                                                                                                                                                                                                                                                                     |                           | $      | 30,563    |   |   | $      | 40,863   |  
|                                |                                                                                                                                                                                                                                                                                                                                              |                           |        |           |   |   |        |         

The share numbers above exclude:



| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 1,496,642 shares of our common stock subject to
    options outstanding as of January 31, 2003 at a weighted
    average exercise price of $9.74 per share.
|
| |  | Warrants to purchase 19,583 shares of common
    stock as of January 31, 2003 at a weighted average exercise
    price of $27.18 per share.                
|
| |  | Warrants to purchase 386,034 shares of common
    stock as noted above with an exercise price of $3.40 per share.                                          

The pro forma information has not been prepared
in accordance with GAAP or Article 11 of
Regulation S-X. The pro forma information has been provided
to demonstrate satisfaction of the continued listing requirement
of Nasdaq. Management believes the information in useful for
this purpose.

Net cash used in operating activities was
$23.9 million, $73.9 million and 87.0 million in
fiscal 2003, 2002 and 2001, respectively. Net cash used in
operating activities in fiscal 2003 was primarily attributed to
a net loss of $37.8 million and a decrease in accrued
liabilities, offset in part by non-cash restructuring charges,
and a decrease in accounts receivable, depreciation expenses and
a decrease in prepaid expenses and other current assets. Net
cash used in operating activities in fiscal 2002 was primarily
attributable to a net loss of $291.5 million, offset in
part by impairment charges, amortization of goodwill and other
intangible assets, restructuring charges, stock-based
compensation, provision for doubtful account receivable and a
decrease in

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net accounts receivable. Net cash used in
operating activities in fiscal 2001 was primarily attributable
to a net loss of $130.9 million and increases in net
accounts receivable and prepaid and other current assets, offset
in part by amortization of goodwill and other intangible assets
and stock-based compensation.


Net cash provided by (used in) investing
activities was $11.0 million, $32.3 million and
$(63.2) million in fiscal 2003, 2002 and 2001,
respectively. Net cash provided by investing activities in
fiscal 2003 was primarily attributable to releases of
investments for restricted cash, offset in part by purchases of
property and equipment. Net cash provided by investing
activities in fiscal 2002 was primarily attributable to net
sales and maturities of short-term investments, offset in part
by purchases of property and equipment. Net cash used in
investing activities in fiscal 2001 was primarily attributable
to net purchases of short-term investments, purchases of
investments for restricted cash and purchases of property and
equipment.

Net cash (used in) provided by financing
activities was $(22.1) million, $(251,000) and
$216.2 million in fiscal 2003, 2002 and 2001, respectively.
Net cash used in financing activities in fiscal 2003 was
primarily attributable to net repayment of bank line of credit,
offset in part by proceeds from a bank term loan. Net cash used
in financing activities in fiscal 2002 was primarily
attributable to treasury stock repurchased in the open market
and repayment of debt and capital lease obligations, offset by
net proceeds from bank line of credit and issuance of common
stock. Cash provided by financing activities in fiscal 2001
resulted from net proceeds from our initial public offering and
net proceeds from bank line of credit, offset in part by
repayments of debt and capital lease obligations.

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

We currently have a term loan for
$5.0 million from a financial institution. We entered into
this loan in September 2002. The term loan is secured by our
tangible and intangible assets, accrues interest at 7.50% per
annum and matures on February 15, 2004. We are required to
make quarterly payments of principal and interest on a five-year
amortization schedule. We repaid $250,000 plus interest in
December 2002, $250,000 plus interest in March 2003 and $250,000
plus interest in June 2003. On the maturity date, the remaining
principal balance of $3.8 million is due. This term loan
has certain financial covenants, including covenants requiring
(1) cash on hand of $8.5 million as of
January 31, 2003, (2) minimum revenue of
$12.5 million for the quarter ended January 31, 2003,
(3) operating expenses not to exceed $11.3 million for
the quarter ended January 31, 2003 and (4) the ratio
of cash and cash equivalents to outstanding balance of the term
loan shall at all times be equal to 1.25 or higher. In January
2003, we agreed with the financial institution that we would not
repay a portion of the term loan with the proceeds of a legal
settlement received in December 2002. As of January 31,
2003, we were not in compliance with the minimum revenue
covenant described above. In February 2002, we received a waiver
for such covenant for the quarter ended January 31, 2003.
We were in compliance with all other covenants as of
January 31, 2003. On July 23, 2003, we repaid
$4.3 million for the balance of the bank term loan
outstanding 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. The line of credit is secured by our tangible and
intangible assets, accrues interest at prime rate plus 0.5% 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 equivalence 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 and stock-based compensation) for the
period from May 1, 2003 to April 30, 2004.

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

|                       |  |           |        |            |  |       |       |  |  |   |        | 
|---------------------- |  | --------- | ------ | ---------- |  | ----- | ----- |  |  | - | ------ | 
|                       |  | Operating |        | Bank       |  |      
|Year Ended January 31, |  | Leases    |        | Borrowings |  | Total
|                       |  |           |        |            |  |      
|2004                   |  | $         | 6,536  |            |  | $     | 1,000 |  |  | $ | 7,536  | 
|2005                   |  |           | 2,804  |            |  |       | 3,750 |  |  |   | 6,554  | 
|2006                   |  |           | 2,120  |            |  |       |      |  |  |   | 2,120  | 
|2007                   |  |           | 1,252  |            |  |       |      |  |  |   | 1,252  | 
|2008                   |  |           | 1,464  |            |  |       |      |  |  |   | 1,464  | 
|Thereafter             |  |           | 2,537  |            |  |       |      |  |  |   | 2,537  | 
|                       |  |           |        |            |  |       |       |  |  |   |        | 
|Total payments         |  | $         | 16,713 |            |  | $     | 4,750 |  |  | $ | 21,463 | 
|                       |  |           |        |            |  |       |       |  |  |   |        | 

Lease payments above, net of estimated sublease
income, relating to facilities that we have either vacated or
terminated pursuant to our restructuring program, amounted to
$3.5 million, $609,000, $1.0 million, $928,000 and
$1.3 million for the twelve months ended January 31,
2004, 2005, 2006, 2007 and 2008, respectively, and
$2.4 million thereafter. We regularly review the estimates
for sublease income and to the extent that these estimates
change due to changes in market condition, the ultimate
restructuring payments could vary by material amounts. The
$3.5 million in payments mentioned above for the twelve
months ended January 31, 2004 for leases we have either
vacated or terminated (but had not yet paid as of
January 31, 2003) include the final $2.0 million cash
payments related to the termination of a major lease in Redwood
City, California. This $2.0 million was paid in February
2003.

We have working capital of $1.2 million as
of January 31, 2003. We believe that cash from operations
and existing cash, including approximately $10.2 million in
net proceeds from a private placement we completed in the first
quarter of fiscal 2004, will be sufficient to meet our current
expectations for working capital and expense requirements for at
least the next twelve months based on, among other things, our
current revenue and expense projections. However, we may require
additional financing in the future. If we were unable to raise
capital in the event of ongoing losses and depletion of our
available cash resources, the absence of funding would have a
material adverse effect on our business. If we issue additional
equity securities, stockholders will experience additional
dilution and the new equity securities may have rights,
preferences or privileges senior to those of the then existing
holders of our common stock.

Recent Accounting Pronouncements

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

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections. The
provisions of SFAS No. 145 relating to the rescission of
SFAS No. 4 are effective for financial statements issued
for fiscal years beginning after May 15, 2002, and the
provisions relating to SFAS No. 13 are effective for
transactions occurring after May 15, 2002. SFAS
No. 145 rescinds SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that
Statement, SFAS No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. SFAS No. 145 also
rescinds SFAS No. 44, Accounting for Intangible Assets of
Motor Carriers, and amends SFAS No. 13, Accounting for
Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS
No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed
conditions. We do not believe the adoption of SFAS No. 145
will have a material effect on our financial position or results
of operations.

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In June 2002, the Financial Accounting Standards
Board, or FASB, issued Statement of Financial Accounting
Standards No. 146, or SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. SFAS
No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). This Statement requires that a liability for
costs associated with an exit or disposal activity be recognized
and measured at fair value only when the liability is initially
incurred. SFAS No. 146 will be effective for exit or
disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 did not have a material
effect on our financial position or results of operations.

In November 2002, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation (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
January 31, 2003, and we do not expect that the adoption of
FIN No. 45 will 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 and do not expect to incur
significant obligations in the future. 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 are currently evaluating
the impact of FIN No. 46 on our financial statements and
related disclosures.




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

We develop products in the United States and
market our products in North America and Europe and to a lesser
degree in Asia. As a result, our financial results may be
affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in foreign markets.
Approximately 36.5% of our total revenue was made in currencies
other than U.S. dollars in fiscal 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 foreign 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. In the second quarter of fiscal 2004, we
started hedging our intercompany accounts denominated in foreign
currency. We will continue to assess the need to further utilize
financial instruments to hedge currency exposures on an ongoing
basis.

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.

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Item 8.     Financial
Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                         |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                                         |  | Page
|                                                                                                                         |  |     
|Independent Auditors Report                                                                                             |  |      | 35 | 
|Consolidated Balance Sheets as of
    January 31, 2003 and 2002                                                          |  |      | 36 | 
|Consolidated Statements of Operations and
    Comprehensive Loss for the Years Ended January 31, 2003,
    2002 and 2001 |  |      | 37 | 
|Consolidated Statements of Stockholders
    Equity (Deficit) for the Years Ended January 31, 2003, 2002
    and 2001    |  |      | 38 | 
|Consolidated Statements of Cash Flows for the
    Years Ended January 31, 2003, 2002 and 2001                            |  |      | 39 | 
|Notes to Consolidated Financial Statements                                                                               |  |      | 40 | 

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INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders of
Niku Corporation:

We have audited the accompanying consolidated
balance sheets of Niku Corporation and subsidiaries (the
Company) as of January 31, 2003 and 2002, and
the related consolidated statements of operations and
comprehensive loss, stockholders equity (deficit), and
cash flows for each of the years in the three-year period ended
January 31, 2003. In connection with our audits of the
consolidated financial statements, we have also audited the
related financial statement schedule listed in Item 15(a).
These consolidated financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Niku Corporation and
subsidiaries at January 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the years
in the three-year period ended January 31, 2003, in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents
fairly, in all material respects the information set forth
therein.

As described in Note 1 to the consolidated
financial statements, certain expenses in the consolidated
statements of operations for the years ended January 31,
2002 and 2001 have been reclassified.



| |             
| | ------------
| | /s/ KPMG LLP

Mountain View, California

February 21, 2003, except as to Note 12,


which is as of June 2, 2003, Note 18,


which is as of May 13, 2003, Note 3,


which is as of May 23, 2003 and Note 10


which is as of July 23, 2003.


35



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |        |          |         | 
|--------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------- | ------ | -------- | ------ | ----- | ------ | -------- | ------- | 
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                             
|                                                          |                                                                                                                                                                                                                                                                                                             | January 31,                                                                                                 
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                             
|                                                          |                                                                                                                                                                                                                                                                                                             | 2003                                                                                                         |                                                                         | 2002  
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |       
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                             
|                                                          |                                                                                                                                                                                                                                                                                                             | (In thousands, except par                                                                                   
|                                                          |                                                                                                                                                                                                                                                                                                             | value and share data)                                                                                       
|ASSETS                                                    |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |       
|Current Assets:                                           |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |       
|                                                          | Cash and cash equivalents                                                                                                                                                                                                                                                                                   |                                                                                                              | $                                                                       | 16,670 |          |        |       | 51,585 |         
|                                                          | Current portion of restricted cash                                                                                                                                                                                                                                                                          |                                                                                                              |                                                                         | 229    |          |        |       | 4,665  |         
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |       
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              | Total cash, cash equivalents and current portion
    of restricted cash |        |          | 16,899 |       |        |          | 56,250  | 
|                                                          | Accounts receivable, net of allowances of $999
    and $3,037 as of January 31, 2003 and 2002, respectively                                                                                                                                                                                                 |                                                                                                              |                                                                         | 7,211  |          |        |       | 12,797 |         
|                                                          | Prepaid expenses and other current assets                                                                                                                                                                                                                                                                   |                                                                                                              |                                                                         | 1,687  |          |        |       | 5,241  |         
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |       
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              | Total current assets                                                    |        |          | 25,797 |       |        |          | 74,288  | 
|                                                          | Restricted cash                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         | 1,108  |          |        |       | 9,822  |         
|                                                          | Property and equipment, net                                                                                                                                                                                                                                                                                 |                                                                                                              |                                                                         | 2,515  |          |        |       | 13,196 |         
|                                                          | Deposits and other assets                                                                                                                                                                                                                                                                                   |                                                                                                              |                                                                         | 1,143  |          |        |       | 4,269  |         
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |       
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              | Total assets                                                            |        | $        | 30,563 |       |        | $        | 101,575 | 
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |       
|LIABILITIES AND STOCKHOLDERS (DEFICIT)
    EQUITY        |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |       
|Current Liabilities:                                      |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |       
|                                                          | Accounts payable                                                                                                                                                                                                                                                                                            |                                                                                                              | $                                                                       | 2,422  |          |        | $     | 3,279  |         
|                                                          | Accrued liabilities                                                                                                                                                                                                                                                                                         |                                                                                                              |                                                                         | 6,180  |          |        |       | 16,577 |         
|                                                          | Accrued restructuring                                                                                                                                                                                                                                                                                       |                                                                                                              |                                                                         | 5,550  |          |        |       | 5,240  |         
|                                                          | Current portion of long-term obligations                                                                                                                                                                                                                                                                    |                                                                                                              |                                                                         | 1,051  |          |        |       | 27,261 |         
|                                                          | Deferred revenue                                                                                                                                                                                                                                                                                            |                                                                                                              |                                                                         | 9,375  |          |        |       | 10,903 |         
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |       
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              | Total current liabilities                                               |        |          | 24,578 |       |        |          | 63,260  | 
|Long-term accrued restructuring                           |                                                                                                                                                                                                                                                                                                             |                                                                                                              | 6,209                                                                   |        |          |        | 6,758 |       
|Long-term obligations, less current portion               |                                                                                                                                                                                                                                                                                                             |                                                                                                              | 3,750                                                                   |        |          |        |      |       
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |       
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              | Total liabilities                                                       |        |          | 34,537 |       |        |          | 70,018  | 
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |       
|Commitments (Note 11)
    Stockholders equity (deficit): |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |       
|                                                          | Preferred stock: $0.0001 par value; 10,000,000
    shares authorized; no shares issued and outstanding                                                                                                                                                                                                      |                                                                                                              |                                                                         |       |          |        |       |       |         
|                                                          | Common stock; $0.0001 par value; 250,000,000
    shares authorized as of January 31, 2003 and 2002,
    respectively; 9,380,760 issued and 8,761,076 issued and
    outstanding as of January 31, 2003; 7,815,205 shares issued
    and 7,361,039 shares issued and outstanding as of
    January 31, 2002. |                                                                                                              |                                                                         | 1      |          |        |       | 1      |         
|                                                          |                                                                                                                                                                                                                                                                                                             | Treasury stock, at cost: 619,684 shares and
    454,166 shares as of January 31, 2003 and 2002, respectively |                                                                         |        | (5,057   | )      |       |        | (3,570   | )      
|                                                          |                                                                                                                                                                                                                                                                                                             | Additional paid-in capital                                                                                   |                                                                         |        | 500,981  |        |       |        | 514,025  |        
|                                                          |                                                                                                                                                                                                                                                                                                             | Deferred stock-based compensation                                                                            |                                                                         |        | (107     | )      |       |        | (15,325  | )      
|                                                          |                                                                                                                                                                                                                                                                                                             | Notes receivable from stockholders                                                                           |                                                                         |        |         |        |       |        | (1,418   | )      
|                                                          |                                                                                                                                                                                                                                                                                                             | Accumulated other comprehensive loss                                                                         |                                                                         |        | (69      | )      |       |        | (227     | )      
|                                                          |                                                                                                                                                                                                                                                                                                             | Accumulated deficit                                                                                          |                                                                         |        | (499,723 | )      |       |        | (461,929 | )      
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |       
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              | Total stockholders (deficit) equity                                    |        |          | (3,974 | )     |        |          | 31,557  | 
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |       
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              | Total liabilities and stockholders
    (deficit) equity                |        | $        | 30,563 |       |        | $        | 101,575 | 
|                                                          |                                                                                                                                                                                                                                                                                                             |                                                                                                              |                                                                         |        |          |        |       |       

See accompanying notes to consolidated
financial statements.

36



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS

|                                                                  |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |          |          |  
|----------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ----- | ------- | ------- | ---- | ------ | -------- | -------- | - | ------ | -------- | -------- | -
|                                                                  |                                                                                                                                                                             |                                      
|                                                                  |                                                                                                                                                                             | Years Ended January 31,              
|                                                                  |                                                                                                                                                                             |                                      
|                                                                  |                                                                                                                                                                             | 2003                                  |       | 2002    |         | 2001
|                                                                  |                                                                                                                                                                             |                                       |       |         |         |     
|                                                                  |                                                                                                                                                                             |                                      
|                                                                  |                                                                                                                                                                             | (In thousands, except per share data)
|Revenue:                                                          |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|                                                                  | License                                                                                                                                                                     |                                       | $     | 18,712  |         |      | $      | 31,974   |          |   | $      | 47,613   |         
|                                                                  | Services                                                                                                                                                                    |                                       |       | 29,698  |         |      |        | 35,492   |          |   |        | 21,309   |         
|                                                                  |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|                                                                  |                                                                                                                                                                             | Total revenue                         |       |         | 48,410  |      |        |          | 67,466   |   |        |          | 68,922   |  
|                                                                  |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|Cost of revenue:                                                  |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|                                                                  | License (inclusive of amortization of developed
    and core technologies of $0, $6,490, and $10,165 for the years
    ended January 31, 2003, 2002 and 2001, respectively) |                                       |       | 977     |         |      |        | 8,178    |          |   |        | 13,208   |         
|                                                                  | Services (exclusive of stock-based compensation
    of $(288), $1,129 and $991 for the years ended January 31,
    2003, 2002 and 2001, respectively)                       |                                       |       | 12,762  |         |      |        | 24,407   |          |   |        | 17,579   |         
|                                                                  | Impairment of developed and core technologies                                                                                                                               |                                       |       |        |         |      |        | 15,906   |          |   |        |         |         
|                                                                  | Impairment of licensed technology                                                                                                                                           |                                       |       |        |         |      |        | 9,386    |          |   |        |         |         
|                                                                  |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|                                                                  |                                                                                                                                                                             | Total cost of revenue                 |       |         | 13,739  |      |        |          | 57,877   |   |        |          | 30,787   |  
|                                                                  |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|                                                                  |                                                                                                                                                                             | Gross profit                          |       |         | 34,671  |      |        |          | 9,589    |   |        |          | 38,135   |  
|                                                                  |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|Operating expenses:                                               |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|                                                                  | Sales and marketing (exclusive of stock-based
    compensation of $(1,761), $5,042 and $16,860 for the years ended
    January 31, 2003, 2002 and 2001, respectively)       |                                       |       | 23,102  |         |      |        | 70,927   |          |   |        | 68,041   |         
|                                                                  | Research and development (exclusive of
    stock-based compensation of $(1,541), $5,844 and $5,264 for the
    years ended January 31, 2003, 2002 and 2001, respectively)   |                                       |       | 11,896  |         |      |        | 34,856   |          |   |        | 37,031   |         
|                                                                  | General and administrative (exclusive of
    stock-based compensation of $(57), $2,387 and $5,930 for the
    years ended January 31, 2003, 2002 and 2001, respectively)    |                                       |       | 8,434   |         |      |        | 15,205   |          |   |        | 13,108   |         
|                                                                  | Asset impairment and other                                                                                                                                                  |                                       |       | 500     |         |      |        | 123,017  |          |   |        |         |         
|                                                                  | Amortization of goodwill and other intangible
    assets                                                                                                                    |                                       |       |        |         |      |        | 20,843   |          |   |        | 25,737   |         
|                                                                  | Restructuring and other                                                                                                                                                     |                                       |       | 37,916  |         |      |        | 24,353   |          |   |        | 1,910    |         
|                                                                  | Stock-based compensation                                                                                                                                                    |                                       |       | (3,647  | )       |      |        | 14,402   |          |   |        | 29,045   |         
|                                                                  | Merger related expenses                                                                                                                                                     |                                       |       |        |         |      |        |         |          |   |        | 4,263    |         
|                                                                  |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|                                                                  |                                                                                                                                                                             | Total operating expenses              |       |         | 78,201  |      |        |          | 303,603  |   |        |          | 179,135  |  
|                                                                  |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|                                                                  |                                                                                                                                                                             | Operating loss                        |       |         | (43,530 | )    |        |          | (294,014 | ) |        |          | (141,000 | )
|Interest income and other income (expense), net                   |                                                                                                                                                                             |                                       | 5,938 |         |         |      | 2,792  |          |          |   | 10,455 |         
|Interest expense                                                  |                                                                                                                                                                             |                                       | (202  | )       |         |      | (324   | )        |          |   | (331   | )       
|                                                                  |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|                                                                  |                                                                                                                                                                             | Net loss                              |       | $       | (37,794 | )    |        | $        | (291,546 | ) |        | $        | (130,876 | )
|                                                                  |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|Basic and diluted net loss per share                              |                                                                                                                                                                             | $                                     | (4.96 | )       |         | $    | (39.20 | )        |          | $ | (19.57 | )       
|                                                                  |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|Shares used in computing basic and diluted net
    loss per share |                                                                                                                                                                             |                                       | 7,618 |         |         |      | 7,437  |          |          |   | 6,687  |         
|                                                                  |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|Comprehensive loss:                                               |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|                                                                  | Net loss                                                                                                                                                                    |                                       | $     | (37,794 | )       |      | $      | (291,546 | )        |   | $      | (130,876 | )       
|                                                                  | Foreign currency translation adjustments                                                                                                                                    |                                       |       | 158     |         |      |        | (225     | )        |   |        | (2       | )       
|                                                                  | Unrealized (loss) gain on short-term investments                                                                                                                            |                                       |       |        |         |      |        | (26      | )        |   |        | 26       |         
|                                                                  |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         
|                                                                  |                                                                                                                                                                             | Comprehensive loss                    |       | $       | (37,636 | )    |        | $        | (291,797 | ) |        | $        | (130,852 | )
|                                                                  |                                                                                                                                                                             |                                       |       |         |         |      |        |          |          |   |        |         

See accompanying notes to consolidated
financial statements.

