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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-K



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



For the fiscal year ended January 31, 2005



OR



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



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, California                      |  | 94063                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Telephone Number
(650) 298-4600

(Registrants telephone number, including area code)



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 ̈



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 registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. ̈



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



The aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 31, 2004, the last business day of the registrants most recently completed second fiscal quarter, was approximately $101,467,368 (based on the last reported sale price of $9.29 on July 30, 2004). Shares of common stock
held by each then current executive officer and director and by each person who is known by the registrant to own 10% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to have been
affiliates of the Company. This determination of affiliate status is not a conclusive determination for other purposes.



The number of shares outstanding of the registrants common stock as of March 31, 2005 was 15,108,566.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Proxy Statement for Registrants 2005 Annual Meeting of
Stockholders, to be filed within 120 days of the end of the fiscal year ended January 31, 2005, are incorporated by reference in Part III of this Annual Report on Form 10-K.



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TABLE OF CONTENTS



|           |  |                                                                                                              |  |         
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | --------
|           |  |                                                                                                              |  | Page No.
|PART I     |  |                                                                                                             
|Item 1.    |  | Business                                                                                                     |  | 4       
|Item 2.    |  | Properties                                                                                                   |  | 12      
|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, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 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                                                   |  | 36      
|Item 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 36      
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 66      
|Item 9A.   |  | Controls and Procedures                                                                                      |  | 66      
|Item 9B.   |  | Other Information                                                                                            |  | 66      
|           | 
|PART III   |  |                                                                                                             
|Item 10.   |  | Directors and Executive Officers of the Registrant                                                           |  | 67      
|Item 11.   |  | Executive Compensation                                                                                       |  | 67      
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 67      
|Item 13.   |  | Certain Relationships and Related Transactions                                                               |  | 67      
|Item 14.   |  | Principal Accountant Fees and Services                                                                       |  | 67      
|           | 
|PART IV    |  |                                                                                                             
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                   |  | 68      
|Signatures |  | 70                                                                                                          



TRADEMARKS



Niku and the Niku logo are registered trademarks
and Clarity is an unregistered trademark of Niku Corporation. All other brand names and trademarks are the property of their respective holders.



Unless stated otherwise, references in this Annual Report on Form 10-K to Niku, we, us, or our refer to
Niku Corporation, a Delaware corporation.



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS



In addition to current and historical information, 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, which are intended to be covered by the safe harbor created by those
sections. These statements relate to our future operations, prospects, potential products, services, developments and business strategies. Words such as expects, anticipates, intends, should,
could, would, may, will, believes, estimates, potential, or continue or similar language identify forward-looking statements, as do the negative of these
terms and other comparable terminology, including, but not limited to, the following:



| |  |  | our future business, financial condition and results of operations;
| | - |  | -------------------------------------------------------------------



| |  |  | maintaining and expanding market acceptance of our products or services;
| | - |  | ------------------------------------------------------------------------



| |  |  | competitiveness of our products or services;
| | - |  | --------------------------------------------



| |  |  | customer satisfaction with our products or services;
| | - |  | ----------------------------------------------------



| |  |  | any statements of belief; and
| | - |  | -----------------------------



| |  |  | any statements of assumptions underlying any of the foregoing.
| | - |  | --------------------------------------------------------------



These forward-looking statements involve known and unknown 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 of this report entitled Risk Factors, Managements Discussion and
Analysis of Financial Condition and Results of Operations and sections in other documents filed with the SEC under similar captions. You should consider the risk factors and uncertainties under the caption Risk Factors, among other
things, in evaluating our prospects and future financial performance. These forward-looking statements are made as of the date of this report. We disclaim any obligation to update or alter these forward-looking statements in this report or the other
documents in which they are found, whether as a result of new information, future events or otherwise, or any obligation to explain the reasons why actual results may differ.



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PART I



Item 1.Business.



Overview



We provide information technology management and governance (IT-MG)
software for the enterprise. Our core product, Clarity, centralizes IT oversight and governance functions while permitting distributed management of IT activities. At a strategic level, customers deploy our solutions to align IT initiatives with
business priorities, control IT costs and meet heightened compliance requirements. At a tactical level, customers use our products to achieve more efficient management of IT resources, applications and processes and to deliver controlled and
predictable execution of projects, programs and initiatives.



The role and operation of IT departments have changed significantly in recent years. The scale and complexity of IT organizations have grown as IT has become an increasingly important factor in many business initiatives. Standards for IT
performance have increased as systems reach larger user populations and chief information officers (CIOs) become accountable for financial results. At the same time, staffing IT organizations has become more complicated as dynamic combinations of
employees, outsourcing providers and temporary labor have become commonplace. Taken together, these changes have created a need for a management system for IT.



Our software provides IT management and governance for many large enterprises worldwide. We have over 375 customers, including many of the worlds
leading companies. Forbes 2000 enterprises represented approximately two-thirds of our 20 largest customers, based on license revenue in the last four completed fiscal quarters. We reach our customers primarily through our direct sales force. We
expect our indirect channel for software sales to become an increasingly important factor in our business going forward.



Our objective is to be the market leader in IT-MG products and services and related areas. Key elements of our strategy include:



| |  |  | Maintaining product leadership in the IT-MG market;
| | - |  | ---------------------------------------------------



| |  |  | Broadening the use of our products to adjacent areas;
| | - |  | -----------------------------------------------------



| |  |  | Growing our direct sales organization;
| | - |  | --------------------------------------



| |  |  | Expanding our indirect sales channels; and
| | - |  | ------------------------------------------



| |  |  | Pursuing strategic acquisitions where appropriate.
| | - |  | --------------------------------------------------



We were incorporated in Delaware in January 1998. Our principal executive offices are located at 305 Main Street, Redwood City, CA 94063, and our
telephone number is (650) 298-4600. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(e) or 15(d) of the Securities Exchange Act, as
amended, are available free of charge on our website at www.niku.com, as soon as reasonably practicable after we file or furnish such information with the SEC. Information contained on our website is not incorporated by reference into this report.



Industry Background



The role and operation of IT departments have changed significantly in recent
years. These changes include the following:



Scale and
Complexity of IT Organizations.    IT organizations have expanded substantially and now represent a large and complex part of virtually all Forbes 2000 organizations. Many large enterprises now



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employ tens of thousands of people in their IT organizations. These numbers increase if outsourcing providers and contractors are included in headcount.
Along with this increase in size has come an increase in complexity. IT organizations today have a mix of internally developed applications and products from hundreds of vendors. These applications and products are often operated on a wide variety
of hardware platforms, databases, operating systems and application servers, and are run by a geographically dispersed workforce consisting of employees, outsourcing providers and temporary labor. The scale and complexity of the modern IT
organization present a significant management challenge.



Importance of IT Systems.    IT systems are an important factor in many business initiatives undertaken today. Voice and data networks and software applications provide the foundation for daily operations in
sales, marketing, manufacturing, customer service and finance organizations, and provide vital support for initiatives designed to increase revenues, decrease costs and improve product quality and customer retention. Executives are becoming
increasingly aware of the importance of IT strategic alignment, governance and communication in achieving the business goals of the enterprise.



IT Standards for the Extended Enterprise.    Business systems now often extend beyond the internal boundaries of an enterprise.
Customers and suppliers use these extended enterprise systems, dramatically raising the level of expectation for system performance, scalability and visibility. Customers, for example, regularly place orders and obtain service using online systems
maintained by IT, while suppliers place bids and receive orders using other online systems. These larger user communities have increased the requirements for IT quality and responsiveness.



IT ROI Requirements.    IT organizations today
must increasingly demonstrate returns on investment. Similar to their counterparts in sales, service, finance and marketing, IT managers are now expected to project their returns on investment and deliver on those projections with control and
predictability. Delivering results with control and predictability has proven challenging in the absence of an integrated management system.



IT Outsourcing.    Staffing the IT function is increasingly challenging, with many large enterprises using a dynamic
combination of employees, outsourcing providers and temporary labor to deliver IT services. CIOs must decide which parts of their organizations can, should or will be outsourced and in order to do so require a clear and accurate view of costs
throughout their organization. Once the answer is provided, CIOs need a comprehensive view of their available resources so that productivity can be optimized. Determining the optimal resource allocation can be virtually impossible without an
accurate view of both supply of and demand for IT resources.



Compliance.    Compliance and transparency are now major issues throughout the business enterprise, including the IT organization. In the past, IT performed relatively straight-forward auditability tasks such as
backing up financial systems, generating transaction logs and managing access rights. With the introduction of regulatory mandates, such as Sarbanes-Oxley Act of 2002 in the United States and Basel II in the international banking community,
compliance and transparency requirements have increased dramatically. Every key IT process, from system changes to accounting for time spent on particular initiatives, must now be documented and followed.



Niku Solution



We provide IT management and governance software for the enterprise. Our core product, Clarity, centralizes IT oversight and
governance functions while permitting distributed management of IT activities. At a strategic level customers deploy our solutions to align IT initiatives with business priorities, control IT costs and meet heightened compliance requirements. At a
tactical level, customers use our products to achieve more efficient management of IT resources, applications and processes and to deliver controlled and predictable execution of projects, programs and initiatives. Using our system, IT departments
can:



| |  |  | Run like a business, forecasting and delivering results with accuracy and precision;
| | - |  | ------------------------------------------------------------------------------------



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| |  |  | Align IT spending with business priorities, rapidly adjusting as conditions change;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Demonstrate measurable business value from technology investments;
| | - |  | ------------------------------------------------------------------



| |  |  | Optimize outsourcing, consolidation and other cost reduction strategies;
| | - |  | ------------------------------------------------------------------------



| |  |  | Communicate more effectively with business partners and other stakeholders to create transparency, accountability and ownership; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Better operate in accordance with todays stringent corporate governance requirements.
| | - |  | --------------------------------------------------------------------------------------



Strategy



Our goal is to be the market leader in IT management and governance solutions and related areas. Our strategy for achieving that goal includes the
following:



Maintain Product Leadership in the IT-MG
Market.    We believe that our volume of license revenues, our independent analyst rankings and our customer base have placed our product Clarity in a leadership position. We intend to maintain this leadership position by
continually enhancing Clarity, extending its capabilities and integrating it with other leading systems. We released the most recent version of Clarity in December 2004, and have further releases planned for 2005.



Broaden the Use of Our Products to Adjacent
Areas.    We plan to expand both the functional areas addressed by our products and the markets we serve. Over time, we intend to add new and distinct products in related areas of IT and to address related markets such as new
product development.



Grow Direct Sales
Organization.    We are adding sales resources in significant markets where we currently have no or only a limited presence, such as Latin America and Asia and the Federal government market in the United States. We intend to
continue our expansion to ensure that our distribution capabilities enable us to capture opportunities in a significantly broader set of markets.



Expand Indirect Sales Channels.    Our sales to date have largely been through our direct sales force. We intend to expand our
indirect channels and increase the percentage of our sales coming from these channels. We plan to do this by expanding our relationships with existing systems integration partners and independent software vendors and by establishing new
relationships with additional channel partners.



Pursue
Strategic Acquisitions Where Appropriate.    We have acquired several companies in the past and over time we intend to acquire businesses and technologies that will expand the functionality in our product offerings, augment
our distribution channels, expand our market opportunity or broaden our customer base.



Products



Clarity



Clarity is comprised of eight modules based on a modern web services
architecture. Clarity provides an integrated IT solution by combining top-down portfolio planning and analysis with bottom-up project, program, financial, demand and process management. Clarity gives executives a timely view into the demand placed
upon their organization as well as their organizations current and proposed investments, initiatives and resources. It also provides managers with enhanced control and predictability over project portfolio execution.



The eight Clarity modules are described below:



Demand Manager.    The Demand Manager module gives
IT executives a holistic view of demand points, including project work, service work and incident driven requests, making it possible to strike a dynamic balance



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among them. The Demand Manager module also links to the Resource Planner and Financial Manager modules to provide insight into how staff time is spent on
both project and service-oriented work, resulting in accurately forecasted future resource requirements and better cost of ownership tracking of existing systems.



Process Manager.    The Process Manager module allows organizations to manage the workflow of
business processes as a unified whole, making it easier to optimize these processes and standardize them across an entire organization. Because the Process Manager module offers the ability to manage the characteristics inherent in a process,
business processes become more automated, adaptable, cohesive, collaborative and reusable.



Portfolio Manager.    The Portfolio Manager module enables an enterprise to align resources and investments with corporate goals. This provides a structured environment for deciding which
projects, programs, initiatives, applications and processes to fund, which to sustain and which to eliminate.



Project Manager.    The Project Manager module provides functionality for project management, status and time tracking to
enable companies to follow corporate best practices and methodologies, to produce optimal plans, to substantially eliminate communication barriers and to execute projects across the portfolio with precision.



Resource Planner.    The Resource Planner module
provides a solution to plan and manage resource capacity and balance it against work demand. The Resource Planner module provides capacity planning, skills management, resource search and qualification, staff requisitions, and resource reporting.



Financial Manager.    The Financial
Manager module can capture, cost and account for project transactions. Categorization functionality allows segregation of capitalized expenditures from expenses for appropriate financial reporting and compliance with SOP 98-1. The Financial Manager
modules charge-back functionality allows transactions from internally-funded projects to be mapped to and allocated across business units and departments, providing equitable distribution of project costs.



Clarity Studio.    The Clarity Studio module
allows users to configure Clarity to function the way their organizations work. Building on the extensibility and open architecture of the Clarity G2000 architecture, Clarity Studio provides the tools to create system partitions, add custom fields
and forms, as well as to build custom portlets, pages, and menus that deliver visibility and access to the information that is important for each user, from project manager to CEO.



Schedule Connect.    The Schedule Connect module provides bi-directional integration between
Clarity and the two leading desktop project scheduling tools, Open Workbench and Microsoft Project.



Open Workbench



We also have an open source desktop project scheduling product called Open Workbench. Open Workbench serves two important roles for us. First, it is a
valuable project scheduling adjunct to Clarity, with which it is closely integrated. Second, it raises awareness of our products within our target markets. We use this increased awareness to help build demand for our Clarity product.



Technology



G2000 Architecture



Scalability.    Clarity is based on a three-tier architecture, enabling organizations to scale the number of their users
significantly and inexpensively. Because Clarity is built with Java 2 Platform Enterprise Edition (J2EE) technology, it provides the standards-based services required to deliver scalable and reliable deployments of Web



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services. J2EE-compliant deployments allow for portability across multiple platforms and interoperability with other J2EE-compliant applications.



The client tier of the Clarity architecture substantially eliminates
desktop maintenance problems because its ultra-thin Web client requires no desktop software installs or downloads, no Java applets and no ActiveX controls. The application tier serves as a gateway between the client and data tiers. Its underlying
J2EE application server controls Web, integration, business logic and persistence services and provides common application functions such as caching, security, globalization, configuration and workflow. The data tier contains both a transactional
and a business intelligence repository.



Clarity can be
deployed in a clustered configuration in order to offer high levels of performance and availability. The Clarity system administration tool uses an intuitive, Web-based console to centralize the configuration and management of clusters within
multiple sites. Additionally, Clarity supports horizontal scaling by replicating services, such as the application server, onto multiple servers within a cluster.



Integration.    Organizations can integrate Clarity with legacy systems, enterprise applications,
such as Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM), and Microsoft Office applications, such as Excel. Integration with third-party software applications is simplified through the use of the Clarity XOG (XML Open
Gateway), an extensive set of eXtensible Markup Language (XML) and Java-based application programming interfaces (APIs). XOG also supports Enterprise Application Integration products through infrastructure middleware. XOG offers pre-defined formats
and mechanisms for integrating applications to Clarity while preserving data integrity through the enforcement of product business rules. Information exchange through integration APIs accesses the same business logic as when a user manually enters
data. One set of business logic for all information sources ensures consistency and reliability.



Clarity XOG APIs adhere to open industry standards such as Simple Object Access Protocol (SOAP) enabled Web Services, Java Database Connectivity (JDBC)
and Java Message Service (JMS). In addition, the APIs allow for both real-time and batch invocations, allowing customers to define what information is transferred to each linked application and when it is done.



Mobility and Localization.    Clarity was designed
for enterprises that require access from any location, regardless of the network quality. Clarity is a simultaneously multi-lingual application, with Unicode format for double-byte languages to allow users to work on the same installation and
experience the application in their native language/locale combinations. The locale function supports multiple currencies and enables users in different time zones to receive all events and notifications in their local time.



Increasingly, mobile workers using low-bandwidth leased lines, PDAs or
notebook computers over wired or wireless modems are challenged by network bandwidth limitations. For these users, Clarity provides bandwidth savings that can translate into productivity gains. Clarity is a narrowband-tolerant application that
compresses HTML content, thereby using an average of seven times less network bandwidth than uncompressed HTML.



Security.    Clarity offers its Precision Security functionality to protect a companys sensitive project, product,
financial and personnel information. For instance, companies can deploy Clarity so that all communication from server to browser is sent via an SSL-encrypted connection. Clarity can integrate with an existing LDAP system for authentication and
authorization, making the implementation process even more efficient and supporting single sign-on deployments.



Rather than rely solely on individual user information to grant or deny access, Clarity can define security administration based on roles, groups and
organizational breakdown structures (OBS). Roles and groups define the rights a user has to perform actions, and the OBS determines what the user can see and act upon. The combination of these two security models makes change management a far less
tedious and time-consuming process as users change jobs or move around in the organization. Additionally, OBS-based Precision Security



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allows companies to construct virtual walls between internal and external units that share a common system, but still need to operate independently.



Configuration.    Clarity Studio is
a point-and-click configuration module that permits organizations to create and deploy personalized portals, pages, menus, graphs and business objects that adapt the software to a companys business processes. Clarity Studio allows tailoring of
business objects, such as portfolios, projects, resources and ideas, without programming or customization using PowerMods functionality. During upgrades, all modifications made using Clarity Studio are automatically reflected in the new installation
to facilitate the upgrading process.



Clarity Core



Claritys eight modules are supported and
connected by a set of core services that allow users to collaborate, manage documents, build personalized dashboards, and create and analyze business information.



The collaboration functionality in Clarity Core services allows teams to work together on various types of business
initiatives with participants from around the globe. Using core collaboration services, users can resolve issues, manage project events and action items and access existing knowledge.



The document management functionality in Clarity core services allows users to store and share documents. Administrators can
apply the Precision Security features in Clarity to secure documents not only by user, group or role, but also by OBS, ensuring that everyone has access to the documents they need and nothing more. With document management, users can control
document versions, use powerful search functionality, and route documents with workflow. Automated workflow is essential when virtual teams are spread worldwide. The process automation features in Clarity allow users to route documents for review
and approval using standard or customized workflows. This functionality reduces cycle time and provides metrics for finding and eliminating bottlenecks.



The Clarity system provides a set of portal functionalities that enables users to create and use their own custom dashboards. Each of these dashboards is
comprised of a set of portlets  small windows of information presented as graphs, tables or web page snippets  that are built and deployed by users within the Clarity Studio module. These portlets access information from within the
Clarity environment, from other databases within the enterprise, and from external sources available in HTML format, such as business news and network status information.



Clarity simplifies the business intelligence process by providing real-time portal views and reporting and analytics to
offer users a more structured way to understand this information.



With Clarity core services, we provide an integrated reporting engine that provides data visualization and analysis capabilities. Standard reports are embedded throughout the software and are readily accessible for users to answer key
questions about their work and business. With reporting and analytics, users can drill-down from reports and receive role-based results.



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Customers



Nikus customers include the following representative companies by industry, all of whom accounted for at least $100,000 of license revenue for the
years ended January 31, 2005, 2004 or 2003.



|                                   |  |                                                                                                                                                                                                                                                                                                                                              
|---------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Insurance and Financial Services   |  | ABN AMRO, Australia and New Zealand Banking Group, HSBC, First Horizon National Corporation, HBOS, Liberty Mutual Insurance Company, Mutual of Omaha, Natexis Banques Populaires, National City
Corporation, Nationwide Building Society, Nationwide Mutual Insurance Company, Rabobank, Skandia Life, Standard Chartered Bank, T. Rowe Price
|                                   | 
|Business Services                  |  | Access Group, Capgemini, Manpower, Xerox                                                                                                                                                                                                                                                                                                     
|                                   | 
|Healthcare                         |  | 3M Healthcare, AstraZeneca, Genentech, HCA, HealthPartners, IDEXX Labs, Kaiser Permanente, Misys, Oxford Health Plans                                                                                                                                                                                                                        
|                                   | 
|Automotive and Transportation      |  | CSX, Nissan North America, Toyota Motor Sales U.S.A.                                                                                                                                                                                                                                                                                         
|                                   | 
|Travel and Entertainment           |  | British Airways, Cendant, Fox Entertainment, Harrahs, Royal Caribbean Cruise Lines, Sony Pictures Entertainment, Vivendi Universal                                                                                                                                                                                                          
|                                   | 
|Public Sector and Non-Profit       |  | Centraal Justitieel Incasso Bureau (Netherlands), IDeA (UK), Knights of Columbus, UK Office of Government Commerce                                                                                                                                                                                                                           
|                                   | 
|Telecommunications and Technology  |  | BellSouth, BT, Český Mobil, Hutchison Australia, O2, Philips Semiconductor, Symbol Technologies, Vodafone                                                                                                                                                                                                                                    
|                                   | 
|Retail and Consumer Packaged Goods |  | 7-Eleven, American Greetings, AutoZone, Avon, Coca-Cola, Columbia House, Kimberly-Clark, Kohls, John Lewis (Waitrose), Target, Thomson Multimedia, Unilever,
Williams-Sonoma                                                                                                                                                                



No customer accounted
for more than 10% of our total revenue in fiscal 2005, 2004 or 2003.



Sales
and Marketing



We sell our products and services primarily
through our worldwide direct sales force. Additionally, we are developing a reseller channel which we expect to be increasingly significant. As part of this reseller channel expansion, in December 2004 we signed a global agreement with a new channel
partner to resell, service and support our Clarity solution.



We also have dedicated technical pre-sales professionals who assist with creating customer-tailored business proposals, product demonstrations and presentations that address the specific needs of each prospective customer. We have technical
pre-sales professionals deployed regionally around the world, including throughout



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the United States and in the United Kingdom, the Netherlands, France, Germany, Belgium, Singapore and Australia.



We also have inside sales teams in the United States and Europe to develop
qualified leads for our direct sales teams and resale partners.



Service and
Support



We offer professional services to assist in the
implementation and use of our software. Our professional services consultants assist customers in many aspects of the implementation process, including requirements assessment, implementation planning and design, data migration, systems integration,
deployment and training. We also maintain a network of implementation partners who provide implementation services to our customers. This network includes large firms such as Capgemini as well as smaller firms.



Our training organization is responsible for developing and delivering
training solutions for our customers, partners, and employees. These solutions are designed to provide project teams and end users with a deep and broad understanding of Nikus products, so that students will learn to implement and use them as
designed. Niku offers a wide variety of courses in multiple formats, including web based training, onsite training, public training courses, and implementation training camps.



We also offer technical support to our customers. We maintain support centers in the United States, Europe and Australia,
providing customers with coverage regardless of time zone. Utilizing advanced call distribution and on-line customer engagement technologies, our customer support delivers high quality, rapid response in local languages throughout the world. Our
customer support utilizes world class enterprise support techniques, providing support for high levels of responsiveness and engineering for optimal resourcing. Our customers also benefit from customer supports Test Center, where multiple
permutations of hardware and software infrastructure are maintained, allowing for the easy replication of customer configurations and rapid diagnosis of issues.



Competition



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 development organizations.
The primary competitive factors include product functionality, scalability, security, platform support for other enterprise requirements, ease of deployment, ease of use, price and worldwide sales, support and professional services capabilities.
Some of our competitors include:



| |  |  | IT systems vendors such as Compuware, IBM and Mercury Interactive;
| | - |  | ------------------------------------------------------------------



| |  |  | application providers such as Lawson Software, Microsoft, Oracle and SAP; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | privately-held providers of project management, portfolio management and professional services automation software.
| | - |  | -------------------------------------------------------------------------------------------------------------------



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, conduct broader
sales distribution, adopt more aggressive pricing policies, offer a broader range of products 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 products and services continues to develop.



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Intellectual Property



We regard substantial elements of our products as proprietary. The steps we take to protect our intellectual property are time-consuming and expensive but
may not prevent third parties from infringing upon or misappropriating our intellectual property, which could significantly harm our business and our ability to compete.



We have filed for four copyright registrations. Although registration is not required to obtain protection under copyright
laws, if our registration applications are rejected, or we fail to register copyrights for some of our products or do not file in a timely manner, it may limit our ability to seek certain remedies available under these laws. Currently, we have one
issued patent and other patent applications pending. Our current patent and patents that may be issued in the future may not provide us with competitive advantages over, or may be challenged by, third parties. We have 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 intellectual property protection may not be available in every country in which our products are distributed or made available.



Employees



As of January 31, 2005, we had a total of 276 employees, including 104 in sales and marketing, 63 in professional services, 51 in research and
development, 25 in customer support and 33 in general and administrative functions. Of these, 198 employees were located in the United States and 78 employees were located outside the United States. We have not experienced any work stoppage, and we
consider our relations with our employees to be good.



Our
future success is substantially dependent on the performance of our senior management and key technical personnel, and our continuing ability to attract and retain highly qualified technical and managerial personnel. See the section Risk
Factors below for a further discussion of certain risks related to our employees.



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, Europe and Australia under leases that expire at
various times through February 2011.



As part of our
restructuring program in fiscal 2002 and 2003, we vacated various facilities. As a result of negotiations with the landlords, we terminated the leases for most of these facilities. We are currently seeking to sublease one remaining partially vacant
facility in California as well as obtain a new subtenant for our facility in New York City for which the sublease expires in June 2005.



We believe that our current facilities will be adequate to meet our current requirements and that, with respect to our principal executive offices,
suitable additional or substitute facilities will be available to us as needed on comparable terms.



12



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##### Table of Contents

Item 3.Legal Proceedings.