37



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

|                                                                                                               |                                         |                                   |           |                |  |            |   |             |  |            |          |               |  |              |        |               |  |         |         |                  |  |   |         |   |  |   |        |   |  |   |      |     |  |   |          |   |  |   |          |     | 
|-------------------------------------------------------------------------------------------------------------- | --------------------------------------- | --------------------------------- | --------- | -------------- |  | ---------- | - | ----------- |  | ---------- | -------- | ------------- |  | ------------ | ------ | ------------- |  | ------- | ------- | ---------------- |  | - | ------- | - |  | - | ------ | - |  | - | ---- | --- |  | - | -------- | - |  | - | -------- | --- | 
|                                                                                                               |                                         |                                   |           |                |  |            |   |             |  |            |          |               |  |              |        | Accumulated   |  |         |         |                 
|                                                                                                               |                                         |                                   |           |                |  |            |   |             |  | Notes      |          | Other         |  |              |        |              
|                                                                                                               |                                         | Common Stock                      |           | Treasury Stock |  | Additional |   | Deferred    |  | Receivable |          | Comprehensive |  |              |        | Total        
|                                                                                                               |                                         |                                   |           |                |  | Paid-in    |   | Stock-Based |  | from       |          | (Loss)        |  | Accumulated  |        | Stockholders
|                                                                                                               |                                         | Shares                            |           | Amount         |  | Shares     |   | Amount      |  | Capital    |          | Compensation  |  | Stockholders |        | Income        |  | Deficit |         | Equity (Deficit)
|                                                                                                               |                                         |                                   |           |                |  |            |   |             |  |            |          |               |  |              |        |               |  |         |         |                 
|                                                                                                               |                                         |                                  
|                                                                                                               |                                         | (In thousands, except share data)
|Balances as of January 31, 2000                                                                                |                                         |                                   | 1,235,542 |                |  | $          |  |             |  |            |         |               |  | $            |       |               |  | $       | 46,797  |                  |  | $ | (17,745 | ) |  | $ | (1,814 | ) |  | $ |     |     |  | $ | (39,507  | ) |  | $ | (12,269  | )  
|Issuance of common stock in connection with the
    acquisition of Legal Anywhere, Inc.                        |                                         |                                   | 85,369    |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 19,998  |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 19,998   |    
|Issuance of common stock in connection with
    initial public offering, net of offering costs of $18,319      |                                         |                                   | 920,000   |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 202,481 |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 202,481  |    
|Conversion of redeemable convertible preferred
    stock into common stock                                     |                                         |                                   | 4,822,981 |                |  |            | 1 |             |  |            |         |               |  |              |       |               |  |         | 100,918 |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 100,919  |    
|Issuance of common stock in connection with the
    acquisition of 600 Monkeys, Inc.                           |                                         |                                   | 16,999    |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 4,101   |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 4,101    |    
|Issuance of common stock in connection with the
    acquisition of bSource, Inc.                               |                                         |                                   | 39,999    |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 7,916   |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 7,916    |    
|Issuance of common stock and stock options in
    connection with the acquisition of ABT Corporation           |                                         |                                   | 395,268   |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 94,447  |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 94,447   |    
|Issuance of common stock and options in
    connection with the exercise of employee stock options             |                                         |                                   | 133,041   |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 1,201   |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 1,201    |    
|Issuance of common stock in connection with the
    exercise of employee stock options for services received   |                                         |                                   | 1,200     |                |  |            |   |             |  |            |          |               |  |              |        |               |  |         | 132     |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 132      |    
|Repurchase of common stock in settlement of notes
    receivable from stockholders                             |                                         |                                   | (24,256   | )              |  |            |  |             |  |            |         |               |  |              |       |               |  |         | (40     | )                |  |   |        |   |  |   | 40     |   |  |   |     |     |  |   |         |   |  |   |         |    
|Issuance of common stock for notes receivable                                                                  |                                         |                                   | 30,100    |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 3,321   |                  |  |   |        |   |  |   | (3,321 | ) |  |   |     |     |  |   |         |   |  |   |         |    
|Interest accrued on notes receivable from
    stockholders                                                     |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         |        |                  |  |   |        |   |  |   | (282   | ) |  |   |     |     |  |   |         |   |  |   | (282     | )  
|Repayment of notes receivable from stockholders                                                                |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         |        |                  |  |   |        |   |  |   | 24     |   |  |   |     |     |  |   |         |   |  |   | 24       |    
|Issuance of common stock in connection with
    employee stock purchase plan                                   |                                         |                                   | 7,524     |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 1,532   |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 1,532    |    
|Deferred stock compensation related to stock
    option grants                                                 |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 30,665  |                  |  |   | (30,665 | ) |  |   |       |   |  |   |     |     |  |   |         |   |  |   |         |    
|Amortization of stock-based compensation                                                                       |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         |        |                  |  |   | 29,045  |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 29,045   |    
|Unrealized gain on short-term investments                                                                      |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         |        |                  |  |   |        |   |  |   |       |   |  |   | 26   |     |  |   |         |   |  |   | 26       |    
|Foreign currency translation adjustment                                                                        |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         |        |                  |  |   |        |   |  |   |       |   |  |   | (2   | )   |  |   |         |   |  |   | (2       | )  
|Net loss                                                                                                       |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         |        |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   | (130,876 | ) |  |   | (130,876 | )  
|                                                                                                               |                                         |                                   |           |                |  |            |   |             |  |            |          |               |  |              |        |               |  |         |         |                  |  |   |         |   |  |   |        |   |  |   |      |     |  |   |          |   |  |   |          |    
|Balances as of January 31, 2001                                                                                |                                         |                                   | 7,663,767 |                |  |            | 1 |             |  |            |         |               |  |              |       |               |  |         | 513,469 |                  |  |   | (19,365 | ) |  |   | (5,353 | ) |  |   | 24   |     |  |   | (170,383 | ) |  |   | 318,393  |    
|Issuance of common stock in connection with the
    exercise of employee stock options                         |                                         |                                   | 87,397    |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 551     |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 551      |    
|Issuance of common stock in connection with the
    acquisition of ABT Corporation                             |                                         |                                   | 46,228    |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 314     |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 314      |    
|Issuance of common stock in connection with
    employee stock purchase plan                                   |                                         |                                   | 42,559    |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 1,244   |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 1,244    |    
|Issuance of common stock in connection with
    restructuring activities                                       |                                         |                                   | 30,000    |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 225     |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 225      |    
|Repurchase of common stock in open market                                                                      |                                         |                                   |          |                |  |            |  |             |  |            | (454,166 | )             |  |              | (3,570 | )             |  |         |        |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | (3,570   | )  
|Repurchase of common stock in settlement of notes
    receivable from stockholders                             |                                         |                                   | (43,808   | )              |  |            |  |             |  |            |         |               |  |              |       |               |  |         | (3,546  | )                |  |   |        |   |  |   | 3,546  |   |  |   |     |     |  |   |         |   |  |   |         |    
|Repurchase of common stock                                                                                     |                                         |                                   | (10,938   | )              |  |            |  |             |  |            |         |               |  |              |       |               |  |         | (11     | )                |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | (11      | )  
|Forgiveness of notes receivable from stockholders                                                              |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         |        |                  |  |   |        |   |  |   | 248    |   |  |   |     |     |  |   |         |   |  |   | 248      |    
|Interest forgiven on notes receivable from
    stockholders                                                    |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         |        |                  |  |   |        |   |  |   | 141    |   |  |   |     |     |  |   |         |   |  |   | 141      |    
|Deferred stock compensation related to stock
    option grants (related to repriced options)                   |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 19,403  |                  |  |   | (19,403 | ) |  |   |       |   |  |   |     |     |  |   |         |   |  |   |         |    
|Reversal of stock-based compensation due to
    employee terminations                                          |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | (17,624 | )                |  |   | 9,041   |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | (8,583   | )  
|Amortization of stock-based compensation                                                                       |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         |        |                  |  |   | 14,402  |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 14,402   |    
|Unrealized loss on short-term investments                                                                      |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         |        |                  |  |   |        |   |  |   |       |   |  |   | (26  | )   |  |   |         |   |  |   | (26      | )  
|Foreign currency translation adjustment                                                                        |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         |        |                  |  |   |        |   |  |   |       |   |  |   | (225 | )   |  |   |         |   |  |   | (225     | )  
|Net loss                                                                                                       |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         |        |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   | (291,546 | ) |  |   | (291,546 | )  
|                                                                                                               |                                         |                                   |           |                |  |            |   |             |  |            |          |               |  |              |        |               |  |         |         |                  |  |   |         |   |  |   |        |   |  |   |      |     |  |   |          |   |  |   |          |    
|Balances as of January 31, 2002                                                                                |                                         |                                   | 7,815,205 |                |  |            | 1 |             |  |            | (454,166 | )             |  |              | (3,570 | )             |  |         | 514,025 |                  |  |   | (15,325 | ) |  |   | (1,418 | ) |  |   | (227 | )   |  |   | (461,929 | ) |  |   | 31,557   |    
|Issuance of common stock in connection with the
    exercise of employee stock options                         |                                         |                                   | 52,973    |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 286     |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 286      |    
|Issuance of common stock in connection with
    employee stock purchase plan                                   |                                         |                                   | 21,741    |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 100     |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 100      |    
|Issuance of common stock in connection with
    exercise of warrant                                            |                                         |                                   | 1,446,000 |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 11      |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 11       |    
|Issuance of common stock in connection with the
    acquisition of ABT Corporation (See Note 16)               |                                         |                                   | 40,000    |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 872     |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 872      |    
|Issuance of common stock in connection with the
    settlement with former employees of Proamics (See Note 16) |                                         |                                   | 4,841     |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 37      |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 37       |    
|Repurchase of common stock in settlement of notes
    receivable from stockholder (See Note 12)                |                                         |                                   |          |                |  |            |  |             |  |            | (125,000 | )             |  |              | (675   | )             |  |         |        |                  |  |   |        |   |  |   | 1,349  |   |  |   |     |     |  |   |         |   |  |   | 674      |    
|Recovery of escrow shares from acquisitions                                                                    |                                         |                                   |          |                |  |            |  |             |  |            | (40,518  | )             |  |              | (812   | )             |  |         |        |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | (812     | )  
|Issuance of warrants in connection with
    restructuring activities (See Note 4)                              |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 5,677   |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | 5,677    |    
|Interest forgiven on notes receivable from
    stockholders                                                    |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         |        |                  |  |   |        |   |  |   | 69     |   |  |   |     |     |  |   |         |   |  |   | 69       |    
|Deferred stock compensation related to stock
    option grants (related to repriced options)                   |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | (18,666 | )                |  |   | 18,666  |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   |         |    
|Reversal of stock-based compensation due to
    employee terminations                                          |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | (1,820  | )                |  |   | 658     |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   | (1,162   | )  
|Amortization of stock-based compensation                                                                       |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         | 459     |                  |  |   | (4,106  | ) |  |   |       |   |  |   |     |     |  |   |         |   |  |   | (3,647   | )  
|Unrealized loss on short-term investments                                                                      |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         |        |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   |         |   |  |   |         |    
|                                                                                                               | Foreign currency translation adjustment |                                   |           |               |  |            |   |            |  |            |          |              |  |              |        |              |  |         |         |                 |  |   |         |  |  |   |        |  |  |   |      | 158 |  |   |          |  |  |   |          | 158 | 
|Net loss                                                                                                       |                                         |                                   |          |                |  |            |  |             |  |            |         |               |  |              |       |               |  |         |        |                  |  |   |        |   |  |   |       |   |  |   |     |     |  |   | (37,794  | ) |  |   | (37,794  | )  
|                                                                                                               |                                         |                                   |           |                |  |            |   |             |  |            |          |               |  |              |        |               |  |         |         |                  |  |   |         |   |  |   |        |   |  |   |      |     |  |   |          |   |  |   |          |    
|Balances as of January 31, 2003                                                                                |                                         |                                   | 9,380,760 |                |  | $          | 1 |             |  |            | (619,684 | )             |  | $            | (5,057 | )             |  | $       | 500,981 |                  |  | $ | (107    | ) |  | $ |       |   |  | $ | (69  | )   |  | $ | (499,723 | ) |  | $ | (3,974   | )  
|                                                                                                               |                                         |                                   |           |                |  |            |   |             |  |            |          |               |  |              |        |               |  |         |         |                  |  |   |         |   |  |   |        |   |  |   |      |     |  |   |          |   |  |   |          |    

See accompanying notes to consolidated financial
statements.

38



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |          |         |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------- | ------- | ------- | ------- | ------- | -------- | ------ | ------- | ------ | -------- | ------- | ------- | -
|                                                         |                                                                                                               |                                                        
|                                                         |                                                                                                               | Years Ended January 31,                                
|                                                         |                                                                                                               |                                                        
|                                                         |                                                                                                               | 2003                                                    |                                       | 2002    |         | 2001   
|                                                         |                                                                                                               |                                                         |                                       |         |         |        
|                                                         |                                                                                                               |                                                        
|                                                         |                                                                                                               | (In thousands)                                         
|Cash flows from operating activities:                    |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|                                                         | Net loss                                                                                                      |                                                         | $                                     | (37,794 | )       |         | $       | (291,546 | )      |         | $      | (130,876 | )      
|                                                         | Adjustments to reconcile net loss to net cash
    used in operating activities                                |                                                         |                                       |         |         |         |         |          |        |         |        |          |        
|                                                         | Depreciation                                                                                                  |                                                         |                                       | 3,429   |         |         |         | 5,424    |        |         |        | 4,110    |        
|                                                         | Amortization of debt discount                                                                                 |                                                         |                                       |        |         |         |         |         |        |         |        | 340      |        
|                                                         | Amortization of goodwill and other intangible
    assets                                                      |                                                         |                                       |        |         |         |         | 27,333   |        |         |        | 35,902   |        
|                                                         | Stock-based compensation                                                                                      |                                                         |                                       | (3,647  | )       |         |         | 14,402   |        |         |        | 29,045   |        
|                                                         | Impairment of licensed technology                                                                             |                                                         |                                       |        |         |         |         | 8,536    |        |         |        |         |        
|                                                         | Restructuring and other                                                                                       |                                                         |                                       | 14,370  |         |         |         | 14,863   |        |         |        |         |        
|                                                         | Impairment of developed and core technologies                                                                 |                                                         |                                       |        |         |         |         | 15,906   |        |         |        |         |        
|                                                         | Asset impairment and other                                                                                    |                                                         |                                       | 500     |         |         |         | 123,017  |        |         |        |         |        
|                                                         | Exercise of stock options for service received                                                                |                                                         |                                       |        |         |         |         |         |        |         |        | 132      |        
|                                                         | Provision for doubtful accounts receivable                                                                    |                                                         |                                       | 59      |         |         |         | 9,010    |        |         |        | 2,429    |        
|                                                         | Revenue resulting from nonmonetary exchanges for
    computer equipment, software and services                |                                                         |                                       |        |         |         |         |         |        |         |        | (630     | )      
|                                                         | Expense resulting from nonmonetary exchanges for
    services                                                 |                                                         |                                       |        |         |         |         |         |        |         |        | 311      |        
|                                                         | Forgiveness of notes receivable from stockholder                                                              |                                                         |                                       | 116     |         |         |         | 248      |        |         |        |         |        
|                                                         | Interest forgiven (accrued) on notes
    receivable from stockholders                                         |                                                         |                                       | (46     | )       |         |         | 141      |        |         |        | (282     | )      
|                                                         | Changes in operating assets and liabilities:                                                                  |                                                         |                                       |         |         |         |         |          |        |         |        |          |        
|                                                         |                                                                                                               | Accounts receivable                                     |                                       |         | 5,492   |         |         |          | 18,373 |         |        |          | (20,313 | )      
|                                                         |                                                                                                               | Prepaid expenses and other current assets               |                                       |         | 3,387   |         |         |          | 2,572  |         |        |          | (11,881 | )      
|                                                         |                                                                                                               | Accounts payable                                        |                                       |         | (857    | )       |         |          | (5,882 | )       |        |          | (1,029  | )      
|                                                         |                                                                                                               | Accrued liabilities                                     |                                       |         | (8,019  | )       |         |          | (7,672 | )       |        |          | (94     | )      
|                                                         |                                                                                                               | Accrued restructuring                                   |                                       |         | 685     |         |         |          | (342   | )       |        |          | 935     |        
|                                                         |                                                                                                               | Deferred revenue                                        |                                       |         | (1,528  | )       |         |          | (8,264 | )       |        |          | 4,918   |        
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|                                                         |                                                                                                               |                                                         | Net cash used in operating activities |         |         | (23,853 | )       |          |        | (73,881 | )      |          |         | (86,983 | )
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|Cash flows from investing activities:                    |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|                                                         | Purchases of property and equipment                                                                           |                                                         |                                       | (2,493  | )       |         |         | (13,457  | )      |         |        | (12,619  | )      
|                                                         | Purchases of short-term investments                                                                           |                                                         |                                       |        |         |         |         | (21,171  | )      |         |        | (112,734 | )      
|                                                         | Sales and maturities of short-term investments                                                                |                                                         |                                       |        |         |         |         | 66,364   |        |         |        | 84,406   |        
|                                                         | Releases (purchases) of investments for
    restricted cash                                                   |                                                         |                                       | 13,089  |         |         |         |         |        |         |        | (14,487  | )      
|                                                         | Acquisitions, net of cash received                                                                            |                                                         |                                       |        |         |         |         |         |        |         |        | (6,125   | )      
|                                                         | Deposits and other assets                                                                                     |                                                         |                                       | 359     |         |         |         | 533      |        |         |        | (1,645   | )      
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|                                                         |                                                                                                               | Net cash provided by (used in) investing
    activities |                                       |         | 10,955  |         |         |          | 32,269 |         |        |          | (63,204 | )      
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|Cash flows from financing activities:                    |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|                                                         | Proceeds from initial public offering of common
    stock, net                                                |                                                         |                                       |        |         |         |         |         |        |         |        | 202,481  |        
|                                                         | Proceeds from issuance of common stock                                                                        |                                                         |                                       | 397     |         |         |         | 1,795    |        |         |        | 2,733    |        
|                                                         | Treasury stock repurchased                                                                                    |                                                         |                                       |        |         |         |         | (3,570   | )      |         |        |         |        
|                                                         | Repurchase of common stock                                                                                    |                                                         |                                       |        |         |         |         | (11      | )      |         |        |         |        
|                                                         | Proceeds from repayment of notes receivable from
    stockholders                                             |                                                         |                                       |        |         |         |         |         |        |         |        | 24       |        
|                                                         | Proceeds (repayment) from bank line of
    credit, net                                                        |                                                         |                                       | (27,000 | )       |         |         | 2,000    |        |         |        | 21,229   |        
|                                                         | Proceeds from bank term loan                                                                                  |                                                         |                                       | 5,000   |         |         |         |         |        |         |        |         |        
|                                                         | Repayment of bank term loan                                                                                   |                                                         |                                       | (250    | )       |         |         |         |        |         |        |         |        
|                                                         | Repayment of debt and capital lease obligations                                                               |                                                         |                                       | (210    | )       |         |         | (465     | )      |         |        | (10,255  | )      
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|                                                         |                                                                                                               | Net cash (used in) provided by financing
    activities |                                       |         | (22,063 | )       |         |          | (251   | )       |        |          | 216,212 |        
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|Net (decrease) increase in cash and cash
    equivalents |                                                                                                               |                                                         | (34,961                               | )       |         |         | (41,863 | )        |        |         | 66,025 |         
|Effect of exchange rate changes                          |                                                                                                               |                                                         | 46                                    |         |         |         | (225    | )        |        |         | (2     | )       
|Cash and cash equivalents, beginning of year             |                                                                                                               |                                                         | 51,585                                |         |         |         | 93,673  |          |        |         | 27,650 |         
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|Cash and cash equivalents, end of year                   |                                                                                                               | $                                                       | 16,670                                |         |         | $       | 51,585  |          |        | $       | 93,673 |         
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|Supplemental disclosures of cash flow information:       |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|Cash paid for interest during the year                   |                                                                                                               | $                                                       | 143                                   |         |         | $       | 309     |          |        | $       | 331    |         
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|Noncash investing and financing activities:              |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|                                                         | Repurchases of common stock in settlement of
    notes receivable from stockholders                           |                                                         | $                                     | 675     |         |         | $       | 3,546    |        |         | $      | 40       |        
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|                                                         | Common stock issued for notes receivable                                                                      |                                                         | $                                     |        |         |         | $       |         |        |         | $      | 3,321    |        
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|                                                         | Deferred stock-based compensation                                                                             |                                                         | $                                     |        |         |         | $       | 19,403   |        |         | $      | 30,665   |        
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|                                                         | Reversal of deferred stock-based compensation                                                                 |                                                         | $                                     | 18,666  |         |         | $       |         |        |         | $      |         |        
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|                                                         | Common stock and redeemable convertible preferred
    stock issued and stock options assumed for acquisitions |                                                         | $                                     |        |         |         | $       |         |        |         | $      | 126,462  |        
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|                                                         | Conversion of redeemable convertible preferred
    stock to common stock                                      |                                                         | $                                     |        |         |         | $       |         |        |         | $      | 100,919  |        
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|                                                         | Unrealized gain on short-term investments                                                                     |                                                         | $                                     |        |         |         | $       |         |        |         | $      | 26       |        
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|                                                         | Write-off of property and equipment to goodwill                                                               |                                                         | $                                     |        |         |         | $       | 1,858    |        |         | $      |         |        
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         
|                                                         | Reversal of stock-based compensation due to
    employee terminations                                         |                                                         | $                                     | 658     |         |         | $       | 9,041    |        |         | $      |         |        
|                                                         |                                                                                                               |                                                         |                                       |         |         |         |         |          |        |         |        |         

See accompanying notes to consolidated financial
statements.

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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Description of
Business and Summary of Significant Accounting
Policies

Description of Business

Niku Corporation (Niku or the Company) was
incorporated in Delaware on January 8, 1998. Niku designs,
develops and markets portfolio management software for large
enterprises. Nikus operations for the period from
January 8, 1998 (inception) through January 31,
1998 were not significant and are included in the Companys
results of operations for the year ended January 31, 1999.

Prior to fiscal 2003, the Company had a fiscal
year that ended on the Saturday preceding January 31. In
the first quarter of fiscal 2003, the Company changed its fiscal
calendar to a calendar month end so fiscal 2003 ended on
January 31, 2003. For presentation purposes, the financial
statements and notes for the twelve months ended
January 31, 2002 and 2001 refer to the periods
calendar month end.

Basis of Presentation

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 are not
limited to, revenue recognition, allowance for doubtful
accounts, depreciation and amortization, sales returns, taxes,
impairment, restructuring, accrued liabilities and
contingencies. Actual results could differ from those estimates.

Reclassifications

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

On November 21, 2002, the Company effected a
one-for-ten reverse stock split of its outstanding common stock.
All information regarding common stock, stock options, warrants
and loss per share amounts has been restated within this
Form 10-K to reflect the reverse stock split.

Cash and Cash Equivalents

The Company considers all highly liquid
investments with remaining maturities of 90 days or less at
the date of acquisition to be cash equivalents. Cash equivalents
consist of money market funds, commercial paper, government
notes and bonds and corporate notes and bonds and certificates
of deposit.

Derivatives Instruments and Hedging
Activities

In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as
amended. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities as
amended by SFAS No. 137 and 138. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at
fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of

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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the derivative are recognized in earnings in the
period of change. The Company adopted SFAS No. 133
effective February 1, 2001 and it did not have a material
effect on the Companys consolidated financial position or
results of operations.

Financial Instruments and Concentration of
Credit Risk

The carrying value of the Companys
financial instruments, including cash and cash equivalents,
short-term investments, accounts receivable and short-term
liabilities approximates fair value. Financial instruments that
subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents and accounts receivable.
Management believes the financial risks associated with these
financial instruments are minimal. The Company maintains its
cash and cash equivalents with high quality financial
institutions. Where appropriate, the Company performs credit
evaluations of its customers, and generally does not require
collateral on accounts receivable. The Company regularly reviews
the adequacy of its accounts receivable allowance after
considering the amount of aged accounts receivable, the age of
each invoice, each customers expected ability to pay and
its collection history with each customer. The Company reviews
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, the Company maintains a
general reserve for all invoices by applying a percentage to
each aging category. The allowance for doubtful accounts
represents the Companys best estimate, but changes in
circumstances such as our customers financial positions
may result in a requirement for additional allowances in the
future.

Property and Equipment

Property and equipment are recorded at cost less
accumulated depreciation. Depreciation and amortization are
computed using the straight-line method over the estimated
useful lives of the assets, generally three years. Leasehold
improvements are amortized over the lease term. Gains and losses
on disposals are included in income at amounts equal to the
difference between the net book value of the disposed assets and
the proceeds received upon disposal. Expenditures for
replacements and improvements are capitalized, while
expenditures for maintenance and repairs are charged to
operations as incurred.

Impairment of Long-lived Assets and Other
Assets

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.SFAS No. 144 superseded SFAS
No. 121, Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed ofand the accounting and
reporting provisions of Accounting Principles Board Opinion
No. 30, Reporting the Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions.SFAS No. 144 established a single
accounting model for impairment or disposal by sale of
long-lived assets. The adoption of SFAS No. 144 in fiscal
2003 did not have a material impact on the Companys
financial position or results of operations.

Revenue Recognition

The Company derives its revenue principally from
licenses of its products, maintenance and support, and delivery
of implementation services. The Company offers its products
primarily through its direct sales force. The Company also
offers its products indirectly through certain channel partners.

Revenue from license fees is recognized in
accordance with Statement of Position 97-2, Software
Revenue Recognition (SOP 97-2), as amended by
SOP 98-9, which permits revenue recognition when
(1) persuasive evidence of an arrangement exists,
(2) delivery of the product has occurred and no significant
obligations of the Companys with regard to implementation
remain, (3) the fee is fixed or determinable, and

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NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(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.The Companys customary practice
is to have a written contract, which is signed by both the
customer and the Company, or a purchase order from those
customers who have previously negotiated a license agreement
with the Company.

Delivery has occurred.The Companys software may be
either physically or electronically delivered to the customers.
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 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.The Company negotiates the fees for
its 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. The Company considers 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 of
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 the Company.
The Companys 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. The
Company has analyzed and determined that it has sufficient VSOE
to allocate revenue to the maintenance and support services and
implementation services components of its perpetual license
arrangements. VSOE for maintenance and support is determined
based upon the customers annual renewal rates for this
element. The Company sells its 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, the Companys
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.

The Company has never engaged in a transaction in
which it provided product licenses or services to a customer in
exchange for an equity interest. The Company recognized no
revenue under any type of reciprocal arrangements in fiscal 2003
or in fiscal 2002. Revenue recognized under reciprocal
arrangements was $16.4 million in the year ended
January 31, 2001, of which approximately $630,000 involved
nonmonetary exchanges.

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NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

Capitalized License Fees

Capitalized license fees relate to royalties that
the Company has paid in advance to third parties for the right
to incorporate their technologies in the Companys
products. Prepaid royalties are expensed to cost of license
revenue when the products are sold to customers.

Research and Development

Research and development costs are expensed as
incurred until technological feasibility in the form of a
working model has been established. Development costs are
capitalized beginning when a products technological
feasibility has been established and ending when the product is
available for general release to customers. Technological
feasibility is reached when the product reaches the working
model stage. To date, the Companys software has become
available for general release concurrent with the establishment
of technological feasibility and, accordingly, no development
costs have been capitalized. Acquired core and developed
technologies are amortized over their estimated economic life
and assessed for impairment in accordance with
SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed. The
Company reclassified, within the 2002 and 2001 Statements of
Operations, $6.5 million and $10.2 million relating to
the amortization of developed and core technologies from
Amortization of Goodwill and Other Intangible Assets
to Cost of License Revenue, and reclassified, within
the 2002 Statement of Operations, $15.9 million relating to
the impairment of developed and core technologies from
Asset Impairment and Other to Impairment of
Developed and Core Technologies. These expense
reclassifications were made to properly conform with the
accounting pronouncements previously articulated in FASB Staff
Implementation Guide, Statement 86, Question 17 and
EITF 96-9, Classification Markdowns and Other Costs
Associated with a Restructuring.

Advertising Expense

Advertising costs are expensed as incurred and
totaled $631,000, $4.4 million and $14.0 million in
the years ended January 31, 2003, 2002 and 2001,
respectively.

Stock-Based Compensation

The Company uses the intrinsic-value method to
account for all of its employee stock-based compensation plans
including FASB Interpretation No. 44 (FIN 44), which
is an interpretation of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees.
Stock-based compensation is being amortized over the vesting
period of 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 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 prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the

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NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

method used on reported results. The Company
adopted the disclosure requirements of SFAS No. 148 in
fiscal 2003.

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 of 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 and in November 2001. With respect to the
stock options granted and restricted stock sold from
January 31, 1998 to February 28, 2000 and 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 loss and basic and diluted
net loss per share would have been as follows (in thousands,
except per share data):

|                                                                                                                                                    |                                 |                         |         |       |   |      |          |        |   |   |          |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ----------------------- | ------- | ----- | - | ---- | -------- | ------ | - | - | -------- | ------ | -
|                                                                                                                                                    |                                 |                        
|                                                                                                                                                    |                                 | Years Ended January 31,
|                                                                                                                                                    |                                 |                        
|                                                                                                                                                    |                                 | 2003                    |         | 2002  |   | 2001
|                                                                                                                                                    |                                 |                         |         |       |   |     
|Net loss, as reported                                                                                                                               |                                 | $                       | (37,794 | )     |   | $    | (291,546 | )      |   | $ | (130,876 | )     
|Add: Stock-based employee compensation expenses
    included in reported net loss, net of related tax effects                                       |                                 |                         | (3,647  | )     |   |      | 14,402   |        |   |   | 29,045   |       
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                                 |                         | (25,169 | )     |   |      | (16,607  | )      |   |   | (41,553  | )     
|                                                                                                                                                    |                                 |                         |         |       |   |      |          |        |   |   |          |       
|Pro forma net loss                                                                                                                                  |                                 | $                       | (66,610 | )     |   | $    | (293,751 | )      |   | $ | (143,384 | )     
|                                                                                                                                                    |                                 |                         |         |       |   |      |          |        |   |   |          |       
|Loss per share:                                                                                                                                     |                                 |                         |         |       |   |      |          |        |   |   |          |       
|                                                                                                                                                    | Basic and diluted  as reported |                         | $       | (4.96 | ) |      | $        | (39.20 | ) |   | $        | (19.57 | )
|                                                                                                                                                    |                                 |                         |         |       |   |      |          |        |   |   |          |       
|                                                                                                                                                    | Basic and diluted  pro forma   |                         | $       | (8.74 | ) |      | $        | (39.50 | ) |   | $        | (21.44 | )
|                                                                                                                                                    |                                 |                         |         |       |   |      |          |        |   |   |          |       

The fair value of each option is estimated on the
date of grant using the Black-Scholes option pricing model after
the IPO, with no expected dividends and the following
weighted-average assumptions:

|                        |  |                         |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ----------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  |                        
|                        |  | Years Ended January 31,
|                        |  |                        
|                        |  | 2003                    |      | 2002 |  | 2001
|                        |  |                         |      |      |  |     
|Expected life (years)   |  |                         | 2.0  |      |  |      | 3.0  |   |  |  | 3.5  |  
|Risk-free interest rate |  |                         | 1.70 | %    |  |      | 3.67 | % |  |  | 4.76 | %
|Volatility              |  |                         | 158  | %    |  |      | 150  | % |  |  | 100  | %

The fair value of purchase rights under the
Employee Stock Purchase Plan is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions for shares issued in the year ended
January 31, 2003, 2002 and 2001, respectively:

|                        |  |                         |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ----------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  |                        
|                        |  | Years Ended January 31,
|                        |  |                        
|                        |  | 2003                    |      | 2002 |  | 2001
|                        |  |                         |      |      |  |     
|Expected life (years)   |  |                         | 1.25 |      |  |      | 1.25 |   |  |  | 1.25 |  
|Risk-free interest rate |  |                         | 1.70 | %    |  |      | 2.22 | % |  |  | 4.73 | %
|Volatility              |  |                         | 158  | %    |  |      | 150  | % |  |  | 100  | %

44



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The weighted average fair value of purchase
rights granted under the Employee Stock Purchase Plan was $3.56,
$21.80 and $136.00 per share in the year ended January 31,
2003, 2002 and 2001, respectively.

Income Taxes

Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected
to be recovered.

Net Loss per Share

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

|                                                 |  |                         |       |      |  |      |       |  |  |  |       | 
|------------------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                                 |  |                        
|                                                 |  | Years Ended January 31,
|                                                 |  |                        
|                                                 |  | 2003                    |       | 2002 |  | 2001
|                                                 |  |                         |       |      |  |     
|Shares issuable under stock options              |  |                         | 1,497 |      |  |      | 1,490 |  |  |  | 1,129 | 
|Shares of restricted stock subject to repurchase |  |                         |      |      |  |      | 31    |  |  |  | 139   | 
|Shares issuable under warrants                   |  |                         | 20    |      |  |      | 6     |  |  |  | 5     | 

The weighted-average exercise price of options
outstanding as of January 31, 2003, 2002 and 2001 was
$9.74, $16.21 and $109.10 per share, respectively. The
weighted-average purchase price of restricted stock subject to
repurchase as of January 31, 2002 and 2001 was $10.00 and
$31.30 per share, respectively. The weighted-average exercise
price of warrants as of January 31, 2003, 2002 and 2001 was
$27.18, $96.80 and $115.80 per share, respectively.

Comprehensive Loss

Comprehensive loss includes, in addition to net
loss, foreign currency translation adjustments and unrealized
gains or losses on short-term investments. Tax effects of the
other components of comprehensive loss have not been
material. The Company has reported components of comprehensive
loss in the accompanying consolidated statements of operations
and comprehensive loss.

Foreign Currency Translation

The functional currencies of the Companys
foreign subsidiaries is the local currency of the country in
which the respective subsidiary operates. Assets and liabilities
are translated using the exchange rate on the balance sheet
date. Revenue, expenses, gains and losses are translated at the
average exchange rate in effect during the period. Translation
adjustments are included in the consolidated balance sheet
caption Accumulated other comprehensive income.
Foreign currency transaction gains and losses are included in
interest income and other income (expense), net, and to date,
have not been material.

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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Recent Accounting
Pronouncements

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

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections.The provisions of SFAS No. 145 relating to
the rescission of SFAS No. 4 are effective for financial
statements issued for fiscal years beginning after May 15,
2002, and the provisions relating to SFAS No. 13 are
effective for transactions occurring after May 15, 2002.
SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt,and an amendment of that
Statement, SFAS No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements.SFAS No. 145 also
rescinds SFAS No. 44, Accounting for Intangible Assets
of Motor Carriers, and amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency
between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. The Company does not believe the
adoption of SFAS No. 145 will have a material effect on its
financial position or results of operations.

In June 2002, the Financial Accounting Standards
Board, or FASB, issued Statement of Financial Accounting
Standards No. 146, or SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities.SFAS
No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). This Statement requires
that a liability for costs associated with an exit or disposal
activity be recognized and measured at fair value only when the
liability is initially incurred. SFAS No. 146 will be
effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of
SFAS No. 146 did not have a material effect on the
Companys financial position or results of operations.

In November 2002, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation
(FIN) No. 5, 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. The Company had no existing
guarantees as of January 31, 2003 and it does not expect
that the adoption of FIN No. 45 will have a material effect
on its financial position or results of operations.
Indemnification and warranty provisions within the
Companys customer license and service agreements are
generally consistent with those prevalent in our industry. The
duration of the Companys product warranties generally does
not exceed 90 days following delivery of our products. The
Company has not incurred significant obligations under customer
indemnification or warranty provision historically and does not
expect to incur significant obligations in the future.
Accordingly, the Company does 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

46



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 are
currently evaluating the impact of FIN No. 46 on our
financial statements and related disclosures.



|   |                                                      
|-- | -----------------------------------------------------
|2. | Reimbursement for out of Pocket Expenses
    Incurred

In November 2001, the FASB issued Emerging Issues
Task Force Issue (EITF) No. 01-14, Income
Statement Characterization of Reimbursements Received for Out of
Pocket Expenses Incurred, which requires the Company to
report reimbursements of out of pocket expenses as revenue and
the corresponding expenses incurred as cost of revenue within
the condensed consolidated statements of operations. The Company
adopted EITF No. 01-14 in the first quarter of fiscal 2003
and reclassified reimbursable expenses into services revenue
with a corresponding increase in cost of services revenue. The
impact of the reclassification was to increase services revenue
and cost of services revenue by $1.2 million and
$1.5 million in fiscal 2003 and 2002, respectively. It is
impracticable for the Company to determine the impact of EITF
No. 01-14 for fiscal 2001.



|   |                           
|-- | --------------------------
|3. | Repricing of Stock Options

On November 12, 2001, the Companys
board of directors, acting pursuant to existing terms of the
Companys stock option plans, approved the repricing of
approximately 890,000 outstanding stock options with exercise
prices above $7.50. The exercise prices of all such stock
options were repriced to $7.50, which was the fair market value
of the Companys stock on November 12, 2001. There
were no changes to the vesting schedules of the repriced
options. Options held by the Companys former chief
executive officer, former executive vice president of strategy
and planning, board of directors and non-employees were not
repriced. The Company is accounting for the repriced options
using variable accounting whereby the aggregate intrinsic value
of the repriced options is continuously remeasured and amortized
to stock-based compensation expense over the vesting periods.
Based on the stock price as of January 31, 2003, the
Company recorded $4.8 million in recovery of stock-based
compensation for stock-based compensation recognized in fiscal
2002 relating to these repriced stock options, offset by
$1.2 million in other stock-based compensation in fiscal
2003. As of January 31, 2003, deferred stock-based
compensation relating to these repriced options was zero,
reflecting the intrinsic value of unexercised repriced options
as of January 31, 2003.

In October 2002, the Company cancelled options to
purchase 55,000 shares of common stock held by our chief
executive officer and immediately granted him 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 $4.19 on January 31, 2003, the Company recorded
$96,000 in stock-based compensation in fiscal 2003. In addition,
based on the closing price of the Companys common stock of
$4.67 on April 30, 2003, the Company recorded $35,000 in
stock-based compensation in the first quarter of fiscal 2003. On
May 23, 2003, the Companys chief executive officer
exercised all of his repriced stock options to purchase
55,000 shares of common stock and the Company recorded an
additional $56,000 in stock-based compensation in May 2003. As
all repriced options were exercised, the Company will no longer
be required to record additional stock-based compensation
relating to these stock options in the future.



|   |                        
|-- | -----------------------
|4. | Restructuring and Other



| |          
| | ---------
| | Severance

In fiscal 2003, the Company implemented a
restructuring program. The Company restructured its operations
and reduced its workforce by approximately 147 employees in
fiscal 2003. These headcount reductions affected all functional
groups of the Company. The Company recorded $3.9 million in
severance

47



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

costs, of which $1.0 million related to the
severance and related charges for the Companys former
chief executive officer and former executive vice president of
planning and strategy.



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Loss on Retirement of Property and Equipment
    and Other Assets No Longer in Use

The Company retired $8.6 million in property
and equipment in connection with vacating certain facilities.
The Company terminated an equipment lease and acquired the
equipment for $2.0 million, of which $1.1 million was
written off as a restructuring cost due to equipment no longer
in use as a result of reductions in headcount.



| |                                                     
| | ----------------------------------------------------
| | Net Lease Commitment Costs on Vacated
    Facilities

The Company also vacated certain facilities and
terminated certain leases, including the lease for a significant
facility in Redwood City, California. The $23.0 million in
net lease commitments on vacated leases recorded in fiscal 2003
includes $21.8 million related to the termination of the
Redwood City lease. The $21.8 million in termination costs
include lease termination payments of $7.4 million, the
release to the landlord of cash securing a $5.9 million
letter of credit that was previously classified as restricted
cash, the release of a $2.9 million security deposit and
$5.6 million in estimated fair value for warrant issued for
1,445,000 shares of common stock with an exercise price of
$0.001. The Company also recorded a $2.2 million credit in
net lease commitment costs related to previously recorded
deferred rent relating to the lease. The estimated fair value of
the warrant was determined using the Black-Scholes options
pricing model with a contractual life of five years, risk-free
interest rate of 1.70%, volatility of 150% and expected dividend
of 0%. The Companys future liabilities under the Redwood
City lease prior to the termination were approximately
$121.7 million.

The Company also terminated a facility lease in
Danville, California. The Companys future liabilities
under this lease, net of estimated sublease income prior to
termination, approximated $2.7 million. The termination
costs included the release to the landlord of a $534,000
security deposit, a cash payment of $216,000 and warrants to
purchase 15,000 shares of common stock with an exercise price of
$0.10 and a fair value of $42,000. The value of these warrants
was determined using the Black-Scholes options pricing model
with an expected life of five years, risk-free interest rate of
1.70%, volatility of 150% and expected dividend of 0%. The
Company also terminated a facility lease in Atlanta, Georgia for
$481,000, consisting of lease termination payment of $181,000
and the release to the landlord of cash securing a $300,000
letter of credit that was previously classified as restricted
cash. The Company also terminated a facility lease in Bellevue,
Washington for $10,000, offset by $80,000 for the reversal of
future lease payments that had been previously accrued relating
to this lease.

The Company has ceased to pay rent on a lease in
New York, New York for a facility we vacated in fiscal 2002, and
the landlord has drawn upon a letter of credit of
$2.6 million secured by a certificate of deposit. The
Company also creased to pay rent on the leases for certain other
smaller facilities that it has vacated. The Company is seeking
to terminate these leases or sublease these facilities.

In addition to above restructuring charges
relating to facility leases, the Company recorded
$2.4 million in net lease commitment costs on vacated
leases in fiscal 2003 related to restructuring activities in
fiscal 2002 primarily due to adjustments to estimated future
sublease income for certain facilities vacated in fiscal 2002.
The Company also terminated a facility lease in Lincolnshire,
Illinois for $388,000, consisting of a lease termination payment
of $63,000 and the release to the landlord of cash securing a
$325,000 letter of credit that was previously classified as
restricted cash. The Companys future liabilities under
this lease, net of estimated sublease income prior to
termination, approximated $692,000.

48



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                        
| | -----------------------
| | Computer and Car Leases

The Company recorded $346,000 relating to lease
payments for computer equipment and car leases that are no
longer being utilized as a result of the reductions in headcount.



| |                            
| | ---------------------------
| | Other Restructuring Charges

The Company recorded a credit of $812,000 for the
value of 40,518 escrow shares of the Companys common stock
recovered from escrow accounts in which such shares had been
placed in conjunction with the acquisitions of ABT Corporation,
bSource, Inc., Proamics Corporation and 600 Monkeys Inc. in
fiscal 2001.