Final settlement papers for litigation relating to a number of initial public offerings (IPO), including our own, are in the process of being approved. We do not presently expect to make any payments under the pending
settlements. The history of this litigation is as follows:



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 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 IPO in February 2000. The complaints in these actions alleged, among other
things, that the registration statement and prospectus filed with the Securities and Exchange Commission for purposes of the IPO were false and misleading because they failed to disclose that the managing underwriters allegedly (i) solicited and
received commissions from certain investors in exchange for allocating to them shares of Company stock in connection with the IPO and (ii) entered into agreements with their customers to allocate such stock to those customers in exchange for the
customers agreeing to purchase additional shares of the Company in the aftermarket at pre-determined prices. The Company believes that the claims asserted against it in these cases are without merit. On August 8, 2001, the Court ordered that these
actions, along with hundreds of IPO allocation cases against other issuers, underwriters and directors and officers, be transferred to one judge for coordinated pre-trial proceedings. In July 2002, omnibus motions to dismiss the complaints based on
common legal issues were filed on behalf of all issuers, underwriters and directors and officers. By order dated October 8, 2002, the Court dismissed the Companys officers and directors from the case without prejudice. In an opinion issued on
February 19, 2003, the Court granted in part and denied in part the motions to dismiss. The complaints against the Company and the other issuers and underwriters were not dismissed as a matter of law. The plaintiffs and the issuer defendants signed
a Memorandum of Understanding, dated as of June 5, 2003, agreeing to settle the cases. No amount is accrued as of January 31, 2005, as a loss is not considered probable.



From time to time, we are also involved in litigation arising in the ordinary course of our business. We do not know whether
we will prevail in these matters, nor can we assure that any remedy could be reached on commercially viable terms, if at all. Even if we prevail, we may incur substantial expenses in defending against third party claims. In accordance with Statement
of Financial Accounting Standards No. 5, Accounting for Contingencies, we record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at
least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and any other information or events pertaining to a particular matter.



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



No matters were submitted to a vote of security holders during the quarter ended January 31, 2005.



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##### Table of Contents

PART II



Item 5.Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.



Market Information for Common Stock



On November 21, 2002, we effected a one-for-ten reverse stock split of our outstanding common stock. All information regarding common stock, stock
options, warrants and income (loss) per share amounts in this Annual Report on Form 10-K has been restated to reflect the reverse stock split.



Our stock is traded on the Nasdaq National Market under the symbol Niku. The table below represents the high and low sales prices for our
common stock as reported by the Nasdaq National Market or Nasdaq SmallCap Market, as applicable, for each quarter in fiscal 2005 and 2004, and reflects the effects of all stock splits:



|                 |  |                       |       |     |   |      
|---------------- |  | --------------------- | ----- | --- | - | -----
|                 |  | Price Range Per Share
|                 |  | High                  |       | Low
|Quarter Ended:   |  |                       |       |     |   |      
|January 31, 2005 |  | $                     | 21.01 |     | $ | 14.32
|October 31, 2004 |  | $                     | 15.75 |     | $ | 9.17 
|July 31, 2004    |  | $                     | 14.35 |     | $ | 9.06 
|April 30, 2004   |  | $                     | 17.70 |     | $ | 9.02 
|January 31, 2004 |  | $                     | 10.29 |     | $ | 7.18 
|October 31, 2003 |  | $                     | 9.00  |     | $ | 4.49 
|July 31, 2003    |  | $                     | 6.92  |     | $ | 3.76 
|April 30, 2003   |  | $                     | 5.08  |     | $ | 2.97 



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



We did not make any unregistered sales of our common stock during the fourth
quarter of fiscal 2005.



Stockholders of Record



At February 28, 2005, we had approximately 540 holders of record of our
common stock. This does not include the stock held in nominee or street name through brokerage accounts.



14



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##### Table of Contents

Equity Compensation Plan Information



The following table provides information as of January 31, 2005 with respect to the shares of our common stock that may be
issued under our existing equity incentive plans.



|                                                           |  |                                                                      |  |                                                      |      |                                                                                                                              |           |    
|---------------------------------------------------------- |  | -------------------------------------------------------------------- |  | ---------------------------------------------------- | ---- | ---------------------------------------------------------------------------------------------------------------------------- | --------- | ---
|Plan Category                                              |  | ANumber of Securitiesto be Issued uponExercise ofOutstanding Options |  | BWeighted AverageExercise PriceofOutstanding Options |      | CNumber of SecuritiesRemaining for FutureIssuance Under EquityCompensation Plans (ExcludingSecurities Reflected in Column A) |          
|Equity Compensation Plans Approved by Stockholders (1)     |  | 2,230,233                                                            |  | $                                                    | 8.93 |                                                                                                                              | 1,037,985 | (3)
|Equity Compensation Plans Not Approved by Stockholders (2) |  | 177,623                                                              |  |                                                      | 8.35 |                                                                                                                              | 729       |    
|                                                           |  |                                                                      |  |                                                      |      |                                                                                                                              |           |    
|Total                                                      |  | 2,407,856                                                            |  |                                                      | 8.88 |                                                                                                                              | 1,038,714 |    
|                                                           |  |                                                                      |  |                                                      |      |                                                                                                                              |           |    

---

|(1) | Includes the 2000 Equity Incentive Plan, 2000 Employee Stock Purchase Plan and 1998 Stock Option Plan. See Note 11 of the Notes to our Consolidated Financial Statements for a
description of the material features of these plans.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes the 2000 Stock Incentive Plan which provides incentives to eligible employees, including employees hired in connection with certain completed acquisitions. See Note 11 of
the Notes to our Consolidated Financial Statements for a description of the material features of this plan.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | On each January 1, the number of shares reserved and available for grant under the 2000 Equity Incentive Plan are increased automatically by a number of shares equal to 5% of our
total outstanding shares on the immediately prior December 31.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Issuer Purchases of Equity Securities



We did
not purchase any shares of our common stock during the fourth quarter of fiscal 2005.



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 years ended January 31, 2005, 2004 and 2003 and the
consolidated balance sheet data as of January 31, 2005 and 2004 are derived from our audited financial statements included in this Annual Report on Form 10-K. The consolidated statement of operations data for the years ended January 31, 2002 and
2001 and the balance sheet data as of January 31, 2003, 2002 and 2001 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 2004 and 2003 ended on January 31. For presentation purposes, fiscal years prior to fiscal 2003 refer to the periods calendar month end.



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##### Table of Contents

Consolidated Statement of Operations Data:



|                                                             |  |                                       |        |      |   |        |      |  |   |         |   |  |      |          |   |  |   |          |  
|------------------------------------------------------------ |  | ------------------------------------- | ------ | ---- | - | ------ | ---- |  | - | ------- | - |  | ---- | -------- | - |  | - | -------- | -
|                                                             |  | Years Ended January 31,               |       
|                                                             |  | 2005                                  |        | 2004 |   |        | 2003 |  |   | 2002    |   |  | 2001 |         
|                                                             |  | (in thousands, except per share data) |       
|Total revenue                                                |  | $                                     | 66,283 |      | $ | 45,710 |      |  | $ | 48,410  |   |  | $    | 67,466   |   |  | $ | 68,922   |  
|Cost of revenue                                              |  |                                       | 18,499 |      |   | 12,397 |      |  |   | 13,739  |   |  |      | 57,877   |   |  |   | 30,787   |  
|Gross profit                                                 |  |                                       | 47,784 |      |   | 33,313 |      |  |   | 34,671  |   |  |      | 9,589    |   |  |   | 38,135   |  
|Operating income (loss)                                      |  |                                       | 4,028  |      |   | (138   | )    |  |   | (43,530 | ) |  |      | (294,014 | ) |  |   | (141,000 | )
|Net income (loss)                                            |  |                                       | 4,032  |      |   | 117    |      |  |   | (37,794 | ) |  |      | (291,546 | ) |  |   | (130,876 | )
|Basic net income (loss) per share                            |  | $                                     | 0.32   |      | $ | 0.01   |      |  | $ | (4.96   | ) |  | $    | (39.20   | ) |  | $ | (19.57   | )
|Diluted net income (loss) per share                          |  | $                                     | 0.30   |      | $ | 0.01   |      |  | $ | (4.96   | ) |  | $    | (39.20   | ) |  | $ | (19.57   | )
|Shares used in computing basic net income (loss) per share   |  |                                       | 12,729 |      |   | 11,560 |      |  |   | 7,618   |   |  |      | 7,437    |   |  |   | 6,687    |  
|Shares used in computing diluted net income (loss) per share |  |                                       | 13,362 |      |   | 11,886 |      |  |   | 7,618   |   |  |      | 7,437    |   |  |   | 6,687    |  



Consolidated Balance Sheet Data:



|                                                  |  |                   |        |      |   |        |  |   |        |   |      |   |         |  |   |        
|------------------------------------------------- |  | ----------------- | ------ | ---- | - | ------ |  | - | ------ | - | ---- | - | ------- |  | - | -------
|                                                  |  | As of January 31,
|                                                  |  | 2005              |        | 2004 |   | 2003   |  |   | 2002   |   | 2001
|                                                  |  | (in thousands)   
|Cash, cash equivalents and short-term investments |  | $                 | 65,616 |      | $ | 23,200 |  | $ | 16,670 |   |      | $ | 51,585  |  | $ | 138,892
|Current portion of restricted cash                |  |                   | 564    |      |   |       |  |   | 229    |   |      |   | 4,665   |  |   |       
|Working capital                                   |  |                   | 55,582 |      |   | 10,456 |  |   | 1,219  |   |      |   | 11,028  |  |   | 121,350
|Restricted cash                                   |  |                   |       |      |   | 1,108  |  |   | 1,108  |   |      |   | 9,822   |  |   | 14,487 
|Total assets                                      |  |                   | 83,413 |      |   | 36,616 |  |   | 30,563 |   |      |   | 101,575 |  |   | 393,067
|Long-term accrued restructuring                   |  |                   | 5,519  |      |   | 6,430  |  |   | 6,209  |   |      |   | 6,758   |  |   |       
|Long-term obligations, less current portion       |  |                   | 315    |      |   | 108    |  |   | 3,750  |   |      |   |        |  |   | 268    
|Total stockholders equity (deficit)              |  |                   | 51,580 |      |   | 7,195  |  |   | (3,974 | ) |      |   | 31,557  |  |   | 318,393



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



Forward-Looking Statements



In addition to current and historical information, this Report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements relate to our future operations, prospects, potential products, services, developments and business strategies. These statements can, in some cases, be identified by the use of terms such as
may, will, should, could, would, intend, expect, plan, anticipate, believe, estimate, predict,
project, potential, or continue or the negative of such terms or other comparable terminology. This Managements Discussion and Analysis of Financial Condition and Results of Operations includes, among
others, forward-looking statements regarding our expectations about revenues, operating costs and expenses, capital expenditures and product development costs, evaluations of possible acquisitions of, or investments in, businesses, products and
technologies, and existing cash and investments being sufficient to meet operating requirements.



These statements involve certain known and unknown risks and uncertainties that could cause our actual results to differ materially from those
expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those listed under the heading Risk Factors and elsewhere in this Report. We do not intend, and undertake no obligation, to
update any of our forward-looking statements after the date of this Report to reflect actual results or future events or circumstances.



16



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##### Table of Contents

The following discussion should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere in this Annual Report.



Overview



Market awareness of IT management and governance (IT-MG)
and our presence in the IT-MG market increased in fiscal 2005. Total revenue for fiscal 2005 was $66.3 million, increasing 45% from the prior year. License revenue for fiscal 2005 was $30.3 million, increasing 64% from the prior year. License
revenue increased sequentially in each quarter in fiscal 2005. Net income for fiscal 2005 increased $3.9 million from the prior year.



In the fourth quarter of fiscal 2005, we completed a secondary public offering of our common stock which generated approximately $35.6 million in net
proceeds to us. We ended fiscal 2005 with stockholders equity of $51.6 million, up from $7.2 million at the end of fiscal 2004, and working capital was $55.6 million, as compared to $10.5 million at the end of fiscal 2004.



In fiscal 2005, we expanded our geographic presence by establishing
operations in the Asia Pacific region. We intend to increase the size of our sales and services organizations in the Asia Pacific region, in Europe and in specific markets in the Americas. Our newly opened Asia Pacific region contributed 5% of total
revenue in fiscal 2005.



We expect an increasing percentage of
our revenue to come from channel partners. As part of this reseller channel expansion, in December 2004 we signed a global agreement with a new channel partner to resell, service and support our Clarity solution.



Critical Accounting Policies, Methods and Estimates



The following discussion of critical accounting policies represents those
accounting policies that require application of managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and or that may change in
subsequent periods. This description is not intended to be a comprehensive list of all of our significant accounting policies, which are more fully described in Note 1 of the Notes to the Consolidated Financial Statements included in this Annual
Report. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for managements judgment in their application.



We have identified the following as our critical accounting policies: revenue
recognition, allowance for doubtful accounts, and restructuring reserves for vacated leased facilities. The following is a brief discussion of these critical accounting policies and methods that we use.



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 when persuasive evidence of an
arrangement exists, delivery of the product has occurred and no significant obligations of ours with regard to implementation remain, the fee is fixed or determinable, and collection of the resulting receivable is probable. Delivery generally occurs
when the product is delivered to a common carrier or electronically delivered to the customer. If undelivered features or services exist in an arrangement that are essential to the functionality of the delivered product, revenue is



17



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##### Table of Contents

recognized when these features or services are delivered. The fees for our products are generally due within six months or less. The Company considers fees
relating to the arrangements with payment terms extending beyond six months not to be fixed or determinable and revenue for these arrangements is recognized as payments become due from the customer. 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.