The Company also recorded a credit of
$1.2 million for the adjustment of stock-based compensation
expenses related to the reversal of previously recorded
stock-based compensation expenses for employees terminated
pursuant to the restructuring program.



| |              
| | -------------
| | Summary Table

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

|                                                                                   |  |               |        |                   |  |                       |        |             |  |               |         |   |  |   |         |   |  |   |        | 
|---------------------------------------------------------------------------------- |  | ------------- | ------ | ----------------- |  | --------------------- | ------ | ----------- |  | ------------- | ------- | - |  | - | ------- | - |  | - | ------ | 
|                                                                                   |  |               |        | Restructuring and |  | Reclassifications and |        |             |  |              
|                                                                                   |  |               |        | Other Charges in  |  | Write Offs in the     |        | Paid in the |  |              
|                                                                                   |  | Accrued as of |        | the Year Ended    |  | Year Ended            |        | Year Ended  |  | Accrued as of
|                                                                                   |  | January 31,   |        | January 31,       |  | January 31,           |        | January 31, |  | January 31,  
|                                                                                   |  | 2002          |        | 2003              |  | 2003                  |        | 2003        |  | 2003         
|                                                                                   |  |               |        |                   |  |                       |        |             |  |              
|Restructuring initiated in fiscal
    2003                                         |  |               |        |                   |  |                       |        |             |  |               |         |   |  |   |         |   |  |   |        | 
|Loss on retirement of property and equipment and
    other assets no longer in use |  | $             |       |                   |  | $                     | 9,684  |             |  | $             | (9,907  | ) |  | $ | 223     |   |  | $ |       | 
|Severance                                                                          |  |               |       |                   |  |                       | 3,912  |             |  |               |        |   |  |   | (2,881  | ) |  |   | 1,031  | 
|Net lease commitment costs on vacated facilities                                   |  |               |       |                   |  |                       | 23,015 |             |  |               | (6,459  | ) |  |   | (12,921 | ) |  |   | 3,635  | 
|Computer and car leases                                                            |  |               |       |                   |  |                       | 346    |             |  |               |         |   |  |   | (43     | ) |  |   | 303    | 
|Other exit costs                                                                   |  |               |       |                   |  |                       | 517    |             |  |               | 82      |   |  |   | (11     | ) |  |   | 588    | 
|Stock-based compensation adjustment                                                |  |               |       |                   |  |                       | (1,162 | )           |  |               | 1,162   |   |  |   |        |   |  |   |       | 
|Restructuring initiated in fiscal
    2002                                         |  |               |        |                   |  |                       |        |             |  |               |         |   |  |   |         |   |  |   |        | 
|Severance                                                                          |  |               | 265    |                   |  |                       | 91     |             |  |               |        |   |  |   | (356    | ) |  |   |       | 
|Net lease commitment costs on vacated facilities                                   |  |               | 10,666 |                   |  |                       | 2,437  |             |  |               | (25     | ) |  |   | (7,049  | ) |  |   | 6,029  | 
|Exit costs for business line                                                       |  |               | 643    |                   |  |                       | (169   | )           |  |               |        |   |  |   | (301    | ) |  |   | 173    | 
|Other exit costs                                                                   |  |               | 424    |                   |  |                       | 57     |             |  |               | (35     | ) |  |   | (446    | ) |  |   |       | 
|Escrow shares adjustment                                                           |  |               |       |                   |  |                       | (812   | )           |  |               | 812     |   |  |   |        |   |  |   |       | 
|                                                                                   |  |               |        |                   |  |                       |        |             |  |               |         |   |  |   |         |   |  |   |        | 
|                                                                                   |  | $             | 11,998 |                   |  | $                     | 37,916 |             |  | $             | (14,370 | ) |  | $ | (23,785 | ) |  | $ | 11,759 | 
|                                                                                   |  |               |        |                   |  |                       |        |             |  |               |         |   |  |   |         |   |  |   |        | 

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

49



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NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                     
| | ------------------------------------
| | Restructuring Charges in Fiscal 2002

In fiscal 2002, the Company initiated a
restructuring program. The Company restructured its operations
and reduced its workforce by approximately 665 employees and
recorded $7.5 million in severance and related charges.
These reductions in workforce affected all of the Companys
functional groups. The Company vacated 17 leased facilities and
recorded $11.0 million in net lease commitment costs. The
Company also recorded $11.8 million in loss on retirement
of property and equipment and other assets, including a
$1.7 million write-off of prepaid expenses associated with
a consulting service arrangement due to the reduction in
headcount. The Company recorded an additional $725,000 in other
exit costs to terminate this consulting service arrangement, of
which $225,000 represents the value of 300,000 shares of
common stock that the Company issued as part of this termination
agreement. The Company recorded $8.6 million in stock-based
compensation adjustment related to the reversal of previously
recorded stock-based compensation expenses for employees
terminated pursuant to the restructuring program. The Company
recorded $24.4 million in restructuring and other charges
in the year ended January 31, 2002 and consisted of the
following (in thousands):

|                                                                  |  |               |     |                   |  |                       |        |             |  |               |         |   |  |   |         |   |  |   |        | 
|----------------------------------------------------------------- |  | ------------- | --- | ----------------- |  | --------------------- | ------ | ----------- |  | ------------- | ------- | - |  | - | ------- | - |  | - | ------ | 
|                                                                  |  |               |     | Restructuring and |  | Reclassifications and |        |             |  |              
|                                                                  |  |               |     | Other Charges in  |  | Write Offs in the     |        | Paid in the |  |              
|                                                                  |  | Accrued as of |     | the Year Ended    |  | Year Ended            |        | Year Ended  |  | Accrued as of
|                                                                  |  | January 31,   |     | January 31,       |  | January 31,           |        | January 31, |  | January 31,  
|                                                                  |  | 2001          |     | 2002              |  | 2002                  |        | 2002        |  | 2002         
|                                                                  |  |               |     |                   |  |                       |        |             |  |              
|Loss on retirement of property and equipment and
    other assets |  | $             |    |                   |  | $                     | 11,814 |             |  | $             | (11,814 | ) |  | $ |        |   |  | $ |       | 
|Severance                                                         |  |               |    |                   |  |                       | 7,522  |             |  |               |        |   |  |   | (7,257  | ) |  |   | 265    | 
|Net lease commitment costs on vacated facilities                  |  |               |    |                   |  |                       | 11,041 |             |  |               | 593     |   |  |   | (968    | ) |  |   | 10,666 | 
|Exit costs for business line                                      |  |               | 935 |                   |  |                       | 1,414  |             |  |               |        |   |  |   | (1,706  | ) |  |   | 643    | 
|Other exit costs                                                  |  |               |    |                   |  |                       | 1,143  |             |  |               | (225    | ) |  |   | (494    | ) |  |   | 424    | 
|Stock-based compensation adjustment                               |  |               |    |                   |  |                       | (8,581 | )           |  |               | 8,581   |   |  |   |        |   |  |   |       | 
|                                                                  |  |               |     |                   |  |                       |        |             |  |               |         |   |  |   |         |   |  |   |        | 
|                                                                  |  | $             | 935 |                   |  | $                     | 24,353 |             |  | $             | (2,865  | ) |  | $ | (10,425 | ) |  | $ | 11,998 | 
|                                                                  |  |               |     |                   |  |                       |        |             |  |               |         |   |  |   |         |   |  |   |        | 



|   |                                                                     
|-- | --------------------------------------------------------------------
|5. | Asset Impairment and Other and Impairment of
    Licensed Technology

There were no asset impairment and other charges
in fiscal 2003 except for an impairment charge of the
Companys strategic equity investment made in April 2000.
In April 2000, the Company purchased 75,000 shares of the
private companys common stock at $6.67 per share. The
Company regularly performs an impairment assessment of this
$500,000 investment. In performing an impairment assessment, the
Company considers the private companys current solvency,
future access to capital and recent equity transactions. Based
on an analysis of these factors, including the terms of a
proposed financing in fiscal 2003 which indicated that its price
per share has dropped to $0.32 per share, the Company determined
that the investment impairment was other than temporary and
recorded such impairment in asset impairment and other charges
in the accompanying consolidated statement of operations and
comprehensive loss in fiscal 2003. The carrying value of the
Companys strategic equity investment was zero at
January 31, 2003.

Asset impairment and other charges in fiscal 2002
were as follows: In the first quarter of fiscal 2002, the
Company performed an impairment assessment of its goodwill and
other intangible assets recorded in connection with its
acquisitions of Legal Anywhere, bSource.com, 600 Monkeys and
Alyanza Software due to a change in the Companys product
plan related to certain acquired technologies. This assessment
was based on the expected future cash flows from goodwill and
intangible assets over their remaining useful lives. The

50



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

determination of cash flows was based on our
decision to abandon certain product lines acquired as part of
the acquisition of these companies, as a result of our
restructuring plan. As a result of this assessment, the Company
recorded $23.2 million in asset impairment charges. This
amount included $20.4 million to write down the net book
value of certain goodwill and other intangible assets from our
acquisitions of Legal Anywhere (excluding $1.3 million in
developed and core technologies), bSource, 600 Monkeys and
Alyanza to zero except for the carrying value of Legal
Anywheres goodwill and customer lists which was reduced to
their estimated fair value of $1.8 million. In the second
quarter of fiscal 2002, the Company performed an additional
impairment assessment of goodwill and other intangible assets
recorded in connection with its acquisitions of ABT, Proamics
and Legal Anywhere. This assessment was triggered and performed
primarily due to a significant decline in the Companys
stock price, which resulted in the net book value of its assets
significantly exceeding its market capitalization. As a result
of this assessment, the Company recorded $99.8 million in
asset impairment charges in the second quarter of fiscal 2002,
which reduced the fair value of goodwill and other intangible
assets related to its acquisitions of ABT (excluding
$6.3 million in developed and core technologies), Proamics
(excluding $8.3 million in developed and core technologies)
and Legal Anywhere to zero.

There was no impairment of developed and core
technologies in fiscal 2003 or fiscal 2001. Impairment of
developed and core technologies was $15.9 million in fiscal
2002. In the first quarter of fiscal 2002, the Company performed
an impairment assessment of its developed and core technology in
connection with its acquisition of Legal Anywhere due to a
change in the Companys product plan related to this
acquired technology. This assessment was based on expected
future cash flows from such developed and core technology overs
its remaining useful life. The determination of cash flows was
based on the Companys decision to abandon certain product
lines acquired as part of the acquisition of Legal Anywhere, as
a results of its restructuring plan. As a results of this
assessment, the Company recorded $1.3 million in impairment
of developed and core technologies charges in the first quarter
of 2002 which reduced the net book value of the developed and
core technology related to its acquisition of Legal Anywhere to
zero. In the second quarter of fiscal 2002, the Company
performed an additional impairment assessment of developed and
core technologies recorded in connection with its acquisitions
of ABT and Proamics. This assessment was triggered and performed
primarily due to a significant decline in the Companys
stock price, which resulted in net book value of its assets
significantly exceeding its market capitalization. As result of
this assessment, the Company recorded $14.6 million in
impairment of developed and core technologies charge in the
second quarter of fiscal 2002 which reduced the fair value of
developed and core technologies related to our acquisitions of
ABT and Proamics to zero.

The estimate of the fair value was based on the
estimated future discounted cash flows for the remaining life of
the goodwill and other intangible assets with a discount rate of
25% and an estimated terminal value. The assumptions supporting
the estimated cash flows, including the discount rate and an
estimated terminal value, reflect managements best
estimates. The discount rate was based upon the weighted average
cost of capital for comparable companies. In fiscal 2002, the
Company recorded $138.9 million in asset impairment
charges, consisting of $136.1 million relating to goodwill
and other intangible assets (including $15.9 million in
developed and core technologies), $1.9 million in
accelerated depreciation for internally used software and
$874,000 to write off fixed assets that the Company no longer
utilized.

In fiscal 2002, the Company determined that the
carrying value of certain royalties that the Company had prepaid
for the right to third party licensed technology would not be
realized. The Company recorded $9.4 million in cost of
revenue for impairment of licensed technology, including
$8.5 million from prepaid royalties on third-party
technologies and $850,000 from royalties paid in fiscal 2002, in
each case on third-party technologies which the Company would
not be including with its products at all or at the extent
required under the applicable contracts due to a change in the
Companys product plan.

51



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NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                  |                                                                                       |                         |         |      |  |      |          |        |  |   |          |        | 
|------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------- | ------- | ---- |  | ---- | -------- | ------ |  | - | -------- | ------ | 
|                                                  |                                                                                       |                        
|                                                  |                                                                                       | Years Ended January 31,
|                                                  |                                                                                       |                        
|                                                  |                                                                                       | 2003                    |         | 2002 |  | 2001
|                                                  |                                                                                       |                         |         |      |  |     
|Net loss, as reported                             |                                                                                       | $                       | (37,794 | )    |  | $    | (291,546 | )      |  | $ | (130,876 | )     
|Adjustment:                                       |                                                                                       |                         |         |      |  |      |          |        |  |   |          |       
|                                                  | Amortization of goodwill and other intangible
    assets with indefinite useful lives |                         |         |     |  |      |          | 13,082 |  |   |          | 21,295 | 
|                                                  |                                                                                       |                         |         |      |  |      |          |        |  |   |          |       
|Net loss, as adjusted                             |                                                                                       | $                       | (37,794 | )    |  | $    | (278,464 | )      |  | $ | (109,581 | )     
|                                                  |                                                                                       |                         |         |      |  |      |          |        |  |   |          |       
|Basic and diluted net loss per share, as reported |                                                                                       | $                       | (4.96   | )    |  | $    | (39.20   | )      |  | $ | (19.57   | )     
|                                                  |                                                                                       |                         |         |      |  |      |          |        |  |   |          |       
|Basic and diluted net loss per share, as adjusted |                                                                                       | $                       | (4.96   | )    |  | $    | (37.44   | )      |  | $ | (16.39   | )     
|                                                  |                                                                                       |                         |         |      |  |      |          |        |  |   |          |       



|   |                       
|-- | ----------------------
|6. | Short-Term Investments

There were no short-term investments as of
January 31, 2003. Short-term investments as of
January 31, 2002 consisted of $400,000 in government bonds
and are included in the caption Restricted Cash.



|   |                         
|-- | ------------------------
|7. | Accounts Receivable, net

Accounts receivable, net consisted of the
following (in thousands):

|                                |  |             |       |      |  |   |        |  
|------------------------------- |  | ----------- | ----- | ---- |  | - | ------ | -
|                                |  |            
|                                |  | January 31,
|                                |  |            
|                                |  | 2003        |       | 2002
|                                |  |             |       |     
|Unbilled accounts receivable    |  | $           | 1,315 |      |  | $ | 3,702  |  
|Accounts receivable             |  |             | 6,895 |      |  |   | 12,132 |  
|                                |  |             |       |      |  |   |        |  
|                                |  |             | 8,210 |      |  |   | 15,834 |  
|Allowance for doubtful accounts |  |             | (999  | )    |  |   | (3,037 | )
|                                |  |             |       |      |  |   |        |  
|                                |  | $           | 7,211 |      |  | $ | 12,797 |  
|                                |  |             |       |      |  |   |        |  

52



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NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Property and
Equipment

Property and equipment consisted of the following
(in thousands):

|                                          |  |             |        |      |  |   |        |  
|----------------------------------------- |  | ----------- | ------ | ---- |  | - | ------ | -
|                                          |  |            
|                                          |  | January 31,
|                                          |  |            
|                                          |  | 2003        |        | 2002
|                                          |  |             |        |     
|Computer equipment and office equipment   |  | $           | 3,298  |      |  | $ | 4,881  |  
|Software                                  |  |             | 3,479  |      |  |   | 5,468  |  
|Furniture and fixtures                    |  |             | 542    |      |  |   | 2,658  |  
|Leasehold improvements                    |  |             | 171    |      |  |   | 6,065  |  
|                                          |  |             |        |      |  |   |        |  
|                                          |  |             | 7,490  |      |  |   | 19,072 |  
|Accumulated depreciation and amortization |  |             | (4,975 | )    |  |   | (5,876 | )
|                                          |  |             |        |      |  |   |        |  
|                                          |  | $           | 2,515  |      |  | $ | 13,196 |  
|                                          |  |             |        |      |  |   |        |  

9.     Accrued
Liabilities

Accrued liabilities consisted of the following
(in thousands):

|                                       |  |             |       |      |  |   |        | 
|-------------------------------------- |  | ----------- | ----- | ---- |  | - | ------ | 
|                                       |  |            
|                                       |  | January 31,
|                                       |  |            
|                                       |  | 2003        |       | 2002
|                                       |  |             |       |     
|Accrued compensation and related costs |  | $           | 2,495 |      |  | $ | 6,546  | 
|Accrued sales/use and property taxes   |  |             | 1,351 |      |  |   | 2,022  | 
|Other                                  |  |             | 2,334 |      |  |   | 8,009  | 
|                                       |  |             |       |      |  |   |        | 
|                                       |  | $           | 6,180 |      |  | $ | 16,577 | 
|                                       |  |             |       |      |  |   |        | 

10.     Debt

In October 2001, the Company entered into two
loan agreements with a financial institution secured generally
by certain of the Companys tangible and intangible assets
and providing lines of credit up to $30.0 million, of which
a $5.0 million line of credit is secured by qualifying
accounts receivables. As of January 31, 2002, the Company
had $27.0 million outstanding under these lines of credit.
These lines of credit were repaid in full in fiscal 2003.
Interest on each of these lines of credit accrued at the rate of
7.0% per annum. These lines of credit expired in July 2002.

In conjunction with the acquisition of ABT in
August 2000, the Company assumed a $744,000 loan that bears
interest at the rate of 8.25% per annum. This loan was repaid in
full in fiscal 2003.

The Company has a term loan for $5.0 million
from a financial institution. The Company entered into this term
loan in September 2002. The term loan is secured by the
Companys tangible and intangible assets, accrues interest
at 7.50% per annum and matures on February 15, 2004. The
Company is required to make quarterly payments of principal and
interest on a five-year amortization schedule. The Company
repaid $250,000 plus interest in December 2002, $250,000 plus
interest in March 2003 and $250,000 plus interest in June 2003.
On the maturity date, the remaining principal balance of
$3.8 million is due. This term loan has certain financial
covenants, including covenants requiring (1) cash on hand of
$8.5 million as of January 31, 2003, (2) minimum
revenue of $12.5 million for the quarter ended
January 31, 2003, (3) operating expenses not to exceed
$11.3 million for the quarter ended January 31, 2003
and (4) the ratio of cash and cash equivalents to
outstanding balance of the term loan shall at all times be equal
to 1.25 or higher. In January 2003, the Company and the
financial institution agreed that the Company would not repay
any portion of the term loan with the proceeds of a legal
settlement received in December 2002. As of January 31,
2003, the Company was not in compliance with the minimum revenue
covenant described above and in February 2003,

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NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the Company received a waiver for such covenant
for the quarter ended January 31, 2003. The Company was
compliant with all other covenants as of January 31, 2003.
On July 23, 2003, the Company repaid $4.3 million for
the balance of the bank term loan outstanding 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 line of credit is secured by the Companys
tangible and intangible assets, accrues interest at prime rate
plus 0.5% 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
equivalence 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 and stock-based
compensation) for the period from May 1, 2003 to
April 30, 2004.

11.     Commitments
and Contingencies

The Companys principal executive office
occupies approximately 37,247 square feet in Redwood City,
California under a lease that expires in June 2005. We currently
occupy various leases in United States and Europe. These leases
expire at various dates through April 2009.

Rental expense was approximately
$7.0 million, $12.5 million and $4.4 million for
the years ended January 31, 2003, 2002 and 2001,
respectively.

Future minimum lease payments under noncancelable
operating leases are as follows as of January 31, 2003 (in
thousands):

|                       |  |           |        |            |  |       |       |  |  |   |        | 
|---------------------- |  | --------- | ------ | ---------- |  | ----- | ----- |  |  | - | ------ | 
|                       |  | Operating |        | Bank       |  |      
|Year Ended January 31, |  | Leases    |        | Borrowings |  | Total
|                       |  |           |        |            |  |      
|2004                   |  | $         | 6,536  |            |  | $     | 1,000 |  |  | $ | 7,536  | 
|2005                   |  |           | 2,804  |            |  |       | 3,750 |  |  |   | 6,554  | 
|2006                   |  |           | 2,120  |            |  |       |      |  |  |   | 2,120  | 
|2007                   |  |           | 1,252  |            |  |       |      |  |  |   | 1,252  | 
|2008                   |  |           | 1,464  |            |  |       |      |  |  |   | 1,464  | 
|Thereafter             |  |           | 2,537  |            |  |       |      |  |  |   | 2,537  | 
|                       |  |           |        |            |  |       |       |  |  |   |        | 
|Total payments         |  | $         | 16,713 |            |  | $     | 4,750 |  |  | $ | 21,463 | 
|                       |  |           |        |            |  |       |       |  |  |   |        | 

Lease payments above, net of estimated sublease
income, relating to facilities that the Company has either
vacated or terminated pursuant to its restructuring program,
amounted to $3.5 million, $609,000, $1.0 million,
$928,000 and $1.3 million for the twelve months ended
January 31, 2004, 2005, 2006, 2007 and 2008, respectively,
and $2.4 million thereafter. The $3.5 million in
payments mentioned above for the twelve months ended
January 31, 2004 for leases we have either vacated or
terminated (but had not yet paid as of January 31, 2003)
included the final $2.0 million cash payments related to
the termination of a major lease in Redwood City, California.
This $2.0 million was paid in February 2003. These amounts
were recorded in accrued restructuring and long-term accrued
restructuring as of January 31, 2003.

12.     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

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NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

interest, which was recorded as compensation
expense. The remaining amount of the loan of $674,000, including
$99,000 in accrued interest, was reclassified to other assets in
the second quarter of fiscal 2003 as there was no longer common
stock to secure the loan. This loan remains secured by the
personal assets of Mr. Pickus. On March 16, 2003,
Mr. Pickus made a $150,000 payment against this loan which
reduced the interest outstanding as of the date of payment to
zero and reduced the principal outstanding to $537,000. On
June 2, 2003, Mr. Pickus repaid $120,000 of this loan,
which reduced the interest outstanding as of the date of payment
to zero and reduced the principal outstanding to $421,000.

13.     Stockholders
Equity (Deficit)



| |                                 
| | --------------------------------
| | Common Shares Repurchase Program

In March 2001, the Companys board of
directors authorized the Company, from time to time and as
business conditions warrant, with no expiration date, to
repurchase shares of common stock at market price having an
aggregate value of up to $10.0 million in open market,
negotiated or block transactions. In fiscal 2002, the Company
repurchased 454,166 shares of common stock at an average
price per share of $7.86. The Company did not repurchase shares
of common stock in open market in fiscal 2003.



| |                       
| | ----------------------
| | 1998 Stock Option Plan

In January 1998, the Company adopted the 1998
Stock Option Plan (1998 Plan). There were initially
800,000 shares of common stock reserved for issuance to
directors, employees and consultants under the 1998 Plan. The
1998 Plan provides for the issuance of stock purchase rights,
incentive stock options or nonstatutory stock options.

The stock purchase rights are subject to a
restricted stock purchase agreement whereby the Company has the
right to repurchase the stock at the original issuance price
upon the voluntary or involuntary termination of the
purchasers employment with the Company. The Companys
repurchase right lapses at a rate of 25% per year over four
years or  1/3 per year over three years. Through
January 31, 2003, the Company had issued
339,975 shares under restricted stock purchase agreements,
of which approximately 255,564 shares had been repurchased.
No shares were subject to repurchase at January 31, 2003.
Certain of these restricted shares were issued to officers of
the Company for full recourse promissory notes with interest
rates ranging from 4.44% to 8.00% in the period from July 1998
to February 2000.

Under the 1998 Plan, the exercise price for
incentive stock options is at least 100% of the stocks
fair market value on the date of grant for employees owning 10%
or less of the voting power of all classes of stock, and at
least 110% of the fair market value on the date of grant for
employees owning more than 10% of the voting power of all
classes of stock. For nonstatutory stock options, the exercise
price is also at least 110% of the fair market value on the date
of grant for employees owning more than 10% of the voting power
of all classes of stock and no less than 85% for employees
owning 10% or less of the voting power of all classes of stock.

Under the 1998 Plan, options generally expire in
ten years. However, the term of the options may be limited to
five years if the optionee owns stock representing more than 10%
of the voting power of all classes of stock. Vesting periods are
determined by the Companys Board of Directors and
generally provided for shares to vest ratably over a four-year
period. Pursuant to a stockholder action dated January 24,
2000, shares issued under the 1998 Plan that are subsequently
canceled or repurchased by the Company or that are issuable upon
exercise of options granted under the 1998 Plan that expire or
become exercisable without being exercised in full, will become
available under the 2000 Equity Incentive Plan. Such shares are
added to common stock reserved for issuance under the 2000
Equity Incentive Plan.