If there are sales to channel partners, they are generally recognized upon sell-through to the end-user customer. In the case of sales by certain channel
partners, we generally recognize revenue upon payment to us by those channel partners.



For multiple-element software arrangements, we defer the fair value of revenue associated with each undelivered element until such time as delivery occurs. Deferred revenue is allocated to each element using vendor
specific objective evidence of fair value (VSOE). The VSOE for each element is established when the same element is sold separately to third parties. VSOE for maintenance and support is determined based upon the customers annual renewal rates
for this element. VSOE for implementation services is determined based upon the engagement labor rates for this element. VSOE for hosting services is determined based upon the rates applicable to the duration of the hosting arrangement, when the
same element is sold separately.



Allowance for Doubtful
Accounts



We make estimates of the collectibility of
accounts receivable. 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 report charges to the allowance for doubtful accounts as a portion of selling, general and administrative costs. We regularly review past due invoices 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. Assumptions and judgments regarding collectibility of accounts could
differ from actual events. As of January 31, 2005, the accounts receivable balance was $12.9 million, net of the allowance for doubtful accounts of $0.2 million. Our allowances for doubtful accounts as a percentage of total net revenue were 0.2%,
1.7%, and 2.1% in 2005, 2004 and 2003, respectively. Our allowances for doubtful accounts as a percentage of gross accounts receivable were 1.2%, 9.3% and 12.2% in 2005, 2004 and 2003, respectively. Based on our results for fiscal 2005, a
one-percentage point deviation in our allowance for doubtful accounts as a percentage of total gross accounts receivable would have resulted in an increase or decrease in expense of $0.1 million.



Restructuring Reserves for Vacated Leased Facilities



We have recorded restructuring charges in connection
with vacating certain leased facilities pursuant to a restructuring program. The fair value of 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 review these estimates in the second and fourth quarter of each year or anytime we have persuasive evidence that a change in the estimate has occurred. For example, in fiscal 2005 we recorded $1.8 million in net lease
commitment costs primarily due to reductions in estimated future sublease income for certain facilities related to restructuring activities initiated in fiscal 2003 and fiscal 2002. If estimates regarding future sublease income change further, we
could be required to record additional restructuring costs of up to approximately $5.0 million.



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##### Table of Contents

Pro Forma Financial Results



We prepare and release quarterly unaudited financial statements in accordance with generally accepted accounting principles
in the United States of America (US GAAP). We also disclose and discuss 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 and restructuring. We believe the disclosure of the pro forma financial information may help 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 for Fiscal Years Ended January 31, 2005, 2004 and 2003



The following table sets forth certain data from our
consolidated statements of operations as a percentage of total revenue. The information contained in the table below should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report
on Form 10-K.



|                                          |  |                         |   |  |       |   |  |       |   
|----------------------------------------- |  | ----------------------- | - |  | ----- | - |  | ----- | --
|                                          |  | Years Ended January 31, |  
|                                          |  | 2005                    |   |  | 2004  |   |  | 2003  |   
|Revenue:                                  |  |                         |   |  |       |   |  |       |   
|License                                   |  | 45.7                    | % |  | 40.5  | % |  | 38.7  | % 
|Maintenance and implementation services   |  | 54.3                    |   |  | 59.5  |   |  | 61.3  |   
|                                          |  |                         |   |  |       |   |  |       |   
|Total revenue                             |  | 100.0                   |   |  | 100.0 |   |  | 100.0 |   
|                                          |  |                         |   |  |       |   |  |       |   
|Cost of revenue:                          |  |                         |   |  |       |   |  |       |   
|License                                   |  | 1.9                     |   |  | 1.4   |   |  | 2.0   |   
|Maintenance and implementation services   |  | 26.0                    |   |  | 25.7  |   |  | 26.4  |   
|                                          |  |                         |   |  |       |   |  |       |   
|Total cost of revenue                     |  | 27.9                    |   |  | 27.1  |   |  | 28.4  |   
|                                          |  |                         |   |  |       |   |  |       |   
|Gross profit                              |  | 72.1                    |   |  | 72.9  |   |  | 71.6  |   
|                                          |  |                         |   |  |       |   |  |       |   
|Operating expenses:                       |  |                         |   |  |       |   |  |       |   
|Sales and marketing                       |  | 37.5                    |   |  | 36.1  |   |  | 47.7  |   
|Research and development                  |  | 12.3                    |   |  | 16.4  |   |  | 24.6  |   
|General and administrative                |  | 11.8                    |   |  | 14.2  |   |  | 17.4  |   
|Asset impairment                          |  |                        |   |  |      |   |  | 1.0   |   
|Restructuring                             |  | 2.8                     |   |  | 5.8   |   |  | 78.3  |   
|Stock-based compensation                  |  | 1.6                     |   |  | 0.7   |   |  | (7.5  | ) 
|                                          |  |                         |   |  |       |   |  |       |   
|Total operating expenses                  |  | 66.0                    |   |  | 73.2  |   |  | 161.5 |   
|                                          |  |                         |   |  |       |   |  |       |   
|Operating income (loss)                   |  | 6.1                     |   |  | (0.3  | ) |  | (89.9 | ) 
|Interest income                           |  | 0.8                     |   |  | 0.6   |   |  | 1.1   |   
|Interest expense                          |  | (0.1                    | ) |  | (0.3  | ) |  | (0.4  | ) 
|Other income (expense), net               |  | 0.1                     |   |  | (0.0  | ) |  | 10.7  |   
|                                          |  |                         |   |  |       |   |  |       |   
|Income (loss) before income taxes         |  | 6.9                     |   |  | (0.0  | ) |  | (78.5 | ) 
|Provision for (benefit from) income taxes |  | 0.8                     |   |  | (0.3  | ) |  | (0.4  | ) 
|                                          |  |                         |   |  |       |   |  |       |   
|Net income (loss)                         |  | 6.1                     | % |  | 0.3   | % |  | (78.1 | )%
|                                          |  |                         |   |  |       |   |  |       |   



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##### Table of Contents

Revenue



The following table sets forth our revenue for fiscal 2005, 2004 and 2003 (in thousands, except for percentages):



|                                        |  |                         |        |          |   |        |  |              |        |  |              |   |  |    |   
|--------------------------------------- |  | ----------------------- | ------ | -------- | - | ------ |  | ------------ | ------ |  | ------------ | - |  | -- | --
|                                        |  | Years Ended January 31, |        | % Change |  
|                                        |  | 2005                    |        | 2004     |   | 2003   |  | 2004 to 2005 |        |  | 2003 to 2004 |  
|License                                 |  | $                       | 30,311 |          | $ | 18,532 |  | $            | 18,712 |  | 64           | % |  | (1 | )%
|Maintenance and implementation services |  |                         | 35,972 |          |   | 27,178 |  |              | 29,698 |  | 32           | % |  | (8 | )%
|                                        |  |                         |        |          |   |        |  |              |        |  |              |   |  |    |   
|                                        |  | $                       | 66,283 |          | $ | 45,710 |  | $            | 48,410 |  | 45           | % |  | (6 | )%
|                                        |  |                         |        |          |   |        |  |              |        |  |              |   |  |    |   



License.    License revenue accounted for 46%, 41% and 39% of total revenue in fiscal 2005, 2004 and 2003, respectively. License revenue was $30.3 million, $18.5 million and $18.7 million in fiscal 2005, 2004 and
2003, respectively, increasing 64% in fiscal 2005 from 2004, and decreasing 1% in fiscal 2004 from fiscal 2003. The increase in license revenue in fiscal 2005 compared to fiscal 2004 was the result of a 14% increase in the number of transactions and
a 16% increase in the average transaction size, excluding one large transaction occurring in the third quarter of fiscal 2004. License revenue in fiscal 2004 compared to fiscal 2003 reflected weaker performance in the first half of fiscal 2004 in
the amount of a $3.3 million decrease from the same period in fiscal 2003 that was offset by stronger performance in the second half of fiscal 2004 represented by an increase of $3.1 million over the same period in fiscal 2003. Growth in the second
half of the year was the result of a large license transaction in the third quarter with a single customer in the amount of $3.0 million and an increase in license revenue from multiple transactions in the fourth quarter.



Services.    The following table sets forth our
services revenue for fiscal 2005, 2004 and 2003 (in thousands, except for percentages):



|                        |  |                         |        |          |   |        |  |              |        |  |              |   |  |     |   
|----------------------- |  | ----------------------- | ------ | -------- | - | ------ |  | ------------ | ------ |  | ------------ | - |  | --- | --
|                        |  | Years Ended January 31, |        | % Change |  
|                        |  | 2005                    |        | 2004     |   | 2003   |  | 2004 to 2005 |        |  | 2003 to 2004 |  
|Maintenance and support |  | $                       | 17,478 |          | $ | 15,934 |  | $            | 18,243 |  | 10           | % |  | (13 | )%
|Implementation services |  |                         | 18,494 |          |   | 11,244 |  |              | 11,455 |  | 64           | % |  | (2  | )%
|                        |  |                         |        |          |   |        |  |              |        |  |              |   |  |     |   
|                        |  | $                       | 35,972 |          | $ | 27,178 |  | $            | 29,698 |  | 32           | % |  | (8  | )%
|                        |  |                         |        |          |   |        |  |              |        |  |              |   |  |     |   



Maintenance and
support.    Maintenance and support revenue accounted for 26%, 35% and 38% of total revenue in fiscal 2005, 2004 and 2003, respectively.Maintenance and support revenue was $17.5 million, $15.9 million and $18.2
million in fiscal 2005, 2004 and 2003, respectively, increasing 10% in fiscal 2005 from 2004 and decreasing 13% in fiscal 2004 from fiscal 2003. The increase in fiscal 2005 from fiscal 2004 was a result of new licenses and more maintenance renewals.
The decrease in fiscal 2004 from fiscal 2003 was primarily attributable to a decrease in the number of supported users for maintenance renewals on legacy products and a decrease in amortization of deferred maintenance revenue assumed following an
acquisition of another company in August 2000.



Implementation services.    Implementation services revenue accounted for 28%, 25% and 24% of total revenue in fiscal 2005, 2004 and 2003, respectively. Implementation services revenue was $18.5 million, $11.2
million and $11.5 million in fiscal 2005, 2004 and 2003, respectively, increasing 64% in fiscal 2005 from fiscal 2004, and decreasing 2% in fiscal 2004 from fiscal 2003. The increase in fiscal 2005 was a result of an increase in new license
transactions, and existing customers requesting additional implementation services. Implementation services revenue in fiscal 2004 relative to fiscal 2003 reflected a decrease in license revenue in the first half of fiscal 2004 that led to a
decrease in demand for implementation services.



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Cost of Revenue



The following table sets forth our cost of revenues for fiscal 2005, 2004 and 2003 (in thousands, except for percentages):



|                                |  |                         |        |          |   |        |  |              |        |  |              |   |  |     |   
|------------------------------- |  | ----------------------- | ------ | -------- | - | ------ |  | ------------ | ------ |  | ------------ | - |  | --- | --
|                                |  | Years Ended January 31, |        | % Change |  
|                                |  | 2005                    |        | 2004     |   | 2003   |  | 2004 to 2005 |        |  | 2003 to 2004 |  
|Cost of license                 |  | $                       | 1,282  |          | $ | 639    |  | $            | 977    |  | 101          | % |  | (35 | )%
|Cost of maintenance and support |  |                         | 2,744  |          |   | 2,143  |  |              | 3,101  |  | 28           | % |  | (31 | )%
|Cost of implementation services |  |                         | 14,473 |          |   | 9,615  |  |              | 9,661  |  | 51           | % |  | (0  | )%
|                                |  |                         |        |          |   |        |  |              |        |  |              |   |  |     |   
|                                |  | $                       | 18,499 |          | $ | 12,397 |  | $            | 13,739 |  | 49           | % |  | (10 | )%
|                                |  |                         |        |          |   |        |  |              |        |  |              |   |  |     |   



Cost of license
revenue.    Cost of license revenue includes royalties payable to third parties for software that is either embedded in or bundled with our software products, new product packaging, documentation and shipping costs. Cost of
license revenue was $1.3 million, $0.6 million and $1.0 million in fiscal 2005, 2004 and 2003, respectively, and represented 4%, 3% and 5% of total license revenue in the respective year. Cost of license revenue increased 101% or $0.6 million in
fiscal 2005 from fiscal 2004 primarily due to the 64% increase in license revenue. Cost of license revenue decreased 35% or $0.3 million in fiscal 2004 from fiscal 2003 mainly due to lower royalty payments as our Clarity product incorporates fewer
royalty-bearing software components from third parties than prior products.



Cost of maintenance and support revenue.    Cost of maintenance and support revenue consists of personnel-related expenses for our maintenance and support services to our customers and an
allocation of overhead costs for information technology and facilities. Cost of maintenance and support revenue was $2.7 million, $2.1 million and $3.1 million in fiscal 2005, 2004 and 2003, respectively, and represented 16%, 13% and 17% of
maintenance and support revenue in each respective year. Cost of maintenance and support revenue increased 28% or $0.6 million in fiscal 2005 from fiscal 2004 primarily because of an increase in compensation expenses relating to an increase in
employee and contractor headcount of $0.6 million and related travel expenses of $0.1 million. Cost of maintenance and support revenue decreased 31% or $1.0 million in fiscal 2004 from fiscal 2003 primarily because of a decrease in facility and IT
costs.