As of January 31, 2003, there were 37,454
options outstanding and no additional options available for
grant under the 1998 Plan.

55



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NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                           
| | --------------------------
| | 2000 Equity Incentive Plan

In December 1999, the Company adopted the 2000
Equity Incentive Plan (2000 Plan). The Company initially
reserved 600,000 shares of common stock for issuance under
the 2000 Plan. Shares issued under the 1998 Plan that are
subsequently canceled or repurchased by the Company or that are
issuable upon exercise of options granted under the 1998 Plan
that expire or become exercisable without being exercised in
full, will become available under the 2000 Plan. On each
January 1, the aggregate number of shares reserved for
issuance under the 2000 Plan will increase automatically by a
number of shares equal to 5% of the Companys total
outstanding shares on December 31 of the preceding year.
The 2000 Plan will terminate in 2010.

Under the 2000 Plan, the exercise price for
incentive stock options is at least 100% of the stocks
fair market value on the date of grant for employees owning 10%
or less of the voting power of all classes of stock, and at
least 110% of the fair market value on the date of grant for
employees owning more than 10% of the voting power of all
classes of stock. For nonstatutory stock options, the exercise
price is also at least 110% of the fair market value on the date
of grant for employees owning more than 10% of the voting power
of all classes of stock and no less than 85% for employees
owning 10% or less of the voting power of all classes of stock.

Under the 2000 Plan, options generally expire in
ten years. However, the term of the options may be limited to
five years if the optionee owns stock representing more than 10%
of the voting power of all classes of stock. Vesting periods are
determined by the Companys Board of Directors and
generally provide for shares to vest ratably over a four-year
period.

As of January 31, 2003, the Company had
851,656 shares available for grant and 1,375,228 shares of
common stock reserved to issue under the 2000 Plan, respectively.



| |                          
| | -------------------------
| | 2000 Stock Incentive Plan

In August 2000, the Company adopted the 2000
Stock Incentive Plan (2000 Incentive Plan) to provide incentives
to eligible employees, including employees hired in connection
with the Companys acquisition of ABT, bSource and 600
Monkeys. The Company reserved 260,000 shares of common
stock for issuance under the 2000 Incentive Plan. The exercise
price of the incentive stock is determined by the Board of
Directors when the option is granted and may not be less than
the par value of the shares on the date of grant. Under the 2000
Incentive Plan, options generally expire in ten years. Vesting
periods are determined by the Companys Board of Directors.

As of January 31, 2003, the Company had
120,002 shares available for grant and 83,960 shares
of common stock reserved for issuance only under the 2000
Incentive Plan.



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

In December 1999, the Company adopted the 2000
Employee Stock Purchase Plan (Purchase Plan) and initially
reserved a total of 100,000 shares of the Companys
common stock for issuance under the Purchase Plan. On
July 31, 2002, the Company suspended the Purchase Plan. The
Companys board of directors has the authority to reinstate
the Purchase Plan in the future. Withholdings under the Purchase
Plan since the last purchase period in February 2002 have been
refunded to the Companys employees. On each
January 1, the aggregate number of shares reserved for
issuance under the Purchase Plan increases automatically by a
number of shares equal to 1% of the Companys total
outstanding shares on December 31 of the preceding year.
The aggregate number of shares reserved for issuance under the
Purchase Plan may not exceed 1,000,000 shares. Generally,
the offering period is 24 months in length. The Purchase
Plan permits eligible employees to purchase common stock through
payroll deductions at a purchase price of 85% of the lower of
the fair market value of the common stock at the beginning of
the applicable offering period or the end of the applicable
purchase period. The Company issued 21,741 and
42,559 shares of common stock under the Purchase Plan in
the years ended January 31, 2003 and 2002 at a
weighted-average purchase price of $4.60

56



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NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and $29.20 per share, respectively. On
July 31, 2002, the Company suspended the Purchase Plan. The
Companys board of directors has the authority to reinstate
the Purchase Plan in the future. Withholdings under the Purchase
Plan since the last purchase period in February 2002 have been
refunded to the Companys employees.

A summary of the status of the Companys
stock option plans as of January 31, 2003, 2002 and 2001
and changes during the years ended on those dates is presented
below (excluding Purchase Plan):

|                                                                                                                                 |  |                         |           |           |  |        |       |           |  |        |            |           |  |   |        |  |  |  |           |   |  |   |        | 
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | --------- | --------- |  | ------ | ----- | --------- |  | ------ | ---------- | --------- |  | - | ------ |  |  |  | --------- | - |  | - | ------ | 
|                                                                                                                                 |  |                        
|                                                                                                                                 |  | Years Ended January 31,
|                                                                                                                                 |  |                        
|                                                                                                                                 |  |                         |           |           |  |       
|                                                                                                                                 |  | 2003                    |           | 2002      |  | 2001  
|                                                                                                                                 |  |                         |           |           |  |       
|                                                                                                                                 |  |                         |           | Weighted- |  |        |       | Weighted- |  |        |            | Weighted-
|                                                                                                                                 |  |                         |           | Average   |  |        |       | Average   |  |        |            | Average  
|                                                                                                                                 |  |                         |           | Exercise  |  |        |       | Exercise  |  |        |            | Exercise 
|                                                                                                                                 |  | Shares                  |           | Price     |  | Shares |       | Price     |  | Shares |            | Price    
|                                                                                                                                 |  |                         |           |           |  |        |       |           |  |        |            |          
|Outstanding at beginning of year                                                                                                 |  |                         | 1,489,587 |           |  | $      | 16.21 |           |  |        | 1,128,822  |           |  | $ | 109.10 |  |  |  | 477,581   |   |  | $ | 10.30  | 
|Granted                                                                                                                          |  |                         | 770,465   |           |  |        | 4.45  |           |  |        | 2,006,814  |           |  |   | 14.75  |  |  |  | 1,074,009 |   |  |   | 135.20 | 
|Canceled                                                                                                                         |  |                         | (710,437  | )         |  |        | 18.08 |           |  |        | (1,516,772 | )         |  |   | 83.99  |  |  |  | (258,428  | ) |  |   | 86.10  | 
|Exercised                                                                                                                        |  |                         | (52,973   | )         |  |        | 5.40  |           |  |        | (129,277   | )         |  |   | 4.27   |  |  |  | (164,341  | ) |  |   | 28.40  | 
|                                                                                                                                 |  |                         |           |           |  |        |       |           |  |        |            |           |  |   |        |  |  |  |           |   |  |   |        | 
|Outstanding at end of year                                                                                                       |  |                         | 1,496,642 |           |  |        | 9.74  |           |  |        | 1,489,587  |           |  |   | 16.21  |  |  |  | 1,128,822 |   |  |   | 109.10 | 
|                                                                                                                                 |  |                         |           |           |  |        |       |           |  |        |            |           |  |   |        |  |  |  |           |   |  |   |        | 
|Options exercisable at end of year                                                                                               |  |                         | 551,890   |           |  |        | 17.47 |           |  |        | 327,203    |           |  |   | 33.26  |  |  |  | 116,797   |   |  |   | 51.50  | 
|                                                                                                                                 |  |                         |           |           |  |        |       |           |  |        |            |           |  |   |        |  |  |  |           |   |  |   |        | 
|Weighted-average fair value of options granted
    during the year with exercise price equal to fair value at date
    of grant  |  |                         | 770,465   |           |  |        | 3.27  |           |  |        | 1,962,314  |           |  |   | 12.30  |  |  |  | 871,162   |   |  |   | 102.00 | 
|Weighted-average fair value of options granted
    during the year with exercise price less than fair value at date
    of grant |  |                         |          |           |  |        |      |           |  |        | 44,500     |           |  |   | 7.10   |  |  |  | 202,848   |   |  |   | 162.30 | 

Options granted and canceled for the year ended
January 31, 2002, included approximately 890,000 stock
options repriced.

The following table summarizes information about
stock options outstanding as of January 31, 2003:

|                        |  |                     |           |             |  |           |      |                     |  |           |        |  |  |  |         |  |  |   |        | 
|----------------------- |  | ------------------- | --------- | ----------- |  | --------- | ---- | ------------------- |  | --------- | ------ |  |  |  | ------- |  |  | - | ------ | 
|                        |  |                     |           |             |  |          
|                        |  | Options Outstanding |           |             |  |          
|                        |  |                     |           |            
|                        |  |                     |           | Weighted-   |  |           |      | Options Exercisable
|                        |  |                     |           | Average     |  |           |      |                    
|                        |  |                     |           | Remaining   |  | Weighted- |      |                     |  | Weighted-
|                        |  | Number              |           | Contractual |  | Average   |      | Number              |  | Average  
|                        |  | of                  |           | Life        |  | Exercise  |      | of                  |  | Exercise 
|Range of Exercise Price |  | Shares              |           | (Years)     |  | Price     |      | Shares              |  | Price    
|                        |  |                     |           |             |  |           |      |                     |  |          
|$ 00.00 - $ 30.56       |  |                     | 1,464,680 |             |  |           | 7.80 |                     |  | $         | 6.85   |  |  |  | 520,224 |  |  | $ | 9.84   | 
|$ 30.57 - $ 61.13       |  |                     | 1,200     |             |  |           | 1.60 |                     |  |           | 31.86  |  |  |  | 1,000   |  |  |   | 31.35  | 
|$ 91.70 - $122.25       |  |                     | 22,862    |             |  |           | 0.40 |                     |  |           | 110.49 |  |  |  | 22,766  |  |  |   | 110.54 | 
|$244.51 - $275.07       |  |                     | 7,900     |             |  |           | 0.50 |                     |  |           | 250.00 |  |  |  | 7,900   |  |  |   | 250.00 | 
|                        |  |                     |           |             |  |           |      |                     |  |           |        |  |  |  |         |  |  |   |        | 
|                        |  |                     | 1,496,642 |             |  |           | 7.60 |                     |  |           | 9.74   |  |  |  | 551,890 |  |  |   | 17.47  | 
|                        |  |                     |           |             |  |           |      |                     |  |           |        |  |  |  |         |  |  |   |        | 

57



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

14.     Income
Taxes

The Companys income tax expense (benefit)
for the years ended January 31, 2003, 2002 and 2001 are as
follows (in thousands):

|         |         |                         |   |      |      |      |   |     |     |  |   |     |     | 
|-------- | ------- | ----------------------- | - | ---- | ---- | ---- | - | --- | --- |  | - | --- | --- | 
|         |         |                        
|         |         | Years Ended January 31,
|         |         |                        
|         |         | 2003                    |   | 2002 |      | 2001
|         |         |                         |   |      |      |     
|Current: |         |                         |   |      |      |      |   |     |     |  |   |    
|         | State   |                         | $ | 37   |      |      | $ | 123 |     |  | $ | 35  |    
|         | Foreign |                         |   | (258 | )    |      |   | 256 |     |  |   | 328 |    
|         |         |                         |   |      |      |      |   |     |     |  |   |    
|         |         | Total current           |   | $    | (221 | )    |   | $   | 379 |  |   | $   | 363 | 
|         |         |                         |   |      |      |      |   |     |     |  |   |    

The reconciliations between the income tax
amounts computed by applying the U.S. federal statutory tax
rate of 35% to income (loss) before income taxes and actual
income taxes are as follows (in thousands):

|                                                                                   |       |                         |         |      |   |      |          |     |  |   |         |     | 
|---------------------------------------------------------------------------------- | ----- | ----------------------- | ------- | ---- | - | ---- | -------- | --- |  | - | ------- | --- | 
|                                                                                   |       |                        
|                                                                                   |       | Years Ended January 31,
|                                                                                   |       |                        
|                                                                                   |       | 2003                    |         | 2002 |   | 2001
|                                                                                   |       |                         |         |      |   |     
|Expected income tax benefit                                                        |       | $                       | (13,307 | )    |   | $    | (101,987 | )   |  | $ | (44,455 | )  
|Nondeductible expenses                                                             |       |                         | 231     |      |   |      | 189      |     |  |   | 296     |    
|Goodwill amortization                                                              |       |                         |        |      |   |      | 37,317   |     |  |   | 6,860   |    
|Stock-based compensation                                                           |       |                         | (1,168  | )    |   |      | 4,033    |     |  |   | 7,900   |    
|State income taxes                                                                 |       |                         | 38      |      |   |      | 123      |     |  |   | 35      |    
|Foreign rate differential                                                          |       |                         | (360    | )    |   |      | 373      |     |  |   | 328     |    
|Merger costs                                                                       |       |                         |        |      |   |      |         |     |  |   | 1,362   |    
|Net operating loss and temporary differences for
    which no benefit was realized |       |                         | 14,345  |      |   |      | 60,331   |     |  |   | 28,037  |    
|                                                                                   |       |                         |         |      |   |      |          |     |  |   |         |    
|                                                                                   | Total |                         | $       | (221 | ) |      | $        | 379 |  |   | $       | 363 | 
|                                                                                   |       |                         |         |      |   |      |          |     |  |   |         |    

As of January 31, 2003 and 2002, the tax
effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are set out
below:

|                     |                             |                                 |          |         |         |  |          |        |         | 
|-------------------- | --------------------------- | ------------------------------- | -------- | ------- | ------- |  | -------- | ------ | ------- | 
|                     |                             |                                
|                     |                             | January 31,                    
|                     |                             |                                
|                     |                             | 2003                            |          | 2002   
|                     |                             |                                 |          |        
|Deferred tax assets: |                             |                                 |          |         |         |  |          |       
|                     | Net operating loss          |                                 | $        | 100,809 |         |  | $        | 80,007 |        
|                     | Tax credit carryover        |                                 |          | 6,389   |         |  |          | 6,099  |        
|                     | Accruals and reserves       |                                 |          | 650     |         |  |          | 1,708  |        
|                     | Restructuring costs         |                                 |          | 3,449   |         |  |          | 4,621  |        
|                     | Plant and equipment         |                                 |          | 2,963   |         |  |          | 4,322  |        
|                     | Compensation accruals       |                                 |          | 307     |         |  |          | 1,299  |        
|                     | Deferred stock compensation |                                 |          | 3,874   |         |  |          | 4,365  |        
|                     | Stock warrants expenses     |                                 |          | 2,317   |         |  |          |       |        
|                     | Deferred revenue            |                                 |          |        |         |  |          | 891    |        
|                     | State taxes                 |                                 |          | 13      |         |  |          | 43     |        
|                     | Other intangible assets     |                                 |          |        |         |  |          |       |        
|                     |                             |                                 |          |         |         |  |          |       
|                     |                             | Total gross deferred tax assets |          |         | 120,771 |  |          |        | 103,355 | 
|Valuation allowance  |                             |                                 | (120,771 | )       |         |  | (103,355 | )     
|                     |                             |                                 |          |         |         |  |          |       
|                     | Net deferred tax assets     |                                 | $        |        |         |  | $        |       |        
|                     |                             |                                 |          |         |         |  |          |       

58



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The net changes in the total valuation allowance
for the years ended January 31, 2003 and 2002 were an
increase of approximately $17.4 million and
$72.3 million, respectively. The Company believes
sufficient uncertainty exists regarding its ability to realize
its deferred tax assets and, accordingly, a valuation allowance
has been established against the net deferred tax assets.

Approximately $3.3 million of the valuation
allowance for deferred tax assets is attributable to employee
stock option deductions, the benefit from which will be
allocated to paid-in capital rather than current earnings if and
when subsequently realized.

As of January 31, 2003 the Company had
approximately $265.2 million and $87.3 million of net
operating loss carryforwards for both federal and state
purposes, respectively, available to offset taxable income in
future years. The federal net operating loss carryforwards
expire if not utilized by 2022 and the state net operating loss
carryforwards expire if not utilized by 2012. In addition, the
Company had approximately $4.2 million and
$2.3 million of tax credit carryforwards for increased
research expenditures for federal and state purposes,
respectively. The increased research credit for federal purposes
expires if not utilized by 2022 and the increased research
credit for state purposes can be carried over indefinitely. The
Company also had approximately $266,000 of manufacturers
investment credit carryforwards for state purposes, which expire
if not utilized by 2010.

Federal and state laws impose substantial
restrictions on the utilization of net operating loss and tax
credit carryforwards in the event of an ownership
change, as defined in Section 382 of the Internal
Revenue Code. The Company has not yet determined whether an
ownership change occurred due to significant stock transactions
in each of the reporting years disclosed. If an ownership change
has occurred, utilization of the net operating loss and tax
credit carryforwards could be significantly reduced.



|    |                    
|--- | -------------------
|15. | Segment Information

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 information is as follows (in
thousands):

|          |             |                         |        |        |  |      |        |        |  |   |        |        | 
|--------- | ----------- | ----------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|          |             |                        
|          |             | Years Ended January 31,
|          |             |                        
|          |             | 2003                    |        | 2002   |  | 2001
|          |             |                         |        |        |  |     
|Services: |             |                         |        |        |  |      |        |        |  |   |        |       
|          | Consulting  |                         | $      | 11,455 |  |      | $      | 14,813 |  |   | $      | 12,889 | 
|          | Maintenance |                         |        | 18,243 |  |      |        | 20,679 |  |   |        | 8,420  | 
|          |             |                         |        |        |  |      |        |        |  |   |        |       
|          |             | $                       | 29,698 |        |  | $    | 35,492 |        |  | $ | 21,309 |       
|          |             |                         |        |        |  |      |        |        |  |   |        |       

It is impractical for the Company to disclose
license revenue by product type.

The Company markets its products primarily from
its operations in the United States. International sales are
primarily to customers in the United Kingdom and the rest of
Europe. Revenue is attributed to the

59



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

location of the customers. Geographic information
regarding the Companys revenue is as follows (in
thousands):

|                 |  |                         |        |      |  |      |        |  |  |   |        | 
|---------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                 |  |                        
|                 |  | Years Ended January 31,
|                 |  |                        
|                 |  | 2003                    |        | 2002 |  | 2001
|                 |  |                         |        |      |  |     
|United States    |  | $                       | 30,764 |      |  | $    | 34,620 |  |  | $ | 56,026 | 
|United Kingdom   |  |                         | 8,409  |      |  |      | 13,808 |  |  |   |       | 
|Europe and other |  |                         | 9,237  |      |  |      | 17,493 |  |  |   | 12,896 | 
|                 |  |                         |        |      |  |      |        |  |  |   |        | 
|                 |  | $                       | 48,410 |      |  | $    | 65,921 |  |  | $ | 68,922 | 
|                 |  |                         |        |      |  |      |        |  |  |   |        | 

It is impracticable to determine the breakdown of
fiscal 2001 revenue between United Kingdom and Europe and other.
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 January 31, 2003 and 2002,
respectively. There were no customers individually representing
more than 10% of total revenue in fiscal 2003, 2002 and 2001,
respectively.



|    |                            
|--- | ---------------------------
|16. | Acquisition Related Matters

On February 7, 2002, the Company settled an
arbitration with two founders of ABT Corporation, a company we
acquired in August 2000, in connection with their consulting
agreements entered with the Company in August 2000. The Company
agreed to pay a total of $2.8 million and the issuance of
40,000 shares of its common stock with a value of $872,000
based on the stock price on the date of the issuance of the
common stock. In fiscal 2003, the Company paid $2.6 million
and the remaining balance was paid by March 2003. These amounts
were included in accrued liabilities as of January 31, 2003.

In May 2002, the Company issued 4,841 shares of
common stock to former employees of Proamics Corporation, a
company we acquired in December 1998. Theses shares were valued
at $7.70 per share based on the stock price on the date of
issuance.



|    |           
|--- | ----------
|17. | 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 (the 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 Goldman, Sachs and Co., Dain Rauscher Wessels,
U.S. Bancorp Piper Jaffray and Thomas Weisel Partners, 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

60



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

issuers and underwriters were not dismissed as a
matter of law. A proposed settlement between the plaintiffs and
issuer defendants is in the process of being negotiated and
approved. 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.

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



|    |                  
|--- | -----------------
|18. | Subsequent Events

On February 12, 2003, the Company entered
into a common stock and warrant purchase agreement with various
investors led by Walden VC, providing for the issuance of
3,088,230 shares of the Companys 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
share in a connection with a private placement. These warrants
have an exercise price of $3.40. In February 2003, the Company
issued 1,549,735 shares of its common stock and warrants to
purchase 193,720 shares of common stock in connection with
this private placement. In April 2003, the Companys
stockholders approved the issuance of the remaining
1,538,495 shares of the Companys common stock and
warrants to purchase 192,314 shares of common stock in
connection with this private placement and we issued such common
stock and warrants to purchase common stock. Total estimated net
proceeds from the private placement approximated
$10.3 million. Total shares and warrants outstanding
following the private placement were 11,853,646 (including
options exercised subsequent to January 31, 2003) and
405,617, respectively.