Cost of implementation services
revenue.    Cost of implementation services revenue consists of personnel-related expenses, the costs of third parties contracted to provide implementation services to our customers and an allocation of overhead costs for
information technology and facilities. Cost of implementation services revenue was $14.5 million, $9.6 million and $9.7 million in fiscal 2005, 2004 and 2003, respectively, and represented 78%, 86% and 84% of implementation services revenue in each
respective year. Cost of implementation services revenue increased 51% or $4.9 million in fiscal 2005 from fiscal 2004 primarily because of an increase of $2.9 million in third party contractor services, increased compensation expenses of $1.8
million and travel expenses of $0.3 million relating to an increase in headcount, offset by a decrease in facility costs of $0.1 million. Cost of implementation services revenue was flat in fiscal 2004 from fiscal 2003 due to related revenues being
flat for the same period.



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##### Table of Contents

Operating Expenses



The following tables set forth our operating expenses for fiscal 2005, 2004 and 2003 (in thousands, except for percentages):



|                           |  |                         |        |      |          |        |  |   |              |   |  |              |    |  |      |   
|-------------------------- |  | ----------------------- | ------ | ---- | -------- | ------ |  | - | ------------ | - |  | ------------ | -- |  | ---- | --
|                           |  | Years Ended January 31, |        |      | % Change |       
|                           |  | 2005                    |        | 2004 |          | 2003   |  |   | 2004 to 2005 |   |  | 2003 to 2004 |   
|Sales and Marketing        |  | $                       | 24,889 |      | $        | 16,507 |  | $ | 23,102       |   |  | 51           | %  |  | (29  | )%
|Research and development   |  |                         | 8,167  |      |          | 7,498  |  |   | 11,896       |   |  | 9            | %  |  | (37  | )%
|General and administrative |  |                         | 7,816  |      |          | 6,505  |  |   | 8,434        |   |  | 20           | %  |  | (23  | )%
|Asset Impairment           |  |                         |       |      |          |       |  |   | 500          |   |  |             | %  |  | (100 | )%
|Restructuring              |  |                         | 1,829  |      |          | 2,648  |  |   | 37,916       |   |  | (31          | )% |  | (93  | )%
|Stock-based compensation   |  |                         | 1,055  |      |          | 293    |  |   | (3,647       | ) |  | 260          | %  |  | 108  | % 
|                           |  |                         |        |      |          |        |  |   |              |   |  |              |    |  |      |   
|                           |  | $                       | 43,756 |      | $        | 33,451 |  | $ | 78,201       |   |  | 31           | %  |  | (57  | )%
|                           |  |                         |        |      |          |        |  |   |              |   |  |              |    |  |      |   



Sales and
marketing.    Sales and marketing expenses consist primarily of personnel-related costs and includes salaries, benefits, training, commissions and bonuses; travel; marketing programs, including customer conferences,
promotional materials, trade shows and advertising; and bad debt allowances. Sales and marketing expenses were $24.9 million, $16.5 million and $23.1 million in fiscal 2005, 2004 and 2003, respectively, representing 38%, 36% and 48% of total revenue
in each respective year. Sales and marketing increased 51% in fiscal 2005 compared to fiscal 2004 due to several factors related to our growth. We increased headcount in our sales organization by 33 employees resulting in increased personnel-related
costs of $5.4 million and associated travel costs of $1.2 million. Advertising costs increased $1.0 million related to expanded marketing efforts and our Global User Conference. Expenses related to reseller fees, facilities and the use of
contractors also increased $0.6 million as a result of the increase in the number of licenses sold. Additionally, sales tax expense increased $0.3 million due to a reversal in the prior year of an accrual related to a sales tax audit. Sales and
marketing expenses decreased 29% in fiscal 2004 from fiscal 2003 primarily because of a $2.9 million reduction in salaries and benefits due to a decrease in the average headcount and a $3.5 million reduction in facility and IT costs as a result of
our cost-reduction initiatives.



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 $8.2 million, $7.5 million and $11.9 million in fiscal 2005, 2004 and 2003, respectively, representing 12%, 16% and 25% of total revenue in each respective year. Research and development expenses
increased 9% or $0.7 million in fiscal 2005 from fiscal 2004 primarily as a result of personnel costs related to headcount additions of $0.9 million and increased use of third party development services of $0.2 million, offset by a decrease in
depreciation of $0.3 million due to assets becoming fully depreciated. Research and development expenses decreased 37% or $4.4 million in fiscal 2004 from fiscal 2003 primarily due to a $1.5 million reduction in salaries and benefits due to a
decrease in average headcount and a $2.7 million reduction in facility and IT costs.



General and administrative.    General and administrative expenses consist primarily of personnel-related costs and other related costs for finance, human resources, information technology
and legal department employees, professional services fees, and other general corporate expenses. General and administrative expenses were $7.8 million, $6.5 million and $8.4 million in fiscal 2005, 2004 and 2003, respectively, representing 12%, 14%
and 17% of total revenue in each respective year. General and administrative expenses increased 20% or $1.3 million in fiscal 2005 from fiscal 2004 primarily due to increased personnel-related costs resulting from headcount additions and a newly
initiated corporate bonus plan, together totaling $0.7 million, and increased fees for professional services related to Sarbanes-Oxley compliance of $1.1 million, partially offset by a decrease in depreciation expense of $0.3 million related to
fully depreciated assets and a decrease in facility costs of $0.2 million. General and administrative expenses decreased 23% or $1.9 million in fiscal 2004 from



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fiscal 2003 primarily due to a $1.2 million decrease in an operating equipment lease, a $1.0 million decrease in depreciation, a $1.0 million decrease in
accounting and legal professional service fees, and approximately $0.6 million reduction in salaries and benefits due to a decrease in the average headcount, offset in part by an increase in IT and facilities costs of $1.8 million.



Restructuring.    In fiscal 2005, we increased our
reserves for vacated facilities resulting in a restructuring charge of $1.8 million due to revisions of the estimate of sublease income for our vacated or partially vacated facilities. Due to the availability of competing office space near a
partially vacated facility in California, we revised our sublease estimate for this facility, which resulted in an additional restructuring charge of $0.8 million in the second quarter of fiscal 2005. We also determined that we would not be able to
sublease the vacated space in our partially vacated New York City facility located on Broadway as early as originally estimated. We revised the sublease estimate for this facility resulting in a charge of $0.2 million. We also revised the sublease
estimate for our other subleased facility in New York City located on 7thAvenue resulting in a charge of $0.2
million in the second quarter of fiscal 2005. This revision was based on our determination that we would not be able to sublease this facility as early as originally estimated.



In addition to the charges taken in the second quarter, we recorded restructuring charges of $0.6 million in the first
quarter of fiscal 2005. These charges were the result of decreasing market rents for our partially vacated New York City facility located on Broadway for which we recorded a charge of $0.4 million, and the determination that we would not be able to
sublease a partially vacated California facility because of the short remaining term under the lease which expires in June 2005, for which we recorded a charge of $0.2 million.



The current sublease for our New York City facility located on 7thAvenue has been extended through June 2005 at which time we will have to remarket the facility. We also have the remaining portion of the partially vacated
facility in California to sublease. If estimates regarding future sublease income change further, we could be required to record additional net lease commitment costs.



In fiscal 2004, we increased our reserves for vacated facilities resulting in a restructuring charge of $2.6 million. This
charge reflected an increase of $2.9 million in net lease commitments to incorporate our assessment at that time of sublease opportunities for vacated facilities, offset in part by a $0.1 million decrease in the reserve for dissolving certain
inactive subsidiaries.



In fiscal 2003, we implemented a
restructuring program that reduced our workforce by approximately 147 employees. 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. We also vacated certain facilities and terminated certain leases, including the lease for a significant facility in Redwood City,
California. We also retired $8.6 million in property and equipment in connection with vacating certain facilities.



Also in fiscal 2003, we took a number of other actions under our restructuring program. We terminated a facility lease in Danville, California. We also
recorded expenses related to lease payments for computer equipment and car leases that were no longer being utilized as a result of the reductions in headcount. We recorded a credit for the value of escrow shares of our common stock recovered from
escrow accounts in which such shares had been placed in conjunction with the acquisition of certain entities in fiscal 2001. We also recorded a credit for the reversal of previously recorded stock-based compensation expenses for employees terminated
pursuant to the restructuring program.



Stock-based
compensation.    We continue to incur stock-based compensation for outstanding stock options that were repriced in November 2001 to the extent that the price of our common stock on the last day of any quarter exceeds the
price at which the options were repriced. We had approximately 23,000 repriced options outstanding as of January 31, 2005. Stock-based compensation expense was $1.1 million, $0.3 million and $(3.6) million in fiscal 2005, 2004 and 2003,
respectively. The stock-based compensation expense recorded in fiscal



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2005 and 2004 was primarily related to these repriced options based on the stock price of $19.70 and $9.65 on January 31, 2005 and 2004, respectively. In
fiscal 2005, we also recorded $0.5 million in stock-based compensation related to the acceleration of vesting on approximately 44,000 unvested stock options pursuant to a separation, release and non-competition agreement with an officer of the
Company. The recovery of stock-based compensation in fiscal 2003 was attributable to repriced options resulting in $4.8 million of expense recovery, offset by $1.2 million in other stock-based compensation expense.



Stock-based compensation by functional group for the years ended January 31,
2005, 2004 and 2003 is as follows (in thousands):



|                           |  |                         |       |      |   |      |  |   |        |  
|-------------------------- |  | ----------------------- | ----- | ---- | - | ---- |  | - | ------ | -
|                           |  | Years Ended January 31, |      
|                           |  | 2005                    |       | 2004 |   | 2003 | 
|Services                   |  | $                       | 42    |      | $ | 130  |  | $ | (288   | )
|Sales and marketing        |  |                         | 58    |      |   | 15   |  |   | (1,761 | )
|Research and development   |  |                         | 942   |      |   | 52   |  |   | (1,541 | )
|General and administrative |  |                         | 13    |      |   | 96   |  |   | (57    | )
|                           |  |                         |       |      |   |      |  |   |        |  
|                           |  | $                       | 1,055 |      | $ | 293  |  | $ | (3,647 | )
|                           |  |                         |       |      |   |      |  |   |        |  



We expect that the
adoption of Statement of Financial Accounting Standards No. 123R (SFAS No. 123R), Share-Based Payment, will significantly increase our stock-based compensation expense in future periods and, as a result, significantly affect our results of
operations.



Interest Income, Interest Expense and Other
Income (Expense), Net



The following table sets forth
our interest income and interest expense for fiscal 2005, 2004 and 2003 (in thousands, except for percentages):



|                 |  |                         |     |   |          |   |      |      |  |   |              |   |  |              |    |  |     |   
|---------------- |  | ----------------------- | --- | - | -------- | - | ---- | ---- |  | - | ------------ | - |  | ------------ | -- |  | --- | --
|                 |  | Years Ended January 31, |     |   | % Change |  
|                 |  | 2005                    |     |   | 2004     |   |      | 2003 |  |   | 2004 to 2005 |   |  | 2003 to 2004 |   
|Interest income  |  | $                       | 533 |   |          | $ | 291  |      |  | $ | 540          |   |  | 83           | %  |  | (46 | )%
|Interest expense |  |                         | (63 | ) |          |   | (140 | )    |  |   | (202         | ) |  | (55          | )% |  | (31 | )%
|                 |  |                         |     |   |          |   |      |      |  |   |              |   |  |              |    |  |     |   
|                 |  | $                       | 470 |   |          | $ | 151  |      |  | $ | 338          |   |  | 211          | %  |  | (55 | )%
|                 |  |                         |     |   |          |   |      |      |  |   |              |   |  |              |    |  |     |   



Interest
income.    Interest income was $0.5 million, $0.3 million and $0.5 million in fiscal 2005, 2004 and 2003, respectively. The net increase of $0.2 million, or 83%, in fiscal 2005 from fiscal 2004, was primarily due to increased
interest earnings on higher cash balances over the prior period as a result of increased revenue and proceeds received from our public offering of common stock in December 2004. The net decrease of $0.2 million, or 46% from fiscal 2004 to 2003 was
primarily due to less interest income as a result of lower invested cash balances.



Interest expense.    Interest expense was $0.1 million, $0.1 million and $0.2 million in fiscal 2005, 2004 and 2003, respectively. Interest expense decreased 55% and 31% in fiscal 2005 from
fiscal 2004 and in fiscal 2004 from fiscal 2003, respectively. These decreases were primarily attributable to repayment of our term loan and a reduction in the use of our line of credit as a result of strong collections and proceeds received from
our public offering of common stock in December 2004.



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The following table sets forth our other income (expense), net for fiscal 2005, 2004 and 2003 (in
thousands, except for percentages):



|                                    |  |                         |     |   |          |   |      |      |  |   |              |   |  |              |    |  |      |   
|----------------------------------- |  | ----------------------- | --- | - | -------- | - | ---- | ---- |  | - | ------------ | - |  | ------------ | -- |  | ---- | --
|                                    |  | Years Ended January 31, |     |   | % Change |  
|                                    |  | 2005                    |     |   | 2004     |   |      | 2003 |  |   | 2004 to 2005 |   |  | 2003 to 2004 |   
|Other income                        |  | $                       | 125 |   |          | $ | 73   |      |  | $ | 5,015        |   |  | 71           | %  |  | (99  | )%
|Foreign exchange gains (losses)     |  |                         | (40 | ) |          |   | (120 | )    |  |   | 166          |   |  | (67          | )% |  | (172 | )%
|Gain (loss) on sale of fixed assets |  |                         | 10  |   |          |   | 14   |      |  |   | (4           | ) |  | (29          | )% |  | (450 | )%
|                                    |  |                         |     |   |          |   |      |      |  |   |              |   |  |              |    |  |      |   
|                                    |  | $                       | 95  |   |          | $ | (33  | )    |  | $ | 5,177        |   |  | 388          | %  |  | (101 | )%
|                                    |  |                         |     |   |          |   |      |      |  |   |              |   |  |              |    |  |      |   



Other income
(expense), net.    Other income (expense) net, is comprised of other non-operating income and expenses consisting primarily of foreign exchange gains and losses as well as proceeds from legal settlements. Other income
(expense), net was $0.1 million, $(33,000) and $5.2 million in fiscal 2005, 2004 and 2003, respectively. The net increase of $0.1 million, or 388%, in fiscal 2005 from fiscal 2004, was due to proceeds from a legal settlement in fiscal 2005 and a
decrease in foreign exchange losses. The net decrease of $5.2 million, or 101%, in fiscal 2004 from fiscal 2003, was primarily attributable to $5.0 million in proceeds from a legal settlement in fiscal 2003. Foreign currency transaction gains and
losses have not been material to date.



Provision for Income Taxes



The provision for income taxes increased 509% to $0.6
million for fiscal 2005 from a benefit of $0.1 million for fiscal 2004. The provision increased 38% to a benefit of $0.1 million for fiscal 2004 from a benefit of $0.2 million for fiscal 2003. The increase in both of these periods is primarily
attributable to profitability being achieved in fiscal 2005 and a decrease in losses in fiscal 2004 compared to losses in fiscal 2003, resulting in increased foreign income taxes and corporate minimum taxes in the United States which could not be
offset by our net operating loss carryforwards. Our effective tax rate for fiscal 2005 was 12%. For a reconciliation of our effective tax rate to the U.S. federal statutory tax rate, refer to Note 12 of the notes to our consolidated financial
statements. Additionally, we had increased sales to foreign locations requiring foreign withholding taxes.



During fiscal 2005, our German subsidiary received a tax assessment of approximately $0.4 million as a result of an audit of a prior year. We believe it
is unlikely that we will be required to pay the total amount assessed. Accordingly, we accrued $0.1 million additional tax, which is our best estimate of the amount we will pay to settle the tax assessment.



Off-Balance Sheet Arrangements



We have no material off-balance sheet arrangements other than operating
leases that are discussed in Note 9 to the Consolidated Financial Statements.



Recent Accounting Pronouncements



In December
2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R) and the SEC released Staff Accounting Bulletin No.
107 (SAB 107), Topic 14: Share-Based Payment. SFAS 123R and SAB 107 will be effective in the third quarter of fiscal 2006 and will result in the recognition of substantial compensation expense relating to our employee stock option plans. We
currently use the intrinsic value method to measure compensation expense for stock-based awards to our employees. Under this standard, we generally do not recognize any compensation related to stock option grants we issue under our stock option
plans. Under the new rules, we are required to adopt a fair-value-based method for measuring the compensation expense related to employee stock awards. This will lead to substantial additional compensation expense. The paragraph entitled



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Stock-Based Compensation included in Note 1 to our consolidated financial statements provides the pro forma net income (loss) and earnings (loss) per
share as if we had used a fair-value-based method similar to the methods required under SFAS 123R to measure the compensation expense for employee stock awards during fiscal 2005, 2004 and 2003.



In June 2004, the Emerging Issues Task Force (EITF) issued EITF
No. 03-01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-01). EITF 03-01 includes new guidance for evaluating and recording impairment losses on debt and equity investments, as
well as new disclosure requirements for investments that are deemed to be temporarily impaired. The accounting guidance of EITF 03-01 was initially effective for reporting periods beginning after June 15, 2004, while the disclosure requirements for
debt and equity securities accounted for under SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, are effective for annual periods ending after December 15, 2003. In September 2004, the FASB issued a final FASB Staff
Position, FSP EITF 03-01-1, that delays the effective date for the measurement and recognition guidance of EITF 03-01. We will evaluate the effect of adopting the recognition and measurement guidance when the final consensus is reached.



Liquidity and Capital Resources



The following table sets forth, as of the periods indicated, our cash and
cash equivalents, working capital and stockholders equity (in thousands, except percentages):



|                          |  |                   |        |          |   |        |  |     |  
|------------------------- |  | ----------------- | ------ | -------- | - | ------ |  | --- | -
|                          |  | As of January 31, |        | % Change |  
|                          |  | 2005              |        | 2004     |  
|Cash and cash equivalents |  | $                 | 65,616 |          | $ | 23,200 |  | 183 | %
|Working capital           |  |                   | 55,582 |          |   | 10,456 |  | 432 | %
|Stockholders equity      |  |                   | 51,580 |          |   | 7,195  |  | 617 | %



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 in our
business. As of January 31, 2005 and January 31, 2004, we had cash and cash equivalents of $65.6 and $23.2 million, respectively. In February 2005, we invested approximately $35.0 million in short-term securities. We also had restricted cash as of
January 31, 2005 and 2004 in the amount of $0.6 million and $1.1 million, respectively, in the form of a certificate of deposit securing a letter of credit for a leased facility. There were no bank borrowings as of January 31, 2005. We had bank
borrowings under a line of credit of $4.3 million as of January 31, 2004 which was repaid in February 2004. As of January 31, 2005, we had working capital of $55.6 million, compared to working capital of $10.5 million as of January 31, 2004. The
increase in working capital as of January 31, 2005 from January 31, 2004 was primarily attributable to $35.6 million in net proceeds from our public offering of common stock in December 2004, $3.5 million in proceeds from the exercise of stock
options and warrants and to $6.8 million in positive operating cash flows driven by an increase in sales. 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. As of January 31, 2005, we had no material commitments for capital expenditures. Our liquidity could be negatively impacted by factors discussed under Risk Factors.



Net cash provided by operating activities was $6.8 million in fiscal 2005.
Net cash used in operating activities was $4.0 million and $23.9 million in fiscal 2004 and 2003, respectively. The principal sources of cash generated by operating activities in fiscal 2005 was net income of $4.0 million, adjusted for non-cash
expenses of $2.1 million related primarily to stock-based compensation of $1.1 million and depreciation of $1.0 million. Our cash flows were also favorably impacted by an increase in accounts payable and accrued liabilities of $4.8 million,
primarily related to increases for outside services of $1.3 million, employee compensation costs of $1.2 million, taxes payable of $1.4 million, audit and legal costs of $0.3 million, and an increase in deferred revenue



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of $1.6 million attributable to year-end maintenance renewals. These activities were offset by an increase in accounts receivable of $5.1 million primarily
due to an increase in license transactions in the quarter ended January 31, 2005 and a decrease in accrued restructuring of $0.5 million representing payments made on vacated facilities in the amount of $2.3 million, offset by restructuring charges
of $1.8 million. Net cash used in operating activities in fiscal 2004 was primarily attributable to decreases in accrued restructuring of $3.6 million, and decreases in accounts payable of $2.1 million, offset in part by depreciation expense of $1.6
million. Net cash used in operating activities in fiscal 2003 was primarily attributable to a net loss of $37.8 million and a decrease in accrued liabilities of $8.0 million primarily attributable to a decrease in short-term accrued restructuring
reserves, offset in part by non-cash restructuring charges, and a decrease in accounts receivable, depreciation expenses and prepaid expenses and other current assets.



Net cash provided by investing activities was $1.0 million, $0.3 million and $11.0 million in fiscal 2005, 2004 and 2003,
respectively. Net cash provided by investing activities in fiscal 2005 was primarily attributable to $0.6 million of proceeds received from deposits and other assets, and $0.5 million for releases of restricted cash, partially offset by $0.2 million
to purchase property and equipment. Net cash provided by investing activities in fiscal 2004 was primarily attributable to $0.3 million of proceeds received from deposits and other assets, and $0.2 million for releases of restricted cash, partially
offset by $0.2 million to purchase property and equipment. 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 (used in) financing activities was $34.5
million, $9.7 million, and $(22.1) million in fiscal 2005, 2004 and 2003, respectively. Net cash provided by financing activities in fiscal 2005 was primarily attributable to $35.6 million of net proceeds from the issuance of common stock in our
public offering in December 2004 and $3.5 million of net proceeds from the issuance of common stock in connection with the exercise of stock options and warrants, offset by $4.6 million in repayments of bank borrowings and capital lease obligations.
Net cash provided by financing activities in fiscal 2004 was primarily attributable to $10.2 million of net proceeds from the issuance of common stock and warrants in connection with the 2003 private placement, offset by $0.5 million net repayments
of bank borrowings. Net cash used in financing activities in fiscal 2003 was primarily attributable to net repayment of a bank line of credit, offset in part by proceeds from a bank term loan.



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 this lease.



We had no outstanding borrowings under
our bank line of credit as of January 31, 2005. The history and terms of this credit facility are as follows: on July 18, 2003, we entered into a $5.0 million line of credit with a financial institution. The line of credit is secured by our tangible
and intangible assets and accrues interest at the prime rate plus 0.50% per annum (5.75% as of January 31, 2005). In July 2004, the line of credit was extended through August 2005 and certain financial covenants were amended. These amended covenants
require: (1) minimum cash and cash equivalent balance equal to at least 1.25 times the outstanding principal balance at each month end, (2) that we have no line of credit balance owing under the agreement for at least 30 days each calendar year and
(3) annual profitability determined in accordance with US GAAP of at least $1 (excluding restructuring charges for vacated facilities and stock-based compensation). As of January 31, 2005, we were in compliance with all financial covenants.



In August 2003, we entered into a non-cancelable master lease
agreement with a computer equipment vendor. The agreement enables us to lease equipment from the vendor under a capital lease. At January 31, 2005, equipment held under the lease was valued at $1.3 million.



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Contractual Obligations



The following table summarizes our contractual obligations at January 31, 2005, and the effect these contractual obligations are expected to have on
our liquidity and cash flows in future periods (in thousands):



|                            |  |                        |        |                 |   |           |  |           |       |              |   |       |  |   |      
|--------------------------- |  | ---------------------- | ------ | --------------- | - | --------- |  | --------- | ----- | ------------ | - | ----- |  | - | -----
|                            |  | Payments due by Period
|                            |  | Total                  |        | LessThan 1 Year |   | 1-3 Years |  | 4-5 Years |       | After5 Years
|Line of Credit (a)          |  | $                      |       |                 | $ |          |  | $         |      |              | $ |      |  | $ |     
|Operating Leases (b)        |  |                        | 15,826 |                 |   | 3,430     |  |           | 6,072 |              |   | 4,260 |  |   | 2,064
|Capital Leases              |  |                        | 920    |                 |   | 605       |  |           | 315   |              |   |      |  |   |     
|Purchase Orders             |  |                        | 3,240  |                 |   | 3,199     |  |           | 41    |              |   |      |  |   |     
|                            |  |                        |        |                 |   |           |  |           |       |              |   |       |  |   |      
|Net contractual obligations |  | $                      | 19,986 |                 | $ | 7,234     |  | $         | 6,428 |              | $ | 4,260 |  | $ | 2,064
|                            |  |                        |        |                 |   |           |  |           |       |              |   |       |  |   |      

---

|(a) | Based on the terms of the July 18, 2003 line of credit financing as discussed in Note 8 to the Consolidated Financial Statements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(b) | Lease payments above are net of contractual sublease income of $1.8 million relating to facilities that we have either vacated or terminated pursuant to our restructuring programs
and amount to $2.0 million, $2.3 million, $2.2 million, $2.0 million and $1.8 million for the twelve months ended January 31, 2006, 2007, 2008, 2009, and 2010 respectively, and $2.1 million thereafter. Sublease income includes contractual sublease
income for restructured facilities in the amount of $0.5 million, $0.5 million, $0.4 million, $0.2 million and $0.1 million for the twelve months ended January 31, 2006, 2007, 2008, 2009 and 2010, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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RISK FACTORS



Our quarterly financial results have fluctuated significantly in the past, and may fluctuate significantly in the future.



Our quarterly operating results have fluctuated significantly in the past
and are likely to 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. We have
limited visibility into our future revenue, especially license revenue, which often has been heavily concentrated in the third month of each quarter. Since we forecast our expenses and develop our hiring plans 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 demand for professional services to implement our products and our efficiency in rendering such services, including variability in the mix of internal resources and
subcontractor resources used to implement our products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | variability in the mix of our product and services in any quarter;
| | - |  | ------------------------------------------------------------------



| |  |  | the amount and timing of operating expenses and capital expenditures relating to the business, including increased personnel costs for employees hired to meet forecasted demand
which may not materialize;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in the amount of product revenue we obtain from new customers, customers expanding their usage of our solutions and customers upgrading from earlier products;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in restructuring accruals based on changes in sublease estimates for lease facilities we vacated;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | the imposition of new accounting rules relating to stock options; and
| | - |  | ---------------------------------------------------------------------



| |  |  | changes in the mix of our domestic and international sales, together with fluctuations in foreign exchange rates; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to attract and retain key personnel.
| | - |  | ------------------------------------------------



Due to these and other factors, we believe that period-to-period comparisons of our results of operations should not be relied upon as indicators of our
future performance. If we are unable to meet the expectations of investors with regard to future operating results, the price of our common stock would likely decline. While our operations were profitable in fiscal 2005, they may not be in
subsequent periods.