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 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. The Companys chief executive officer,
chief financial officer and members of the board of directors
are not eligible to participate in the program. The stock option
exchange program did not result in any additional compensation
charges or variable plan accounting. On April 15, 2003,
stock options for 622,511 shares of common stock were
eligible to be exchanged. On May 13, 2003, 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
program, the Company will no longer incur stock-based
compensation for outstanding stock options for approximately
298,000 shares of common stock

61



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##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 our stock price increases
above $7.50.



|    |                                                  
|--- | -------------------------------------------------
|19. | Selected Quarterly Financial Data
    (Unaudited)

The selected unaudited quarterly financial data
are as follows (in thousands, except per share data):

|                                                                 |                                                          |                                       |                   |             |       |          |        |           |        |             |        |             |         |          |        |           |       |     |        |       |         |         |        |        |         |         |        |        |          |          |        |        |         |         |  
|---------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------- | ----------------- | ----------- | ----- | -------- | ------ | --------- | ------ | ----------- | ------ | ----------- | ------- | -------- | ------ | --------- | ----- | --- | ------ | ----- | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | -------- | -------- | ------ | ------ | ------- | ------- | -
|                                                                 |                                                          |                                      
|                                                                 |                                                          | Quarter Ended,                       
|                                                                 |                                                          |                                      
|                                                                 |                                                          | January 31,                           |                   | October 31, |       | July 31, |        | April 30, |        | January 31, |        | October 31, |         | July 31, |        | April 30,
|                                                                 |                                                          | 2003                                  |                   | 2002        |       | 2002     |        | 2002      |        | 2002(1)     |        | 2001(1)     |         | 2001(1)  |        | 2001(1)  
|                                                                 |                                                          |                                       |                   |             |       |          |        |           |        |             |        |             |         |          |        |          
|                                                                 |                                                          |                                      
|                                                                 |                                                          | (In thousands, except per share data)
|Revenue                                                          |                                                          | $                                     | 12,015            |             |       | $        | 11,774 |           |        | $           | 10,494 |             |         | $        | 14,127 |           |       | $   | 18,280 |       |         | $       | 14,476 |        |         | $       | 17,237 |        |          | $        | 17,473 |       
|Cost of revenue                                                  |                                                          |                                       | 2,787             |             |       |          | 3,050  |           |        |             | 3,820  |             |         |          | 4,082  |           |       |     | 4,053  |       |         |         | 7,437  |        |         |         | 25,026 |        |          |          | 21,361 |       
|                                                                 |                                                          |                                       |                   |             |       |          |        |           |        |             |        |             |         |          |        |           |       |     |        |       |         |         |        |        |         |         |        |        |          |          |        |       
|Gross Profit                                                     |                                                          |                                       | 9,228             |             |       |          | 8,724  |           |        |             | 6,674  |             |         |          | 10,045 |           |       |     | 14,227 |       |         |         | 7,039  |        |         |         | (7,789 | )      |          |          | (3,888 | )     
|                                                                 |                                                          |                                       |                   |             |       |          |        |           |        |             |        |             |         |          |        |           |       |     |        |       |         |         |        |        |         |         |        |        |          |          |        |       
|Operating expenses:                                              |                                                          |                                       |                   |             |       |          |        |           |        |             |        |             |         |          |        |           |       |     |        |       |         |         |        |        |         |         |        |        |          |          |        |       
|                                                                 | Sales and marketing                                      |                                       |                   | 4,103       |       |          |        | 3,438     |        |             |        | 7,414       |         |          |        | 8,147     |       |     |        | 9,034 |         |         |        | 12,308 |         |         |        | 17,181 |          |          |        | 32,404 |        
|                                                                 | Research and development                                 |                                       |                   | 1,907       |       |          |        | 1,967     |        |             |        | 3,993       |         |          |        | 4,029     |       |     |        | 4,319 |         |         |        | 8,963  |         |         |        | 10,532 |          |          |        | 11,042 |        
|                                                                 | General and administrative                               |                                       |                   | 1,664       |       |          |        | 2,232     |        |             |        | 2,331       |         |          |        | 2,207     |       |     |        | 1,929 |         |         |        | 3,126  |         |         |        | 4,051  |          |          |        | 6,099  |        
|                                                                 | Asset impairment and other                               |                                       |                   |            |       |          |        | 75        |        |             |        | 425         |         |          |        |          |       |     |        |      |         |         |        |       |         |         |        | 99,832 |          |          |        | 23,185 |        
|                                                                 | Amortization of goodwill and other intangible
    assets |                                       |                   |            |       |          |        |          |        |             |        |            |         |          |        |          |       |     |        |      |         |         |        |       |         |         |        | 11,357 |          |          |        | 9,486  |        
|                                                                 | Restructuring and other                                  |                                       |                   | 880         |       |          |        | 7,469     |        |             |        | 30,405      |         |          |        | (838      | )     |     |        | 9,374 |         |         |        | 4,138  |         |         |        | 7,749  |          |          |        | 3,092  |        
|                                                                 | Stock-based compensation                                 |                                       |                   | 135         |       |          |        | 165       |        |             |        | (301        | )       |          |        | (3,646    | )     |     |        | 6,395 |         |         |        | 1,134  |         |         |        | 2,188  |          |          |        | 4,685  |        
|                                                                 | Merger related expenses                                  |                                       |                   |            |       |          |        |          |        |             |        |            |         |          |        |          |       |     |        |      |         |         |        |       |         |         |        |       |          |          |        |       |        
|                                                                 |                                                          |                                       |                   |             |       |          |        |           |        |             |        |             |         |          |        |           |       |     |        |       |         |         |        |        |         |         |        |        |          |          |        |       
|                                                                 |                                                          | Total operating expenses              |                   |             | 8,689 |          |        |           | 15,346 |             |        |             | 44,267  |          |        |           | 9,899 |     |        |       | 31,051  |         |        |        | 29,669  |         |        |        | 152,890  |          |        |        | 89,993  |        
|                                                                 |                                                          |                                       |                   |             |       |          |        |           |        |             |        |             |         |          |        |           |       |     |        |       |         |         |        |        |         |         |        |        |          |          |        |       
|                                                                 |                                                          | Operating loss                        |                   |             | 539   |          |        |           | (6,622 | )           |        |             | (37,593 | )        |        |           | 146   |     |        |       | (16,824 | )       |        |        | (22,630 | )       |        |        | (160,679 | )        |        |        | (93,881 | )      
|Interest and other income, net                                   |                                                          |                                       | 5,120             |             |       |          | 184    |           |        |             | 312    |             |         |          | 120    |           |       |     | 3      |       |         |         | 395    |        |         |         | 1,071  |        |          |          | 999    |       
|                                                                 |                                                          |                                       |                   |             |       |          |        |           |        |             |        |             |         |          |        |           |       |     |        |       |         |         |        |        |         |         |        |        |          |          |        |       
|                                                                 |                                                          |                                       | Net income (loss) |             | $     | 5,659    |        |           | $      | (6,438      | )      |             | $       | (37,281  | )      |           | $     | 266 |        |       | $       | (16,821 | )      |        | $       | (22,235 | )      |        | $        | (159,608 | )      |        | $       | (92,882 | )
|                                                                 |                                                          |                                       |                   |             |       |          |        |           |        |             |        |             |         |          |        |           |       |     |        |       |         |         |        |        |         |         |        |        |          |          |        |       
|Basic net income (loss) per share                                |                                                          | $                                     | 0.68              |             |       | $        | (0.88  | )         |        | $           | (5.03  | )           |         | $        | 0.04   |           |       | $   | (2.31  | )     |         | $       | (3.01  | )      |         | $       | (21.19 | )      |          | $        | (12.30 | )     
|                                                                 |                                                          |                                       |                   |             |       |          |        |           |        |             |        |             |         |          |        |           |       |     |        |       |         |         |        |        |         |         |        |        |          |          |        |       
|Shares used in computing basic net income
    (loss) per share   |                                                          |                                       | 8,338             |             |       |          | 7,312  |           |        |             | 7,414  |             |         |          | 7,386  |           |       |     | 7,292  |       |         |         | 7,375  |        |         |         | 7,533  |        |          |          | 7,550  |       
|                                                                 |                                                          |                                       |                   |             |       |          |        |           |        |             |        |             |         |          |        |           |       |     |        |       |         |         |        |        |         |         |        |        |          |          |        |       
|Diluted net income (loss) per share                              |                                                          | $                                     | 0.63              |             |       | $        | (0.88  | )         |        | $           | (5.03  | )           |         | $        | 0.03   |           |       | $   | (2.31  | )     |         | $       | (3.01  | )      |         | $       | (21.19 | )      |          | $        | (12.30 | )     
|                                                                 |                                                          |                                       |                   |             |       |          |        |           |        |             |        |             |         |          |        |           |       |     |        |       |         |         |        |        |         |         |        |        |          |          |        |       
|Shares used in computing diluted net income
    (loss) per share |                                                          |                                       | 9,023             |             |       |          | 7,312  |           |        |             | 7,414  |             |         |          | 7,766  |           |       |     | 7,292  |       |         |         | 7,375  |        |         |         | 7,533  |        |          |          | 7,550  |       
|                                                                 |                                                          |                                       |                   |             |       |          |        |           |        |             |        |             |         |          |        |           |       |     |        |       |         |         |        |        |         |         |        |        |          |          |        |       



---



|    |                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Revenue and cost of revenue reclassified for
    Emerging Issues Task Force Issue (EITF)
    No. 01-14, Income Statement Characterization of
    Reimbursements Received for Out of Pocket Expenses Incurred.

62



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Identification of Directors and Executive
Officers

Our board of directors currently consists of six
members and previously was divided into three classes, with each
class serving a staggered three-year term. In December 2002, we
transferred the listing of our common stock from the Nasdaq
National Market to the Nasdaq SmallCap Market. As a result, we
may be subject to California Corporations Code which requires
the annual election of directors. A director serves in office
until his respective successor is duly elected and qualified or
until his earlier resignation, death or removal.

Certain information regarding the members of our
board of directors is set forth below:

|                      |  |     |    |          |  |                                                                 
|--------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------------
|Name                  |  | Age |    | Position
|                      |  |     |    |         
|Joshua Pickus         |  |     | 42 |          |  | President, Chief Executive Officer and Chairman
    of the Board
|Ravi Chiruvolu(1)     |  |     | 34 |          |  | Director                                                        
|Matt Miller           |  |     | 40 |          |  | Director                                                        
|Edward F. Thompson(1) |  |     | 64 |          |  | Director                                                        
|Peter Thompson        |  |     | 46 |          |  | Director                                                        
|Val E. Vaden(1)       |  |     | 43 |          |  | Director                                                        



---

(1) Member of the Audit Committee and the
Compensation Committee

Joshua Pickushas
served as our president and chief executive officer since
November 2002. Mr. Pickus served as a member of our board
of directors since October 2002 and as chairman of the board
since February 2003. Mr. Pickus was our chief financial
officer from February 2001 to January 2003 and our president,
worldwide business relations from January 2001 to November 2002.
From November 1999 to January 2001, Mr. Pickus served as
our president, vertical markets. From April 1999 to November
1999, Mr. Pickus was a general partner in the private
equity group at Bowman Capital Management, a technology
investment firm. From January 1994 to March 1999, he was a
partner at Venture Law Group, a Silicon Valley law firm.
Mr. Pickus holds an AB in public and international affairs
from Princeton University and a JD from the University of
Chicago Law School.

Ravi Chiruvoluhas
been a director of Niku since October 2002. Mr. Chiruvolu
has been a general partner of Charter Ventures since June 2000.
From October 1998 to June 2000, Mr. Chiruvolu served as a
principal of Alta Partners. From June 1996 to October 1998,
Mr. Chiruvolu was a general manager of Peapod, Inc. From
May 1995 to June 1996, Mr. Chiruvolu worked in the
corporate strategy group of Ameritech, Inc, a regional Bell
operating company. Mr. Chiruvolu is also a member of the
boards of directors of several private companies.
Mr. Chiruvolu holds a MBA from Harvard University and a MS
and BS in mechanical engineering from MIT.

Matt Millerwas
elected to our board in February 2003, in connection with a
private placement we entered into with various investors, led by
Walden VC. Mr. Miller has served as a general partner of
Walden VC since January 2002. From April 2000 to January 2002,
Mr. Miller served as president and later as chief executive
officer of Moai Technologies, a software company. From July 1996
to April 2000, Mr. Miller served as vice president and
general manager at Remedy Corporation, a software company.
Mr. Miller holds a MBA in finance and marketing from
Columbia University and a BA in psychology from Cornell
University.

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Edward F. Thompsonhas been a director of Niku since
August 2001. Mr. Thompson has served as a senior advisor to
the board of directors of Fujitsu Limited and as a director of
several Fujitsu subsidiaries or portfolio companies since 1995.
From 1976 to 1994, Mr. Thompson served in a series of
management positions with Amdahl Corporation including, from
August 1983 to June 1994, chief financial officer and secretary
of Amdahl and from October 1985 to June 1994, chief executive
officer of Amdahl Capital Corporation. Mr. Thompson holds a
MBA in operations research and finance from Santa Clara
University and a BS in aeronautical engineering from the
University of Illinois. Mr. Thompson is a member of the
board of directors of Stratex Networks, Inc., a networking
company. He is also a member of the boards of directors and
strategic advisory boards of several private companies.

Peter Thompsonhas
been a director of Niku since December 2002. Mr. Thompson
has been a director of Technology Consulting at Btexact
Technologies, a division of British Telecom, since April 2000.
From April 1998 to April 2000, Mr. Thompson served as the
general manager of Integrated Business Solutions at British
Telecom. From February 1996 to April 1998, Mr. Thompson
served as the channel manager and product manager for BT
Wholesale, a division of British Telecom. From March 1994 to
February 1996, Mr. Thompson served as the development
program director for the BT/ MCI joint venture, a global
telecommunications venture. Mr. Thompson holds a Honors
degree from Loughborough University of Science and Technology in
electronic and electrical engineering.

Val E. Vadenhas
been a director of Niku since November 2001. Mr. Vaden is a
managing partner of Vector Capital and co-founded the firm.
Prior to forming Vector Capital, from August 1994 to August
1997, Mr. Vaden was a founding general partner of Benchmark
Capital. Mr. Vaden holds an MBA from the Stanford
University Graduate School of Business and an AB from Stanford
University. Mr. Vaden also serves as a director on the
boards of several private companies.

Our executive officers and their ages and
positions as of March 31, 2003 were as follows:

|                   |  |     |    |          |  |                                                              |  | 
|------------------ |  | --- | -- | -------- |  | ------------------------------------------------------------ |  | 
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Joshua Pickus      |  |     | 42 |          |  | President, Chief Executive Officer and Chairman of the Board
|Michael Shahbazian |  |     | 56 |          |  | Chief Financial Officer                                     

Joshua Pickushas
served as our president and chief executive officer since
November 2002. Mr. Pickus served as a member of our board
of director since October 2002 and as chairman of the board
since February 2003. Mr. Pickus was our chief financial
officer from February 2001 to January 2003 and our president,
worldwide business relations from January 2001 to November 2002.
From November 1999 to January 2001, Mr. Pickus served as
our president, vertical markets. From April 1999 to November
1999, Mr. Pickus was a general partner in the private
equity group at Bowman Capital Management, a technology
investment firm. From January 1994 to March 1999, he was a
partner at Venture Law Group, a Silicon Valley law firm.
Mr. Pickus holds an AB in public and international affairs
from Princeton University and a JD from the University of
Chicago Law School.

Michael Shahbazianhas served as our chief financial
officer since January 2003. From November 2000 to November 2002,
Mr. Shahbazian served as the chief financial officer of
ANDA Networks, a telecommunications equipment company. From
February 2000 to November 2000, Mr. Shahbazian served as
the chief financial officer of Inventa Technologies, an internet
professional services company. From April 1999 to January 2000,
Mr. Shahbazian served as the chief financial officer for
Walker Interactive, a software company. From June 1979 to April
1999, Mr. Shahbazian served in a variety of senior finance
positions at Amdahl Corporation, including corporate treasurer
and European CFO. Mr. Shahbazian hold a BS in Business from
California State University at Fresno and a MBA from the
University of Southern California.

There currently are no family relationships among
any of our directors or executive officers.

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Compliance with Section 16(a) of the
Exchange Act

Section 16(a) of the Securities Exchange Act
of 1934 requires our directors and executive officers, and
holders of more than 10% of our common stock, to file with the
Securities and Exchange Commission initial reports of ownership
and reports of changes in ownership of common stock and other
equity securities of ours. Such officers, directors and 10%
stockholders are required by Securities and Exchange Commission
regulations to furnish us with copies of all Section 16(a)
forms they file.

Securities and Exchange Commission regulations
require us to identify anyone who filed a required report late
during the most recent fiscal year. Based on our review of forms
we received, or written representations from reporting persons
stating that they were not required to file these forms, we
believe that, during the fiscal year, all Section 16(a)
filing requirements were satisfied on a timely basis except for
options granted to Messrs. Edward F. Thompson and
Vaden in June 2002 that were reported on their respective
Form 5s in March 2003.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The following table shows compensation
information during each of our last three fiscal years for our
Chief Executive Officer and our other four most highly
compensated executive officers. These individuals are
collectively referred to as the Named Executive
Officers.

|                     |                                             |        |      |        |  |       |         |              |  |            |         |            |     |         |   |              |  |  |   |   |  |  |         |         |     |  |   |   |  |  |   |   | 
|-------------------- | ------------------------------------------- | ------ | ---- | ------ |  | ----- | ------- | ------------ |  | ---------- | ------- | ---------- | --- | ------- | - | ------------ |  |  | - | - |  |  | ------- | ------- | --- |  | - | - |  |  | - | - | 
|                     |                                             |        |      |        |  |       |         |              |  | Restricted |         | Securities |     |         |   |             
|                     |                                             |        |      |        |  |       |         | Other        |  | Stock      |         | Underlying |     | LTIP    |   | All         
|Name and Principal   |                                             | Fiscal |      | Salary |  | Bonus |         | Annual       |  | Awards     |         | Options    |     | Payouts |   | Other       
|Position             |                                             | Year   |      | ($)    |  | ($)   |         | Compensation |  | ($)        |         | (#)        |     | ($)     |   | Compensation
|                     |                                             |        |      |        |  |       |         |              |  |            |         |            |     |         |   |             
|Joshua Pickus        |                                             |        | 2003 |        |  | $     | 294,946 |              |  | $          | 250,000 |            |     |         |  |              |  |  |  |   |  |  | 150,000 | (4)     |     |  |  |   |  |  |  |  
|                     | President, Chief Executive                  |        |      | 2002   |  |       |         | 344,308      |  |            |         | 400,000    |     |         |   |             |  |  |   |  |  |  |         | 55,000  | (5) |  |   |  |  |  |   |  | 
|                     | Officer and Chairman                        |        |      | 2001   |  |       |         | 298,077      |  |            |         | 100,000    |     |         |   |             |  |  |   |  |  |  |         | 23      | (6) |  |   |  |  |  |   |  | 
|                     | of the Board                                |        |      |        |  |       |         |              |  |            |         |            |     |         |   |              |  |  |   |   |  |  |         |         |     |  |   |   |  |  |   |   | 
|Michael Shahbazian   |                                             |        | 2003 |        |  |       | 9,375   | (1)          |  |            |        |            |     |         |  |              |  |  |  |   |  |  |        |         |     |  |  |   |  |  |  |  
|                     | Chief Financial Officer                     |        |      | 2002   |  |       |         |             |  |            |         |           |     |         |   |             |  |  |   |  |  |  |         |        |     |  |   |  |  |  |   |  | 
|                     |                                             |        | 2001 |        |  |       |        |              |  |            |        |            |     |         |  |              |  |  |  |   |  |  |        |         |     |  |  |   |  |  |  |  
|Farzad Dibachi       |                                             |        | 2003 |        |  |       | 74,572  | (2)          |  |            |        |            |     |         |  |              |  |  |  |   |  |  |        |         |     |  |  |   |  |  |  |  
|                     | Former President, Chief                     |        |      | 2002   |  |       |         | 364,508      |  |            |         | 350,000    |     |         |   |             |  |  |   |  |  |  |         | 150,000 | (7) |  |   |  |  |  |   |  | 
|                     | Executive Officer and Chairman of the Board |        |      | 2001   |  |       |         | 347,756      |  |            |         |           |     |         |   |             |  |  |   |  |  |  |         | 20,000  | (8) |  |   |  |  |  |   |  | 
|Richard N. LaBarbera |                                             |        | 2003 |        |  |       | 202,564 |              |  |            |        |            |     |         |  |              |  |  |  |   |  |  |        |         |     |  |  |   |  |  |  |  
|                     | Former President, Global                    |        |      | 2002   |  |       |         | 478,846      |  |            |         | 500,000    | (3) |         |   |             |  |  |   |  |  |  |         | 25,000  | (9) |  |   |  |  |  |   |  | 
|                     | Operations                                  |        |      | 2001   |  |       |         | 127,566      |  |            |         |           |     |         |   |             |  |  |   |  |  |  |         | 100,000 | (9) |  |   |  |  |  |   |  | 
|Rhonda Dibachi       |                                             |        | 2003 |        |  |       | 160,844 |              |  |            |        |            |     |         |  |              |  |  |  |   |  |  |        |         |     |  |  |   |  |  |  |  
|                     | Former Executive Vice                       |        |      | 2002   |  |       |         | 238,125      |  |            |         | 200,000    |     |         |   |             |  |  |   |  |  |  |         | 20,000  | (7) |  |   |  |  |  |   |  | 
|                     | President of Planning and Strategy          |        |      | 2001   |  |       |         | 198,718      |  |            |         |           |     |         |   |             |  |  |   |  |  |  |         | 10,000  | (8) |  |   |  |  |  |   |  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents Mr. Shahbazians salary from
    his employment commencement date on January 21, 2003 to
    January 31, 2003.                                                                                                                                                                                                                                             
|   
|(2) | From November 2001 to September 2002,
    Mr. Dibachi declined to receive a salary.                                                                                                                                                                                                                                                                                   
|   
|(3) | Represents a loan that was forgiven in the first
    quarter of fiscal 2002.                                                                                                                                                                                                                                                                                          
|   
|(4) | These options vest monthly over 24 months
    from the grant date.                                                                                                                                                                                                                                                                                                    
|   
|(5) | All options granted to Mr. Pickus in fiscal
    2002 were cancelled in fiscal 2003.                                                                                                                                                                                                                                                                                   
|   
|(6) | These options fully vested one year from the
    grant date.                                                                                                                                                                                                                                                                                                          
|   
|(7) | Mr. Dibachis unvested options to
    purchase 62,500 shares were cancelled on November 14, 2002
    and vested options to purchase 87,500 shares expired on
    February 14, 2003. Ms. Dibachis unvested options
    to purchase 8,333 shares were cancelled on
    November 14, 2002 and vested options to purchase
    11,667 shares expired on February 14, 2003.

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|    |                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(8) | Mr. Dibachis unvested options to
    purchase 6,666 shares were cancelled on November 14, 2002
    and vested options to purchase 13,334 shares expired on
    February 14, 2003. Ms. Dibachis unvested options
    to purchase 3,333 shares were cancelled on
    November 14, 2002 and vested options to purchase
    6,667 shares expired on February 14, 2003.
|   
|(9) | Mr. LaBarbara exercised options to purchase
    13,000 shares of common stock in March 2002. Unvested options to
    purchase 71,138 shares of common stock were cancelled on
    July 31, 2002 and vested options to purchase
    41,112 shares of common stock expired on November 12,
    2002.                                                                  

Options Granted in Fiscal 2003

The following table shows all options to acquire
shares of our common stock granted to the Named Executive
Officers during fiscal 2003.

|              |  |            |          |            |  |              |         |           |  |            |      |                        |  |     |      |  |  |  |          |  |  |   |         |  |  |   |         | 
|------------- |  | ---------- | -------- | ---------- |  | ------------ | ------- | --------- |  | ---------- | ---- | ---------------------- |  | --- | ---- |  |  |  | -------- |  |  | - | ------- |  |  | - | ------- | 
|              |  |            |          |            |  |              |         |           |  |            |      |                       
|              |  |            |          |            |  |              |         |           |  |            |      | Potential Realizable  
|              |  |            |          |            |  |              |         |           |  |            |      | Value at Assumed      
|              |  |            |          | Number of  |  | % of Total   |         |           |  |            |      | Annual Rates of Stock 
|              |  |            |          | Securities |  | Options      |         |           |  |            |      | Price Appreciation for
|              |  |            |          | Underlying |  | Granted to   |         | Exercise  |  |            |      | Options Term          
|              |  |            |          | Options    |  | Employees in |         | Price     |  | Expiration |      |                       
|Name          |  | Grant Date |          | Granted(#) |  | Fiscal Year  |         | ($/Share) |  | Date       |      | 5%                     |  | 10%
|              |  |            |          |            |  |              |         |           |  |            |      |                        |  |    
|Joshua Pickus |  |            | 10/21/02 |            |  |              | 150,000 |           |  |            | 19.5 | %                      |  | $   | 1.50 |  |  |  | 10/20/12 |  |  | $ | 141,501 |  |  | $ | 358,592 | 

The options shown in the above table were granted
at an exercise price equal to the fair market value of our
common stock on the date of grant and will expire ten years from
the date of grant. Options granted to Mr. Pickus vest
monthly over two years from the grant date for as long as
Mr. Pickus remains employed by us. During fiscal 2003, we
granted options to purchase a total of 770,465 shares of common
stock to our employees.