If the IT-MG market does not grow rapidly, we may be
unable to meet our growth objectives.



Our ability to grow
is constrained by the pace at which enterprises adopt IT management and governance as a category requiring sustained investment. Because we operate in a relatively new market, it takes time and effort to educate potential customers with regard to
the benefits of our products and services. We cannot be certain that a viable market for our products will emerge or be sustainable. If the IT-MG market fails to develop, or develops more slowly than expected, demand for our products would be less
than anticipated and our business and operating results would be seriously harmed.



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We are dependent on sales of one product, Clarity, which accounts for substantially all of our revenue.



Revenue from licenses of, and services related to, Clarity
accounted for substantially all of our total revenue in fiscal 2005 and 2004. We believe that revenue generated from Clarity will continue to account for a large portion of our revenue for the foreseeable future. Accordingly, a decline in the price
of Clarity, or our inability to increase license sales of Clarity, would significantly harm our business and operating results. In addition, our future financial performance will depend upon successfully developing and selling enhanced versions of
Clarity.



Our market is highly competitive which could make it difficult for
us to attract customers, cause us to reduce prices, and result in poor operating results.



The market for our products and services is highly 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 development organizations. The primary competitive factors include product
functionality, scalability, security, platform support for other enterprise requirements, ease of deployment, ease of use, price and worldwide sales, support and professional services capabilities. Some of our competitors include:



| |  |  | IT systems vendors such as Compuware, IBM and Mercury Interactive;
| | - |  | ------------------------------------------------------------------



| |  |  | application providers such as Lawson Software, Microsoft, Oracle and SAP; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | privately-held providers of project management, portfolio management and professional services automation software.
| | - |  | -------------------------------------------------------------------------------------------------------------------



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, conduct broader
sales distribution, adopt more aggressive pricing policies, offer a broader range of products 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 products and services continues to develop.



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



We experience seasonality in the licensing of our products and sales of our services. For example, revenue has typically
been lower in our first fiscal quarter due to patterns in the capital budgeting and purchasing cycles of our current and prospective customers. For the same reasons, we also expect that revenues in European markets may decline during July, the last
month of our second fiscal quarter, and August, the first month of our third fiscal quarter. These seasonal variations in our revenue are likely to lead to fluctuations in our quarterly operating results.



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 six months, making it difficult to predict the quarter in which we may recognize revenue from a sale, if at all. While we have seen reductions in this sales period in certain recent transactions, the general
length of our 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



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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 rely on distribution agreements and relationships with various third parties and any failure to obtain or maintain such distribution
relationships on favorable terms could harm our operating results.



We derive a portion of our business from sales of our products and services through distribution channels, such as global software vendors, systems integrators or value-added resellers. We expect that sales of our products through these
channels may account for a more significant portion of our revenue in the future. Our dependence on indirect distribution channels presents a number of risks, including:



| |  |  | Each of our global software vendors, systems integrators or value-added resellers can cease marketing our products and services with limited or no notice with little or no penalty;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | These third parties may not be able to effectively sell any new products and services that we may introduce;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | We may not be able to replace existing or recruit additional global software vendors, systems integrators or value-added resellers, if we lose any of our existing ones;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | These third parties may also offer competitive products and services;
| | - |  | ---------------------------------------------------------------------



| |  |  | We may face conflicts between the activities of our indirect channels and our direct sales and marketing activities; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | These third parties may not give priority to the marketing of our products and services as compared to other products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



The occurrence of any of these events could adversely affect our business or
operating results.



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



Implementation of products as complex as those we offer may be costly and time-consuming. Customers could become
dissatisfied with our products if implementation requires more time, expense or resources than they expected. Additionally, our financial results would be adversely impacted 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. 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. It is difficult and expensive to recruit, train and retain qualified personnel to perform implementation services, and we may from time to time have inadequate levels of staffing to
perform implementation services. As a result, our growth could be limited due to our lack of capacity to provide those services, or we could experience deterioration in service levels or decreased customer satisfaction, any of which would harm our
business.



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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 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. 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 adversely affect our operating results.



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 operating results could be adversely affected.



We must attract and retain qualified personnel, which is particularly difficult for us
because we compete with other technology-related companies and are located in the San Francisco Bay area, where there is intense competition for personnel.



Our success depends on our ability to attract and retain qualified, experienced employees. We compete for experienced engineering, sales, consulting
and finance personnel with software vendors and other technology firms and consulting and professional services companies. It is particularly difficult to recruit and retain personnel in the San Francisco Bay area, where our headquarters is located.
Although we provide compensation packages that include stock options, cash incentives and other employee benefits, we may not be able to attract, assimilate and retain highly qualified employees in the future.



The success of our business depends on the efforts and abilities of our senior management
and other key personnel.



We depend on the continued
services and performance of our senior management and other key personnel. Although we recently entered into an employment agreement with our Chief Executive Officer, we do not have long-term employment agreements with any of our key personnel. The
loss of any of our executive officers or other key employees could hurt our business and result in significant disruption to our ongoing operations.



Because a significant portion of our revenue comes from our international operations, we are subject to risks inherent in doing business in foreign countries that
could adversely affect our results of operations.



International revenue represented 39% of our total revenue for fiscal 2005, making international activities a significant part of our business. In addition to uncertainty about our ability to continue to generate revenues from our foreign
operations and expand our international market position, there are certain risks inherent in doing business internationally, including:



| |  |  | currency exchange rate fluctuations, particularly in countries where we sell our products in denominations other than U.S. dollars, such as in the United Kingdom, the euro zone, and
Australia, or have exposures in intercompany accounts denominated in foreign currencies;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | seasonal fluctuations in purchasing patterns in other countries, particularly declining sales during July and August in European markets;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in developing, staffing and simultaneously managing a large number of varying foreign operations as a result of distance, language and cultural differences;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the burdens of complying with a wide variety of foreign laws and stringent local labor laws and regulations and reduced protection for intellectual property rights in some
countries;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the need to develop internationalized versions of our products and marketing and sales materials;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | tariffs, export controls and other trade barriers;
| | - |  | --------------------------------------------------



| |  |  | longer payment cycles; and
| | - |  | --------------------------



| |  |  | potentially adverse tax consequences.
| | - |  | -------------------------------------



One or more of these factors could harm our future international operations and, consequently, could harm our operating results.



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 our products, particularly Clarity, and their components. Clarity has been
designed based upon currently prevailing technologies such as hypertext markup language (HTML), extensible markup language (XML), extensible stylesheet language (XSL), Java Two Platform Enterprise Edition (J2EE), secure socket layer (SSL), and
Simple Object Access Protocol (SOAP). If new technologies emerge that are incompatible with our products, our products could become obsolete and our existing and potential customers might seek alternatives. We may not be able to adapt quickly to new
technologies.



Additionally, we design our products to work
with databases such as Oracle Database Server and Microsoft SQL Server, operating systems such as Sun Solaris, Microsoft Windows, HP UX, IBM AIX and application servers such as IronFlare Orion, BEA WebLogic, and IBM WebSphere, and we embed a
reporting product from Actuate. Any changes to those products or increasing popularity of other products 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 these products, could delay our product development, increase our research and development expenses and
cause customers to delay evaluation, purchase and deployment of our products, all of which could adversely affect our operating results.



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 the steps we take to protect our intellectual property may be inadequate, time-consuming, and expensive. These steps, however, may be unable to prevent third parties from infringing upon or
misappropriating our intellectual property, which could significantly harm our business and our ability to compete. For example, notwithstanding the security systems in place in 2002, Business Engine Corporation (Business Engine), a competitor,
entered our network and misappropriated sales and development documents. As a result of this intrusion, we pursued litigation against Business Engine



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and the Department of Justice filed criminal charges against the then chief technology officer of Business Engine. While the former Business Engine chief
technology officer pled guilty in the criminal action and the civil litigation resulted in the payment to us by Business Engine of $5 million in fiscal 2003 and an agreement by Business Engine to have its products monitored by a third party for a
year, it also required us to devote management time and expense to prosecute the litigation against Business Engine.



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. There have been an increasing number of software patents issued, and this increased issuance rate heightens the
likelihood of infringement claims. 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. From time to time, in the past we have and in the future we expect to receive notices of potential infringement from third parties demanding that we cease any infringement and inviting us to take a license in order to continue
marketing our products. If we become liable to third parties for infringement of their intellectual property rights, we could be required to pay a substantial damage award and to develop non-infringing technology, obtain one or more licenses for us
and our customers from third parties, or cease selling the products that contain the infringing intellectual property. We may be unable to develop non-infringing technology or obtain a license at a reasonable cost, or at all. If any of the foregoing
were to occur, there would be significant harm to our business.



We have filed for four copyright registrations. Although registration is not required to obtain protection under copyright laws, if our registration applications are rejected, or we fail to register copyrights for some of our products or do
not file in a timely manner, it may limit our ability to seek certain remedies available under such laws. Currently, we have one issued patent and other patent applications pending. Our current patent and patents that may be issued in the future may
not provide us with competitive advantages over, or may be challenged by, third parties. 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 intellectual property 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.



If our business continues to grow, the
failure to effectively anticipate and manage the growth of our business could harm us.



If we are able to continue growing our business both in the United States and internationally, we must expand and adapt our operational infrastructure and increase the number of our personnel in certain areas. Our
business relies on our data systems, billing systems and other operational and financial reporting and control systems and procedures, many of which have been recently adopted. All of these systems have become increasingly complex in the recent past
due to the growing diversification and complexity of our business and the necessity for compliance with regulatory requirements. To effectively manage any future growth, we will need to



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continue to upgrade and improve our data systems, billing systems and other operational and financial systems, procedures and controls. If we are unable to
adapt our systems in a timely manner to accommodate our growth, our business may be adversely affected.



Additionally, we have experienced recent growth in personnel numbers and expect to continue to hire additional personnel in selected areas. This growth
requires significant time and resource commitments from our senior management. Further, as a result of international expansion, more than one-half of our employees are based outside of our Redwood City, California headquarters. If we are unable to
effectively manage a large and geographically dispersed group of employees or to anticipate our future growth and personnel needs, our business may be adversely affected.



If at any time we are unable to reach a favorable conclusion after assessing the effectiveness of our internal control over financial
reporting, or if our independent auditors are unable to provide an unqualified attestation report, our stock price could be adversely affected.



Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to report on, and our independent auditors to attest to, the
effectiveness of our internal controls over financial reporting on an annual basis. The rules governing the standards that must be met for management to assess our internal controls over financial reporting are new and complex, and require
significant documentation, testing and possible remediation. If we cannot favorably assess the effectiveness of our internal controls over financial reporting in any period, or if our independent auditors are unable to provide an unqualified
attestation report on our assessment, investor confidence and our stock price could be adversely affected.



Provisions of Delaware law and 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 and
our certificate of incorporation and bylaws could have the effect of delaying or preventing a change in control, even if a change in control presumably would be beneficial to our stockholders. Relevant provisions include those:



| |  |  | authorizing the issuance of preferred stock without stockholder approval as described more fully below;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | providing for a classified board of directors with staggered, three-year terms;
| | - |  | -------------------------------------------------------------------------------



| |  |  | 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 stockholder meetings; and
| | - |  | --------------------------------------------------------------------------



| |  |  | prohibiting stockholder actions by written consent.
| | - |  | ---------------------------------------------------



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



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



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rights that could adversely affect the rights of the holders of our common stock and could also adversely affect the market price of our common stock.



Item 7A.Quantitative and Qualitative Disclosures About Market Risk.



We develop products in the United States and market our products in North America, Europe and Asia. Approximately 36% of our total revenue was in
currencies other than U.S. dollars in fiscal 2005. Accordingly, our financial results have been and will be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Our exposures to
foreign exchange rate fluctuations also arise from inter-company accounts with our foreign subsidiaries which are typically denominated in the currency of the foreign subsidiary. We currently do not use financial instruments to hedge operating
expenses of our foreign subsidiaries. We do however hedge our inter-company and accounts receivable balances denominated in foreign currency from time to time. We will continue to assess the need to further utilize financial instruments to hedge
currency exposures on an ongoing basis. We have determined that the foreign currency rate fluctuations have not had a material impact on our consolidated revenue and expenses.



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 deposit 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 line of
credit because of the short term nature of the borrowings. 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.



The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term and long-term investments in a variety of securities, including both government
and corporate obligations and money market funds. We are exposed to market risk as it relates to changes in the market value of our investments. Our objective in managing exposure to stock market fluctuations is to minimize the impact of stock
market declines to earnings and cash flows. However, continued market volatility, as well as mergers and acquisitions, have the potential to have a material non-cash impact on our financial position and/or operating results in future periods.



Item 8.Financial Statements and Supplementary Data.