Potential realizable values are calculated by:



| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Multiplying the number of shares of common stock
    subject to a given option by the market price on the date of the
    grant or the date of repricing, if the option was repriced;
|
| |  | Assuming that the amount derived from that
    calculation compounds at the annual 5% or 10% rates shown in the
    table for the entire ten-year term of the option; and            
|
| |  | Subtracting from that result the total option
    exercise price.                                                                                                                    

The 5% and 10% assumed annual rates of stock
price appreciation are required by the rules of the Securities
and Exchange Commission and do not reflect our estimate or
projection of future common stock prices. As of January 31,
2003, the closing price of our common stock was $4.19 per
share.

Options Repriced in Fiscal 2003

The following table shows the number of options
held by the Named Executive Officers that were exchanged in a
manner that may be deemed to be a repricing during fiscal 2003.



|              |  |      |          |                      |  |              |        |           |  |          |      |                      |  |   |      |  |  |   |      |  |  |  |      | 
|------------- |  | ---- | -------- | -------------------- |  | ------------ | ------ | --------- |  | -------- | ---- | -------------------- |  | - | ---- |  |  | - | ---- |  |  |  | ---- | 
|              |  |      |          | Number of Securities |  | Market Price |        | Exercise  |  |          |      | Length of Original  
|              |  |      |          | Underlying           |  | of Stock at  |        | Price at  |  | New      |      | Options Term        
|              |  |      |          | Options/SARs         |  | Time of      |        | Time of   |  | Exercise |      | Remaining at Date of
|Name          |  | Date |          | Repriced             |  | Repricing    |        | Repricing |  | Price    |      | Repricing (Years)   
|              |  |      |          |                      |  |              |        |           |  |          |      |                     
|Joshua Pickus |  |      | 10/21/02 |                      |  |              | 25,000 |           |  | $        | 1.50 |                      |  | $ | 7.50 |  |  | $ | 1.50 |  |  |  | 9.06 | 
|              |  |      | 10/21/02 |                      |  |              | 30,000 |           |  | $        | 1.50 |                      |  | $ | 7.50 |  |  | $ | 1.50 |  |  |  | 8.42 | 

Options Exercised in Fiscal 2003

The following table shows the number of shares
acquired and the value realized upon exercise of stock options
by the Named Executive Officers during fiscal 2003 and the
number and value of options they held as of the end of fiscal
2003. Also reported are values of in-the-money
options that represent the positive difference between the
exercise price of the outstanding stock option and the fair
market value of the shares subject to the option at fiscal year
end multiplied by the number of shares issued upon exercise of
the option.

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The fair market value is based on $4.19 per
share, which was the closing price of our common stock as
reported on the Nasdaq SmallCap Market on January 31, 2003.
These values have not been, and may never be, realized.


|                     |  |                 |        |           |  |              |      |                            |  |                         |         |             |  |               |        |  |  |  |         |  |  |   |        |  |  |   |         | 
|-------------------- |  | --------------- | ------ | --------- |  | ------------ | ---- | -------------------------- |  | ----------------------- | ------- | ----------- |  | ------------- | ------ |  |  |  | ------- |  |  | - | ------ |  |  | - | ------- | 
|                     |  |                 |        |           |  |              |      |                            |  |                        
|                     |  |                 |        |           |  |              |      | Number of Securities       |  | Value of Unexercised   
|                     |  |                 |        |           |  |              |      | Underlying Unexercised     |  | In the Money Options at
|                     |  | Shares Acquired |        |           |  |              |      | Options at Fiscal Year End |  | Fiscal year End($)     
|                     |  | on Exercise     |        | Exercised |  | Value        |      |                            |  |                        
|Name                 |  | (#)             |        | Price ($) |  | Realized ($) |      | Exercisable                |  | Unexercisable           |         | Exercisable |  | Unexercisable
|                     |  |                 |        |           |  |              |      |                            |  |                         |         |             |  |              
|Joshua Pickus        |  |                 |       |           |  | $            |     |                            |  | $                       |        |             |  |               | 31,297 |  |  |  | 118,725 |  |  | $ | 84,130 |  |  | $ | 319,370 | 
|Farzad Dibachi       |  |                 |       |           |  |              |     |                            |  |                         |        |             |  |               |       |  |  |  | 100,834 |  |  |   |       |  |  |   |        | 
|Rhonda Dibachi       |  |                 |       |           |  |              |     |                            |  |                         |        |             |  |               |       |  |  |  | 18,334  |  |  |   |       |  |  |   |        | 
|Richard N. LaBarbera |  |                 | 13,000 |           |  |              | 7.50 |                            |  |                         | 173,075 |             |  |               |       |  |  |  |        |  |  |   |       |  |  |   |        | 

Compensation of Directors

Our non-employee directors generally do not
receive cash compensation for their services as directors but
are reimbursed for their reasonable expenses in attending board
and committee meetings. Our directors are currently granted
options under our 2000 Equity Incentive Plan. The options
granted under the 2000 Equity Incentive Plan to
non-employee directors are automatic and non-discretionary, with
an exercise price equal to the fair market value of the common
stock on the date of grant. Each non-employee director who
becomes a member of the board is automatically granted an option
to purchase 5,000 shares of our common stock as of the date
that director joins the board. Immediately following each annual
meeting of our stockholders, each non-employee director is
automatically granted an additional option to purchase
2,500 shares of our common stock if the non-employee
director has served continuously as a member of our board for at
least twelve months since the date of the initial option grant
to that non-employee director. All options granted to each
eligible non-employee director have an exercise price equal to
the fair market value of our common stock on the date of grant.
The board of directors may also make discretionary supplemental
grants to any eligible director and has done so to
Messrs. Chiruvolu, Edward F. Thompson and Vaden.
Options granted to non-employee directors have a ten-year term
from the date of grant, and may be exercised for three months
after termination of service or twelve months in the event of
death or disability. All options granted to non-employee
directors vest over three years, at a rate of 2.778% of the
total shares on each monthly anniversary of the grant, so long
as the non-employee director remains a director or consultant,
except for the 20,000 options we granted to Mr. Chiruvolu
on October 22, 2002, the 10,000 shares we granted to
Mr. Edward F. Thompson on November 13, 2002 and
the 20,000 options we granted to Mr. Vaden on
November 13, 2002, which vest ratably over twenty-four
months. In the event of our dissolution or liquidation or a
change in control transaction, options granted to our
non-employee directors under the plan become 100% vested and
exercisable in full.

Below are options we have granted to non-employee
members of our board of directors in fiscal 2003.



|                   |  |            |          |                 |  |                |        |     |  |   |      | 
|------------------ |  | ---------- | -------- | --------------- |  | -------------- | ------ | --- |  | - | ---- | 
|                   |  |            |          | Number of       |  | Exercise Price
|Name               |  | Grant Date |          | Options Granted |  | Per Share     
|                   |  |            |          |                 |  |               
|Ravi Chiruvolu     |  |            | 10/11/02 |                 |  |                | 5,000  |     |  | $ | 1.10 | 
|                   |  |            | 10/22/02 |                 |  |                | 20,000 |     |  |   | 2.60 | 
|Edward F. Thompson |  |            | 06/26/02 |                 |  |                | 2,500  |     |  |   | 4.00 | 
|                   |  |            | 11/13/02 |                 |  |                | 10,000 | (1) |  |   | 6.40 | 
|Val E. Vaden       |  |            | 06/26/02 |                 |  |                | 2,500  |     |  |   | 4.00 | 
|                   |  |            | 11/13/02 |                 |  |                | 20,000 |     |  |   | 6.40 | 



---



|    |                                                                   
|--- | ------------------------------------------------------------------
|(1) | Mr. Edward F. Thompson also received cash
    payments of $20,000.

Employment Agreements with Named Executive
Officers

On October 18, 2002, we entered into an
employment agreement with Farzad Dibachi, who was then our
president and chief executive officer. The agreement provides
for a base salary of $360,000 per year, a

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discretionary bonus, certain benefits and
$30,000 per month for six months upon resignation or
termination by us other than for cause. The agreement also
provides for a one-time payment of $50,000 and three quarterly
payments of $84,792 for, among other things, the execution of a
voting agreement, a non-solicitation agreement and certain other
agreements by Mr. Dibachi. Mr. Dibachi resigned as our
president and chief executive officer in November 2002 and as a
director in December 2002. From November 2001 to September 2002,
Mr. Dibachi declined to take a salary. In connection with
these arrangements, we have paid approximately $254,000 in
severance plus related benefits to Mr. Dibachi in fiscal
2003 and paid approximately $296,000 in severance plus related
benefits in fiscal 2004.


On October 18, 2002, we entered into an
employment agreement with Rhonda Dibachi, who was then our vice
president of strategy and planning. The agreement provided for a
base salary of $202,500 per year, a discretionary bonus and
$16,875 per month for six months upon resignation or
termination by us other than for cause. The agreement also
provides for a one-time payment of $50,000 and three quarterly
payments of $84,792 for, among other things, the execution of a
voting agreement, a non-solicitation agreement and certain other
agreements by Ms. Dibachi. Ms. Dibachi resigned as our
executive vice president of strategy and planning in November
2002. In connection with these arrangements, we have paid
approximately $209,000 in severance plus related benefits to
Ms. Dibachi in fiscal 2003 and paid approximately $252,000
in severance plus related benefits in fiscal 2004.

Limitation of Liability and
Indemnification

Section 145 of the Delaware General
Corporation Law (the DGCL) authorizes a court to
award, or a corporations board of directors to grant,
indemnity to directors and officers in terms sufficiently broad
to permit such indemnification under certain circumstances for
liabilities (including reimbursement for expenses incurred)
arising under the Securities Act. Our Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws
provide for indemnification of our directors, officers,
employees and other agents to the maximum extent permitted by
the DGCL. In addition, we have entered into indemnification
agreements with certain of our directors and officers which,
among other things, provide for indemnification of our directors
and officers for expenses and liabilities incurred in any
investigation, defense, settlement or appeal of a proceeding
arising out of his or her services as a director or officer or
at our request. We believe that these provisions and agreements
are necessary to attract and retain qualified people as
directors and executive officers. We also have purchased and
maintained insurance for our officers, directors, employees or
agents against liabilities that a director, an officer, an
employee or an agent may incur in his or her capacity as such.

Compensation Committee Report

In the section below, we describe our executive
compensation policies and practices. We also identify the
procedures we use to determine the compensation of our Chief
Executive Officer and other Named Executive Officers.

Compensation
Philosophy.In developing our
executive compensation policies, our compensation committee has
two principal objectives: (1) attracting and retaining our
executive officers; and (2) motivating our executive
officers to achieve short-term and long-term corporate goals
that enhance stockholder value. Our committee seeks to achieve
those objectives within the Companys current financial
plans. Accordingly, our committee has adopted the following
overriding policies:



| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pay compensation that is competitive with the
    practices of comparable high technology companies;                                                             
|
| |  | set challenging performance goals for our
    officers and provide a short-term incentive through a bonus plan
    that is based upon achievement of these goals;
|
| |  | align the interests of our officers with those of
    our stockholders by providing a significant long-term incentive
    in the form of stock options; and      
|
| |  | adjust compensation levels to reflect changes in
    the Companys market, performance and resources.                                                            

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In determining executive compensation levels at
the annual compensation review in fiscal 2003, the Compensation
Committee reviewed market data for compensation by publicly-held
technology companies comparable to us. Comparable companies that
we evaluated included those examined in several commercial
surveys of executive compensation in technology companies.

Total Annual
Compensation.Each Named Executive
Officers compensation package may, in one or more years,
be comprised of the following three elements: (1) base
salary; (2) annual variable performance awards such as
bonuses; and (3) long-term equity incentives. We authorize
guidelines for officers target total annual compensation
(salary and bonus) after reviewing similar compensation
information from companies in the high technology industry.

Base Compensation.Salaries for Named Executive Officers for fiscal 2003 were
initially determined on an individual basis by evaluating each
named executives scope of responsibility, performance,
prior experience and salary history as well as the salaries for
similar positions at technology companies in the San Francisco
Bay Area that are of comparable size to us and with which we
compete for executive personnel. Salary for Mr. Shahbazian
was based on his industry experience, competitive salary
information and current market conditions as well as
negotiations with him prior to his commencement of employment.

Bonuses.Target
bonuses for each Named Executive Officer are based on his or her
potential impact on our operating and financial results and
based on market competitive pay practices. Target bonuses are
generally expressed as a percentage of an executives base
salary. The actual bonus that is paid to each officer depends on
the achievement of business unit and corporate objectives and
financial performance goals. The business unit objectives we set
include both financial and operating goals, including, for
example, increasing revenue, operating income and cash flow. In
fiscal 2003, bonuses were paid based on the Companys
achievement of profitability in the third and fourth quarters of
the year.

Each year, we adjust the performance goals in
light of general business conditions and our corporate
strategies for the year. For fiscal 2003, the Committee
established an executive bonus program under which payments were
made if the Companys financial performance improved
significantly. Mr. Pickus, our chief financial officer for
the majority of fiscal 2003, earned a bonus of $250,000 in
fiscal 2003 based primarily on the Companys achievement of
profitability in the third and fourth quarters of the year.
Mr. Shahbazian, hired as the Companys chief financial
officer in January 2003, did not receive a bonus in fiscal 2003.

Stock Options.Our
committee strongly believes that stock options motivate our
officers to maximize stockholder value and to remain employed
with Niku despite a very competitive labor market. Except as
specified herein, all Niku stock options have a per share
exercise price equal to the fair market value of our common
stock on the grant date. The actual value of the equity-based
compensation depends entirely on appreciation of our common
stock. Stock options have value for the executive only if the
price of our common stock increases above the fair market value
on the grant date and the executive remains in our employ for
the period required for the options or shares to vest.

The number of options granted to each named
executive officer and the vesting schedule are determined based
on a variety of factors, including (1) the executives
position at Niku; (2) his or her individual performance;
and (3) the number of options the executive already holds.
In fiscal 2003, our committee relied upon these factors to
approve stock option grants for the named executive officers and
other senior officers, and for certain other individual grants.
All other grants were approved by Joshua Pickus, our president
and chief executive officer and Farzad Dibachi, our former
president and chief executive officer, after utilizing
guidelines approved by the committee.

Compensation of Chief Executive
Officer.During fiscal 2003,
Mr. Pickus earned a salary of $294,946 and, as noted above,
a bonus of $250,000. This bonus was based primarily on the
Companys achievement of profitability in the fourth
quarter of the year. During fiscal 2003, Mr. Pickus also
received equity-based compensation in the form of options to
purchase 150,000 shares of our common stock with an
exercise price of $1.50 and had options to purchase
55,000 shares of our common stock with an exercise price of
$7.50 cancelled. This cancellation was made in a manner that may
be deemed a repricing of Mr. Pickus options.

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The committee believed that the grant of new
options to Mr. Pickus and the cancellation of old options
held by Mr. Pickus was appropriate given our need to retain
and motivate him.


During fiscal 2003, Mr. Dibachi received a
salary of $74,572. Mr. Dibachi declined to receive a salary
from November 2001 to September 2002. We did not grant options
to Mr. Dibachi in fiscal 2003. In October 2002, we entered
into an employment agreement with Mr. Dibachi providing for
a base salary of $360,000 per year, a discretionary bonus,
certain benefits and $30,000 per month for six months upon his
resignation or termination by us other than for cause. The
agreement also provides for a one-time payment of $50,000 and
three quarterly payments of $84,792 for, among other things, the
execution of a voting agreement, a non-solicitation agreement
and certain other agreements by Mr. Dibachi.
Mr. Dibachi resigned as our president and chief executive
officer in November 2002 and as a director in December 2002. In
connection with these arrangements, we have paid approximately
$254,000 in severance plus related benefits to Mr. Dibachi
in fiscal 2003 and paid approximately $296,000 in severance plus
related benefits in fiscal 2004.

Tax Deductibility of Executive
Compensation.Under
Section 162(m) of the Internal Revenue Code, we generally
receive a federal income tax deduction for compensation paid to
any of our Named Executive Officers only if the compensation is
less than $1,000,000 during any fiscal year or is
performance-based under Section 162(m). Our
stock option plans permit our committee to pay compensation that
is performance-based and thus fully tax-deductible
by us. Our committee currently intends to continue seeking a tax
deduction for all of our executive compensation, to the extent
we determine it is in our best interests.

COMPENSATION COMMITTEE:

Ravi Chiruvolu

Edward F. Thompson


Val E. Vaden


Stockholders should be aware that under SEC
rules, the Compensation Committee Report is not considered
filed with the SEC under the Securities Exchange Act
of 1934, and is not incorporated by reference in any of our past
or future filings under the Securities Exchange Act of 1934 or
the Securities Act of 1933 unless this report is specifically
referenced. You may not consider this report for soliciting the
purchase or sale of our common stock.

Compensation Committee Interlocks and Insider
Participation

None of our executive officers served during
fiscal 2003 as a member of the board of or compensation
committee of any entity that has had one or more executive
officers which served as a member of our board of directors of
compensation committee.

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Stock Performance Graph

The graph set forth below compares the cumulative
total stockholder return on our common stock between
February 29, 2000, the date of our initial public offering,
and January 31, 2003 with the cumulative total return of
(i) the Nasdaq Stock Market Index (the Nasdaq
Index); (ii) the JP Morgan H&Q Computer Software
Index (the JP Morgan Index); and (iii) the
RDG Software Composite Index, over the same period. This graph
assumes the investment of $100.00 on February 29, 2000 in
our common stock, the Nasdaq Index, the JP Morgan Index and
the RDG Software Composite Index, and calculates the annual
return through January 31, 2003. This graph assumes the
reinvestment of dividends, if any. The stock price performance
shown in the graph below is based on historical data and does
not necessarily indicate future stock price performance.

The JP Morgan Index was discontinued in the
middle of 2002 and has been replaced with the RDG Software
Composite Index.

COMPARISON OF 35 MONTH CUMULATIVE TOTAL RETURN*

AMONG NIKU CORPORATION, THE NASDAQ STOCK
MARKET (U.S.) INDEX


THE JP MORGAN H&Q COMPUTER SOFTWARE
INDEX


AND THE ROG SOFTWARE COMPOSITE INDEX


Comparison of 35 month cumulative total return Chart

*$100 invested on 2/29/00 in stock or
index-including reinvestment of dividends. Fiscal year ending
January 31.

The Stock Performance Graph is not considered
filed with the SEC under the Securities Exchange Act
of 1934, as amended, and is not incorporated by reference in any
past or future filing by us under the Securities Exchange Act of
1934, as amended, or the Securities Act of 1933, as amended,
unless this section is specifically referenced.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The following table indicates beneficial
ownership of our common stock as of June 30, 2003 by:
(a) each person or entity known by us to beneficially own
5% or more of our common stock; (b) each of our directors
and nominees; (c) each of our Named Executive Officers (as
defined below); and (d) all directors and Named Executive
Officers as a group.

The percentage of beneficial ownership for the
table is based on 11,921,440 shares of our common stock
outstanding as of June 30, 2003, as adjusted as required by
rules promulgated by the Securities and Exchange Commission. To
our knowledge, except under community property laws or as
otherwise noted, the persons and entities named in the table
have sole voting and sole investment power over their shares of
our common stock.

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Unless otherwise indicated, each entity or person
listed below maintains a mailing address at c/o Niku
Corporation, 305 Main Street, Redwood City, California 94063.


Information with respect to beneficial ownership
has been furnished by each director, officer or 5% or more
stockholder, as the case may be, and Schedules 13D and 13G,
if any, filed with the Securities and Exchange Commission.
Beneficial ownership is determined under the rules of the
Securities and Exchange Commission and does not necessarily
indicate beneficial ownership for any other purpose. In
computing the number of shares beneficially owned by a person
named in the following table and the percentage ownership of
that person, shares of our common stock that are subject to
options or warrants held by that person that are currently
exercisable or exercisable within 60 days of June 30,
2003 are deemed outstanding. These shares are not, however,
deemed outstanding for the purpose of computing the percentage
ownership of any other person.

|                                                                    |                                      |              |           |              |  |  |      |   | 
|------------------------------------------------------------------- | ------------------------------------ | ------------ | --------- | ------------ |  |  | ---- | - | 
|                                                                    |                                      | Nature of    |           | Percent of  
|                                                                    |                                      | Beneficial   |           | Common Stock
|Beneficial Owner                                                    |                                      | Ownership(1) |           | Outstanding 
|                                                                    |                                      |              |           |             
|WaldenVC(1)                                                         |                                      |              | 2,586,493 |              |  |  | 21.2 | %
|                                                                    | 750 Battery Street, 7th Floor        |              |           |              |  |  |      |   | 
|                                                                    | San Francisco, CA 94111              |              |           |              |  |  |      |   | 
|Limar Realty Corp. #30(2)                                           |                                      |              | 1,445,000 |              |  |  | 12.1 | %
|                                                                    | 1730 South El Camino Real, Suite 400 |              |           |              |  |  |      |   | 
|                                                                    | San Mateo, CA 94402                  |              |           |              |  |  |      |   | 
|Vector Capital Partners II, L.L.C.(3)                               |                                      |              | 1,121,859 |              |  |  | 9.4  | %
|                                                                    | 465 Montgomery Street, 19th Floor    |              |           |              |  |  |      |   | 
|                                                                    | San Francisco, CA 94104              |              |           |              |  |  |      |   | 
|Farzad and Rhonda Dibachi(4)                                        |                                      |              | 1,012,354 |              |  |  | 8.5  | %
|Terence Garnett and Katrina A. Garnett(5)                           |                                      |              | 802,743   |              |  |  | 6.7  | %
|Ravi Chiruvolu(6)                                                   |                                      |              | 52,252    |              |  |  | *    |  
|Matt Miller(7)                                                      |                                      |              | 1,986,294 |              |  |  | 16.3 | %
|Joshua Pickus(8)                                                    |                                      |              | 69,820    |              |  |  | *    |  
|Michael Shahbazian(9)                                               |                                      |              | 19,999    |              |  |  | *    |  
|Edward F. Thompson(10)                                              |                                      |              | 6,804     |              |  |  | *    |  
|Peter Thompson(11)                                                  |                                      |              | 6,965     |              |  |  | *    |  
|Val E. Vaden(12)                                                    |                                      |              | 1,130,746 |              |  |  | 9.4  | %
|All directors and executive officers as a group
    (7 persons)(13) |                                      |              | 3,272,880 |              |  |  | 26.6 | %



---



| |   |             
| | - | ------------
| | * | Less than 1%



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents 1,618,179 shares and warrants to
    purchase 202,272 shares held by Walden VC II, L.P.;
    149,013 shares and warrants to purchase 18,627 shares
    held by Walden SBIC, L.P.; 145,104 shares and warrants to
    purchase 18,138 shares held by Walden Capital
    Partners II, L.P.; 146,527 shares and warrants to
    purchase 18,316 shares held by Walden VC II-Side,
    L.P.; 58,824 shares and warrants to purchase
    7,353 shares held by Walden Investors; 29,411 shares
    and warrants to purchase 3,677 shares held by Walden
    Management Co. Pension Fund; 29,411 shares and warrants to
    purchase 3,677 shares held by Walden Management
    Corporation; 65,511 shares and warrants to purchase
    3,677 shares held by Walden Capital Partners;
    32,011 shares and warrants to purchase 3,677 shares
    held by George Sarlo Revocable Trust dated 12/23/91; and
    29,411 shares and warrants to purchase 3,677 shares
    held by Sarlo-Berliner, Inc. Each is a member of a
    Section 13(d) group and disclaims beneficial ownership of
    the reported securities except to the extent of its pecuniary
    interest therein. Messrs. Matthew Miller, Larry Marcus,
    Steve Eskenazi, Art Berliner, George Sarlo and Phil Sanderson
    possess voting and dispositive power over the shares held by
    certain WaldenVC and its affiliated entities.
|   
|(2) | Mr. Theodore H. Kruttschnitt, III possesses
    voting and dispositive power over the shares held by Limar
    Realty Corp. #30. Mr. Kruttschnitt, III is a
    controlling stockholder of Limar Realty Corp. #30.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Represents 917,374 shares and warrants to
    purchase 47,426 shares held by Vector Capital II,
    L.P.; 35,948 shares and warrants to purchase
    1,859 shares held by Vector Entrepreneur Fund II,
    L.P.; and 113,390 shares and warrants to purchase
    5,862 shares held by Vector Member Fund II L.P. Vector
    Capital Partners II, L.L.C. is the general partner of
    Vector Capital II, L.P., Vector Entrepreneur Fund II,
    L.P. and Vector Member Fund II, L.P. and may be deemed to
    have sole power to vote these shares. Mr. Val E. Vaden and
    Alexander R. Slusky possess voting and dispositive power over
    the shares held by Vector Capital II, L.P. and its
    affiliates. Mr. Vaden and Mr. Slusky are Managing
    Members of Vector Capital Partners II, L.L.C., which is the
    general partner of Vector Capital II, L.P.
|   
|(4) | Represents 1,012,354 shares held by the Dibachi
    Family Trust. Mr. Farzad Dibachi and Ms. Rhonda
    Dibachi possess voting and dispositive power over the shares
    held by the Dibachi Family Trust.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(5) | Represents 464,323 shares held by the Garnett
    Family Trust; 7,538 shares held by Mr. Garnett; and
    294,117 shares and warrants to purchase 36,765 shares
    held by Katrina A. Garnett. Excludes 120,000 shares held by
    the Garnett 1996 Childrens Trust. Mr. and
    Mrs. Garnett do not possess any voting or dispositive power
    over shares held by the Garnett 1996 Childrens Trust and
    disclaim beneficial ownership over the shares held by the trust.
    Mr. Garnett and Ms. Garnett possess voting and
    dispositive power over the shares held by the Garnett Family
    Trust.                                                                                                                                                                                                                                                      
|   
|(6) | Represents 38,847 shares held by
    Mr. Chiruvolu, 9,728 shares subject to options held by
    Mr. Chiruvolu that are exercisable within 60 days of
    June 30, 2003 and warrants to purchase 3,677 shares
    held by Mr. Chiruvolu.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(7) | Represents 1,000 shares held by Mr. Miller.
    Includes 1,618,179 shares and warrants to purchase
    202,272 shares held by Walden VC II, L.P. and
    146,527 shares and warrants to purchase 18,316 shares
    held by Walden VC II-Side, L.P. Mr. Miller is a
    managing member of Walden VC, LLC, the general partner of Walden
    VC II, L.P. and Walden VC II-Side, L.P.
    Mr. Miller disclaims beneficial ownership to the shares
    held by such funds except to the extent of his pecuniary
    interest therein.                                                                                                                                                                                                                                                                                                                                    
|   
|(8) | Represents 4,739 shares held by the Pickus Family
    Trust and 65,081 shares subject to options held by
    Mr. Pickus that are exercisable within 60 days of
    June 30, 2003. Mr. Pickus Ms. Carey Pickus
    possess voting and dispositive power over the shares held by the
    Pickus Family Trust.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(9) | Represents 19,999 shares subject to options
    held by Mr. Shahbazian that are exercisable within
    60 days of June 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Represents 6,804 shares subject to options
    held by Mr. Edward F. Thompson that are exercisable within
    60 days of June 30, 2003.                                                                                                                                                                                                                                                                                                                                                         
|    
|(11) | Represents 1,410 shares held by Mr. Peter
    Thompson and 5,555 shares subject to options held by
    Mr. Thompson that are exercisable within 60 days of
    June 30, 2003.                                                                                                                                                                                                                                                                                                                   
|    
|(12) | Represents 8,887 shares subject to options
    held by Mr. Vaden that are exercisable within 60 days
    of June 30, 2003 and 1,066,712 shares and warrants to
    purchase 55,147 shares of common stock held by funds
    managed by Vector Capital Partners II, L.L.C.
    Mr. Vaden is a Managing Member of Vector Capital
    Partners II, L.L.C. Mr. Vaden disclaims beneficial
    ownership of the shares held by such funds except to the extent
    of his pecuniary interest therein.
|    
|(13) | Represents 2,877,414 shares held by all directors
    and executive officers as a group and 395,466 shares
    subject to options or warrants held by all directors and
    executive officers as a group that are exercisable within
    60 days of June 30, 2003.                                                                                                                                                                                                                             

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Equity Incentive Plan Information

The following table provides information as of
January 31, 2003 with respect to the shares of our common
stock that may be issued under our existing equity incentive
plans.

|                                                          |  |                      |           |                     |  |                        |       |  |  |  |           | 
|--------------------------------------------------------- |  | -------------------- | --------- | ------------------- |  | ---------------------- | ----- |  |  |  | --------- | 
|                                                          |  | A                    |           | B                   |  | C                     
|                                                          |  |                      |           |                     |  | Number of Securities  
|                                                          |  |                      |           |                     |  | Remaining for Future  
|                                                          |  | Number of Securities |           |                     |  | Issuance Under Equity 
|                                                          |  | to be Issued upon    |           | Weighted Average    |  | Compensation Plans    
|                                                          |  | Exercise of          |           | Exercise Price of   |  | (Excluding Securities 
|Plan Category                                             |  | Outstanding Options  |           | Outstanding Options |  | Reflected in Column A)
|                                                          |  |                      |           |                     |  |                       
|Equity Compensation Plans Approved by
    Shareholders(1) |  |                      | 1,375,228 |                     |  | $                      | 10.12 |  |  |  | 1,077,678 | 
|Equity Compensation Plans Approved by
    Shareholders(2) |  |                      | 121,414   |                     |  |                        | 5.39  |  |  |  | 120,002   | 
|                                                          |  |                      |           |                     |  |                        |       |  |  |  |           | 
|                                                          |  |                      | 1,496,642 |                     |  | $                      | 9.74  |  |  |  | 1,197,680 | 
|                                                          |  |                      |           |                     |  |                        |       |  |  |  |           | 



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Includes the 2000 Equity Incentive Plan and the
    2000 Employee Stock Purchase Plan.                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | 2. | Includes the 1998 Stock Option Plan and 2000
    Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | 3. | On each January 1, the number of shares
    reserved and available for grant under the 2000 Equity Incentive
    Plan is increased automatically by a number of shares equal to
    5% of our total outstanding shares on the immediately prior
    December 31 and the number of shares reserved for issuance
    under the 2000 Employee Stock Purchase Plan is increased by a
    number of shares equal to 1% of our total outstanding shares on
    the immediately prior December 31.




Item 13.     Certain
Relationships and Related Transactions

Other than the compensation arrangements
described in Compensation of Directors and
Executive Compensation and Related Information and
the transactions described below, since January 31, 2002,
there has not been nor is there currently proposed, any
transaction or series of similar transactions required to be
disclosed to which we were or will be a party in which the
amount involved exceeds $60,000 and in which any executive
officer, director or beneficial owner of more than 5% of our
common stock had or will have a direct or indirect material
interest.

Loan to Executive Officer

In November 1999, we loaned $1,250,000 to our
then president, vertical markets, Joshua Pickus, who is now our
chief executive officer, secured by a stock pledge agreement and
personal assets, in connection with his purchase of
125,000 shares of our restricted common stock. The loan
initially accrued interest at 6.08% and was to mature in
November 2002. In May 2002, we extended the maturity date of the
loan to November 2004 and reduced the interest rate to 3.21%. In
July 2002, we 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, we cancelled $116,000
in accrued interest, which was recorded as compensation expense.
The remaining amount of the loan of $674,000, including $99,000
in accrued interest, was reclassified to other assets in the
second quarter of fiscal 2003 as there was no longer common
stock to secure the loan. This loan remains secured by the
personal assets of Mr. Pickus. On March 16, 2003,
Mr. Pickus made a $150,000 payment against this loan which
reduced the interest outstanding as of the date of repayment to
zero and reduced the principal outstanding to $537,000. On
June 2, 2003, Mr. Pickus repaid $120,000 of this loan,
which reduced the interest outstanding as of the date of payment
to zero and reduced the principal outstanding to $421,000. In
November 1999, we also loaned $200,000 to Mr. Pickus under a
separate agreement at a rate of 8.0% per annum, which was due on
or before November 11, 2002. Mr. Pickus has fully
repaid this loan.

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Other Transactions

On February 12, 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 our
common stock at a price of $0.40 per warrant share. The warrants
carry an exercise price of $3.40 per share and have a five-year
term. The private placement closed in two parts and the
subsequent closing of the private placement was approved by our
stockholders at a special meeting of stockholders held on
April 10, 2003. The sale of common stock and warrants is
intended to be exempt from the registration statements of the
Securities Act of 1933, as amended, and we expect to rely upon
Section 4(2) and/or the Regulation D safe
harbor provisions.

In connection with the private placement, our
board of directors appointed Matt Miller, a managing member of
Walden VC, to our board of directors as a Class III
Director. Walden VC and its affiliated entities purchased
2,264,702 shares and warrants to purchase
283,091 shares of our common stock in the private placement.

Mr. Val E. Vaden, a member of our board of
directors, is a managing member of Vector Capital
Partners II, L.L.C. (hereinafter referred to as
Vector Capital). Vector Capital or its affiliates
purchased 441,177 shares and warrants to purchase
55,147 shares of our common stock in the private placement.
Vector Capital or its affiliates held 849,055 shares and
warrants to purchase 27,940 shares prior to the private
placement.

Mr. Ravi Chiruvolu, a member of our board of
directors, purchased 29,412 shares and warrants to purchase
3,677 shares of our common stock in the private placement.
Mr. Chiruvolus participation in the private placement
was conditioned on our obtaining stockholder approval for his
purchase of shares and warrants, which was obtained at the
special meeting of stockholders held on April 10, 2003.

Mr. Terence Garnett resigned from our board
of directors in May 2002. In the private placement,
Ms. Katrina Garnett, wife of Terence Garnett, purchased
294,117 shares and warrants to purchase 36,765 shares of
our common stock.




Item 14.     Controls
and Procedures

Evaluation of Disclosure Controls and
Procedures

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

Changes in Internal Controls

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




PART IV




Item 15.     Exhibits,
Financial Statement Schedules and Reports on 8-K

(a) 1.     Financial
Statements

See Item 8 of the annual report on
Form 10-K.

2.     Financial
Statements Schedules

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##### Table of Contents



The following financial statement schedule is
filed herein on page 81.

Schedule II  Valuation and
Qualifying Accounts

3.     Exhibits

(a) The following exhibits are filed as part
of, or incorporated by reference into, this annual report on
Form 10-K

(b) Reports on Form 8-K

On December 3, 2002, we filed a current
report on Form 8-K to announce that our common stock will
trade on The Nasdaq SmallCap Market beginning December 3,
2002.

On November 7, 2002, we filed a current
report on Form 8-K to announce the termination of the lease
for our former headquarters at 350 Convention Way, Redwood
City, California.

|       |          |               |  |                                                                                                                                                                  
|------ | -------- | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |          | Exhibit Title
|       |          |              
|       | 3.01(1)  |               |  | Amended and Restated Certificate of Incorporation.                                                                                                               
|       | 3.02(8)  |               |  | Certificate of Amendment to the Amended and
    Restated Certificate of Incorporation, dated November 20,
    2002                                               
|       | 3.03(10  | )             |  | Registrants Amended and Restated Bylaws.                                                                                                                        
|       | 4.01(1)  |               |  | Fourth Amended and Restated Investors
    Rights Agreement, dated November 18, 1999, as amended
    December 8, 1999.                                           
|       | 4.02(4)  |               |  | Warrant to Purchase Common Stock of the
    Registrant by and between in Limar Realty Corp. #30 and the
    Registrant, dated October 31, 2002.                  
|       | 4.03(9)  |               |  | Form of Warrant to Purchase Common Stock of the
    Registrant, dated February 12, 2003.                                                                         
|       | 4.04(9)  |               |  | Registration Rights Agreement by and between
    various Investors and the Registrant, dated February 12,
    2003.                                              
|       | 10.01(1) |               |  | Form of Indemnification Agreement by and between
    Registrant and its directors and executive officers.                                                        
|       | 10.02(1) |               |  | 1998 Stock Plan, as amended.                                                                                                                                     
|       | 10.03(10 | )             |  | 2000 Equity Incentive Plan, as amended.                                                                                                                          
|       | 10.04(10 | )             |  | 2000 Employee Stock Purchase Plan, as amended.                                                                                                                   
|       | 10.05(2) |               |  | 2000 Stock Incentive Plan.                                                                                                                                       
|       | 10.11(1) |               |  | Restricted Stock Purchase Agreement by and
    between Joshua Pickus and the Registrant, dated November 1,
    1999.                                             
|       | 10.12(1) |               |  | Full Recourse Promissory Note by and between
    Joshua Pickus and the Registrant, dated November 11, 1999.                                                      
|       | 10.13(3) |               |  | Office Lease by and between Brugger Corporation
    and the Registrant, dated May 7, 1999.                                                                       
|       | 10.14(5) |               |  | Amended and Restated Secured Full Recourse
    Promissory Note by and between Joshua Pickus and the Registrant,
    dated May 15, 2002.                          
|       | 10.15(6) |               |  | Amended to the Lease by and between Brugger
    Corporation and the Registrant, dated July 29, 2002.                                                             
|       | 10.16(6) |               |  | Business Loan Agreement, Commercial Security
    Agreement and Promissory Note by and between Mid Peninsula Bank
    and the Registrant, dated September 9, 2002.
|       | 10.17(7) |               |  | Employment Agreement by and between Farzad
    Dibachi and the Registrant, dated October 18, 2002.                                                               
|       | 10.18(7) |               |  | Employment Agreement by and between Rhonda
    Dibachi and the Registrant, dated October 18, 2002.                                                               
|       | 10.19(4) |               |  | Voting Agreement by and between Limar Realty
    Corp. #30 and the Registrant, dated October 31, 2002.                                                           

76



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##### Table of Contents



|       |          |               |  |                                                                                                                                  
|------ | -------- | ------------- |  | ---------------------------------------------------------------------------------------------------------------------------------
|Number |          | Exhibit Title
|       |          |              
|       | 10.20(8) |               |  | Voting Agreement by and between Farzad and Rhonda
    Dibachi and the Registrant, dated November 6, 2002.                        
|       | 10.21(9) |               |  | Common Stock and Warrant Purchase Agreement by
    and between various Investors and the Registrant, dated
    February 12, 2003.
|       | 21.01(3) |               |  | List of Subsidiaries.                                                                                                            
|       | 23.01    |               |  | Consent of KPMG LLP                                                                                                              
|       | 99.01    |               |  | Certification of Chief Executive Officer under
    Section 906 of the Sarbanes-Oxley Act of 2002.                                
|       | 99.02    |               |  | Certification 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
    Registrants Registration Statement on Form S-8 dated
    November 17, 2001.    
|   
|(3) | Incorporated by reference to the
    Registrants Fiscal 2001 Annual Report on Form 10-K
    filed on April 19, 2001.
|   
|(4) | Incorporated by reference to the Current Report
    on Form 8-K filed on November 7, 2002.                           
|   
|(5) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q filed on
    June 13, 2002.          
|   
|(6) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q filed on
    September 12, 2002.     
|   
|(7) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q filed
    December 13, 2002.         
|   
|(8) | Incorporated by reference to the Current Report
    on Form 8-K filed on November 21, 2002.                          
|   
|(9) | Incorporated by reference to the Current Report
    on Form 8-K filed on April 14, 2003.                             



|     |                                                                                                       
|---- | ------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K filed
    April 15, 2003.

77



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this annual report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly
authorized.



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



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

| |                                   
| | ----------------------------------
| |                                   
| | Joshua Pickus                     
| | President, Chief Executive Officer
| | and Chairman of the Board         
| | (Principal Executive Officer)     

Dated: August 6, 2003

Pursuant to the requirements of the Securities
Exchange Act of 1934, this amendment to the annual report on
Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:

|                                         |  |                                                                                            |  |                |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | -------------- |  | 
|                                         |  |                                                                                            |  |               
|Signature                                |  | Title                                                                                      |  | Date          
|                                         |  |                                                                                            |  |               
|/s/ JOSHUA PICKUSJoshua Pickus           |  | President, Chief Executive Officer and Chairman
    of the Board                           |  | August 6, 2003
|                                        
|/s/ MICHAEL SHAHBAZIANMichael Shahbazian |  | Chief Financial Officer (Principal Financial
    Officer and Principal Accounting Officer) |  | August 6, 2003
|                                        
|*Ravi Chiruvolu                          |  | Director                                                                                   |  | August 6, 2003
|                                        
|*Matt Miller                             |  | Director                                                                                   |  | August 6, 2003
|                                        
|*Edward F. Thompson                      |  | Director                                                                                   |  | August 6, 2003
|                                        
|*Peter Thompson                          |  | Director                                                                                   |  | August 6, 2003
|                                        
|*Val E. Vaden                            |  | Director                                                                                   |  | August 6, 2003
|                                        
|*By:                                     |  | /s/ JOSHUA PICKUSJoshua Pickus
    Attorney-in-Fact                                        |  |                |  | 

78



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##### Table of Contents



CERTIFICATION OF CHIEF EXECUTIVE
OFFICER

I, Joshua Pickus, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Niku Corporation;                                                                                                                                                                                                                                                                        
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and have:                                                                                                          



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



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



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



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



| |                        
| | -----------------------
| | /s/ JOSHUA PICKUS      
| |                        
| | Joshua Pickus          
| | Chief Executive Officer

Date: August 6, 2003

79



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##### Table of Contents



CERTIFICATION OF CHIEF FINANCIAL
OFFICER

I, Michael Shahbazian, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Niku Corporation;                                                                                                                                                                                                                                                                        
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and have:                                                                                                          



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



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



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



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



| |                               
| | ------------------------------
| | /s/ MICHAEL SHAHBAZIAN        
| |                               
| | Michael Shahbazian            
| | Chief Financial Officer       
| | (Principal Accounting Officer)

Date: August 6, 2003

80



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##### Table of Contents



NIKU CORPORATION

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS


|                                 |  |                |       |             |  |            |       |            |  |            |       |  |  |   |        |     |  |   |       | 
|-------------------------------- |  | -------------- | ----- | ----------- |  | ---------- | ----- | ---------- |  | ---------- | ----- |  |  | - | ------ | --- |  | - | ----- | 
|                                 |  |                |       | Balance     |  |            |       |            |  |           
|                                 |  | Balance        |       | Acquired    |  | Charged to |       |            |  | Balance at
|                                 |  | Beginning of   |       | Through     |  | Operating  |       |            |  | End of    
|                                 |  | Period         |       | Acquisition |  | Expenses   |       | Write-offs |  | Period    
|                                 |  |                |       |             |  |            |       |            |  |           
|                                 |  |               
|                                 |  | (In thousands)
|Allowance for doubtful accounts: |  |                |       |             |  |            |       |            |  |            |       |  |  |   |        |     |  |   |       | 
|January 31, 2000                 |  | $              |      |             |  | $          | 1,983 |            |  | $          | 200   |  |  | $ |       |     |  | $ | 2,183 | 
|January 31, 2001                 |  | $              | 2,183 |             |  | $          | 2,734 |            |  | $          | 2,429 |  |  | $ | 906    |     |  | $ | 6,440 | 
|January 31, 2002                 |  | $              | 6,440 |             |  | $          |      |            |  | $          | 9,010 |  |  | $ | 12,413 | (1) |  | $ | 3,037 | 
|January 31, 2003                 |  | $              | 3,037 |             |  | $          |      |            |  | $          | 59    |  |  | $ | 2,097  |     |  | $ | 999   | 



---



|    |                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------
|(1) | Write-offs included $2,606 relating to write off
    of allowance for doubtful accounts from acquisitions.

81



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##### Table of Contents






EXHIBIT INDEX

|       |       |               |  |                                                                                                  
|------ | ----- | ------------- |  | -------------------------------------------------------------------------------------------------
|Number |       | Exhibit Title
|       |       |              
|       | 23.01 |               |  | Consent of KPMG LLP                                                                              
|       | 99.01 |               |  | Certification of Chief Executive Officer under
    Section 906 of the Sarbanes-Oxley Act of 2002.
|       | 99.02 |               |  | Certification of Chief Financial Officer under
    Section 906 of the Sarbanes-Oxley Act of 2002.