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                          |  |     
|------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                          |  | Page
|Managements Report on Internal Control Over Financial Reporting                                                          |  | 37  
|Report of Independent Registered Public Accounting Firm                                                                   |  | 38  
|Report of Independent Registered Public Accounting Firm                                                                   |  | 39  
|Consolidated Balance Sheets as of January 31, 2005 and 2004                                                               |  | 40  
|Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended January 31, 2005, 2004 and 2003 |  | 41  
|Consolidated Statements of Stockholders Equity (Deficit) for the Years Ended January 31, 2005, 2004 and 2003             |  | 42  
|Consolidated Statements of Cash Flows for the Years Ended January 31, 2005, 2004 and 2003                                 |  | 43  
|Notes to Consolidated Financial Statements                                                                                |  | 44  



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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING



Management of the company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over
financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the companys principal executive and principal financial officers and
effected by the companys board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and procedures that:



| |  |  | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the companys assets that could have a material effect
on the financial statements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management assessed
the effectiveness of the companys internal control over financial reporting as of January 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework.



Based
on our assessment, management believes that, as of January 31, 2005, the companys internal control over financial reporting is effective.



The companys independent auditors have issued an audit report on our assessment of the companys internal control over financial reporting.
This report appears on page 39.



|                      |  |  |  |                                                                          
|--------------------- |  |  |  | -------------------------------------------------------------------------
|Dated: April 14, 2005 |  |  |  | /s/    JOSHUA PICKUS                                                     
|                      |  |  |  | Joshua Pickus Chief Executive Officer                                    
|                      |  | 
|                      |  |  |  | /s/    MICHAEL
SHAHBAZIAN                                                
|                      |  |  |  | Michael Shahbazian Chief Financial Officer (Principal Accounting Officer)



37



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

Niku Corporation:



We have
audited the accompanying consolidated balance sheets of Niku Corporation and subsidiaries (the Company) as of January 31, 2005 and 2004, and the related consolidated statements of operations and comprehensive income (loss),
stockholders equity (deficit), and cash flows for each of the years in the three-year period ended January 31, 2005. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 as of January 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended
January 31, 2005, in conformity with U.S. generally accepted accounting principles.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Niku Corporations internal control over financial reporting as of
January 31, 2005, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 14, 2005 expressed an unqualified
opinion on managements assessment of, and the effective operation of, internal control over financial reporting.



/s/ KPMG LLP



Mountain View, California

April 14, 2005



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

Niku Corporation:



We have
audited managements assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting that Niku Corporation (the Company) maintained effective internal control over financial reporting
as of January 31, 2005, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Niku Corporations management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on
the effectiveness of the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.



A companys
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, managements assessment that Niku Corporation maintained
effective internal control over financial reporting as of January 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Also, in our opinion, Niku Corporation maintained, in all material respects, effective internal control over financial reporting as of January 31, 2005, based on criteria established in Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets
of Niku Corporation and subsidiaries as of January 31, 2005 and 2004, and the related consolidated statements of operations and comprehensive income (loss), stockholders equity (deficit), and cash flows for each of the years in the three-year
period ended January 31, 2005, and our report dated April 14, 2005 expressed an unqualified opinion on those consolidated financial statements.



/s/ KPMG LLP



Mountain View, California

April 14, 2005



39



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##### Table of Contents

NIKU CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)



|                                                                                                                                                                                                                                                                                 |  |             |          |   |      |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                                                                                                                                 |  | January 31, |         
|                                                                                                                                                                                                                                                                                 |  | 2005        |          |   | 2004 |  
|ASSETS                                                                                                                                                                                                                                                                           |  |             |          |   |      |   |          |  
|Current Assets:                                                                                                                                                                                                                                                                  |  |             |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                                                                                                                                                                        |  | $           | 65,616   |   |      | $ | 23,200   |  
|Current portion of restricted cash                                                                                                                                                                                                                                               |  |             | 564      |   |      |   |         |  
|Accounts receivable, net of allowances of $155 and $797 as of January 31, 2005 and 2004, respectively                                                                                                                                                                            |  |             | 12,893   |   |      |   | 7,794    |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                                        |  |             | 2,508    |   |      |   | 2,345    |  
|                                                                                                                                                                                                                                                                                 |  |             |          |   |      |   |          |  
|Total current assets                                                                                                                                                                                                                                                             |  |             | 81,581   |   |      |   | 33,339   |  
|Restricted cash                                                                                                                                                                                                                                                                  |  |             |         |   |      |   | 1,108    |  
|Property and equipment, net                                                                                                                                                                                                                                                      |  |             | 1,534    |   |      |   | 1,281    |  
|Deposits and other assets                                                                                                                                                                                                                                                        |  |             | 298      |   |      |   | 888      |  
|                                                                                                                                                                                                                                                                                 |  |             |          |   |      |   |          |  
|Total assets                                                                                                                                                                                                                                                                     |  | $           | 83,413   |   |      | $ | 36,616   |  
|                                                                                                                                                                                                                                                                                 |  |             |          |   |      |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                             |  |             |          |   |      |   |          |  
|Current Liabilities:                                                                                                                                                                                                                                                             |  |             |          |   |      |   |          |  
|Accounts payable                                                                                                                                                                                                                                                                 |  | $           | 1,130    |   |      | $ | 320      |  
|Accrued liabilities                                                                                                                                                                                                                                                              |  |             | 11,093   |   |      |   | 7,075    |  
|Accrued restructuring                                                                                                                                                                                                                                                            |  |             | 2,269    |   |      |   | 1,812    |  
|Current portion of capital lease obligations                                                                                                                                                                                                                                     |  |             | 605      |   |      |   | 121      |  
|Bank borrowings                                                                                                                                                                                                                                                                  |  |             |         |   |      |   | 4,250    |  
|Deferred revenue                                                                                                                                                                                                                                                                 |  |             | 10,902   |   |      |   | 9,305    |  
|                                                                                                                                                                                                                                                                                 |  |             |          |   |      |   |          |  
|Total current liabilities                                                                                                                                                                                                                                                        |  |             | 25,999   |   |      |   | 22,883   |  
|Long-term portion of accrued restructuring                                                                                                                                                                                                                                       |  |             | 5,519    |   |      |   | 6,430    |  
|Capital lease obligations, less current portion                                                                                                                                                                                                                                  |  |             | 315      |   |      |   | 108      |  
|                                                                                                                                                                                                                                                                                 |  |             |          |   |      |   |          |  
|Total liabilities                                                                                                                                                                                                                                                                |  |             | 31,833   |   |      |   | 29,421   |  
|                                                                                                                                                                                                                                                                                 |  |             |          |   |      |   |          |  
|Commitments and Contingencies (Note 9)                                                                                                                                                                                                                                           |  |             |          |   |      |   |          |  
|Stockholders equity:                                                                                                                                                                                                                                                            |  |             |          |   |      |   |          |  
|Common stock; $0.0001 par value; 60,000,000 shares authorized as of January 31, 2005 and 2004; 15,609,054 and 12,581,516 shares issued as of
January 31, 2005 and 2004, respectively; 14,989,370 and 11,961,832 shares outstanding as of January 31, 2005 and 2004, respectively |  |             | 2        |   |      |   | 1        |  
|Treasury stock, at cost: 619,684 shares as of January 31, 2005 and 2004                                                                                                                                                                                                          |  |             | (5,057   | ) |      |   | (5,057   | )
|Additional paid-in capital                                                                                                                                                                                                                                                       |  |             | 551,682  |   |      |   | 511,503  |  
|Deferred stock-based compensation                                                                                                                                                                                                                                                |  |             |         |   |      |   | (2       | )
|Accumulated other comprehensive income                                                                                                                                                                                                                                           |  |             | 527      |   |      |   | 356      |  
|Accumulated deficit                                                                                                                                                                                                                                                              |  |             | (495,574 | ) |      |   | (499,606 | )
|                                                                                                                                                                                                                                                                                 |  |             |          |   |      |   |          |  
|Total stockholders equity                                                                                                                                                                                                                                                       |  |             | 51,580   |   |      |   | 7,195    |  
|                                                                                                                                                                                                                                                                                 |  |             |          |   |      |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                                       |  | $           | 83,413   |   |      | $ | 36,616   |  
|                                                                                                                                                                                                                                                                                 |  |             |          |   |      |   |          |  



See accompanying notes
to consolidated financial statements.



40



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##### Table of Contents

NIKU CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)



|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|------------------------------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                             |  | Years Ended January 31, |       
|                                                             |  | 2005                    |        |   | 2004 |   |        | 2003 | 
|Revenue:                                                     |  |                         |        |   |      |   |        |      |  |   |         |  
|License                                                      |  | $                       | 30,311 |   |      | $ | 18,532 |      |  | $ | 18,712  |  
|Maintenance and implementation services                      |  |                         | 35,972 |   |      |   | 27,178 |      |  |   | 29,698  |  
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Total revenue                                                |  |                         | 66,283 |   |      |   | 45,710 |      |  |   | 48,410  |  
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Cost of revenue:                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|License                                                      |  |                         | 1,282  |   |      |   | 639    |      |  |   | 977     |  
|Maintenance and implementation services                      |  |                         | 17,217 |   |      |   | 11,758 |      |  |   | 12,762  |  
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Total cost of revenue                                        |  |                         | 18,499 |   |      |   | 12,397 |      |  |   | 13,739  |  
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Gross profit                                                 |  |                         | 47,784 |   |      |   | 33,313 |      |  |   | 34,671  |  
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Operating expenses:                                          |  |                         |        |   |      |   |        |      |  |   |         |  
|Sales and marketing                                          |  |                         | 24,889 |   |      |   | 16,507 |      |  |   | 23,102  |  
|Research and development                                     |  |                         | 8,167  |   |      |   | 7,498  |      |  |   | 11,896  |  
|General and administrative                                   |  |                         | 7,816  |   |      |   | 6,505  |      |  |   | 8,434   |  
|Asset impairment                                             |  |                         |       |   |      |   |       |      |  |   | 500     |  
|Restructuring                                                |  |                         | 1,829  |   |      |   | 2,648  |      |  |   | 37,916  |  
|Stock-based compensation                                     |  |                         | 1,055  |   |      |   | 293    |      |  |   | (3,647  | )
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Total operating expenses                                     |  |                         | 43,756 |   |      |   | 33,451 |      |  |   | 78,201  |  
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Operating income (loss)                                      |  |                         | 4,028  |   |      |   | (138   | )    |  |   | (43,530 | )
|Interest income                                              |  |                         | 533    |   |      |   | 291    |      |  |   | 540     |  
|Interest expense                                             |  |                         | (63    | ) |      |   | (140   | )    |  |   | (202    | )
|Other income (expense), net                                  |  |                         | 95     |   |      |   | (33    | )    |  |   | 5,177   |  
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Income (loss) before income taxes                            |  |                         | 4,593  |   |      |   | (20    | )    |  |   | (38,015 | )
|Provision for (benefit from) income taxes                    |  |                         | 561    |   |      |   | (137   | )    |  |   | (221    | )
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Net income (loss)                                            |  | $                       | 4,032  |   |      | $ | 117    |      |  | $ | (37,794 | )
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Basic net income (loss) per share                            |  | $                       | 0.32   |   |      | $ | 0.01   |      |  | $ | (4.96   | )
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Shares used in computing basic net income (loss) per share   |  |                         | 12,729 |   |      |   | 11,560 |      |  |   | 7,618   |  
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Diluted net income (loss) per share                          |  | $                       | 0.30   |   |      | $ | 0.01   |      |  | $ | (4.96   | )
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Shares used in computing diluted net income (loss) per share |  |                         | 13,362 |   |      |   | 11,886 |      |  |   | 7,618   |  
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Comprehensive income (loss):                                 |  |                         |        |   |      |   |        |      |  |   |         |  
|Net income (loss)                                            |  | $                       | 4,032  |   |      | $ | 117    |      |  | $ | (37,794 | )
|Foreign currency translation adjustments                     |  |                         | 171    |   |      |   | 425    |      |  |   | 158     |  
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Comprehensive income (loss)                                  |  | $                       | 4,203  |   |      | $ | 542    |      |  | $ | (37,636 | )
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Allocation of stock-based compensation:                      |  |                         |        |   |      |   |        |      |  |   |         |  
|Services                                                     |  | $                       | 42     |   |      | $ | 130    |      |  | $ | (288    | )
|Sales and marketing                                          |  |                         | 58     |   |      |   | 15     |      |  |   | (1,761  | )
|Research and development                                     |  |                         | 942    |   |      |   | 52     |      |  |   | (1,541  | )
|General and administrative                                   |  |                         | 13     |   |      |   | 96     |      |  |   | (57     | )
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Total stock-based compensation                               |  | $                       | 1,055  |   |      | $ | 293    |      |  | $ | (3,647  | )
|                                                             |  |                         |        |   |      |   |        |      |  |   |         |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

NIKU CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

(in thousands, except share data)



|                                                                                                           |  |              |  |                |   |        |                          |   |        |                                 |        |   |                                 |   |         |                                            |  |   |                    |   |  |                                    |        |   |  |   |      |   |  |   |          |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | ------------ |  | -------------- | - | ------ | ------------------------ | - | ------ | ------------------------------- | ------ | - | ------------------------------- | - | ------- | ------------------------------------------ |  | - | ------------------ | - |  | ---------------------------------- | ------ | - |  | - | ---- | - |  | - | -------- | - |  | - | ------- | -
|                                                                                                           |  | Common Stock |  | Treasury Stock |   |        | AdditionalPaid-inCapital |   |        | DeferredStock-BasedCompensation |        |   | NotesReceivablefromStockholders |   |         | AccumulatedOtherComprehensiveIncome (Loss) |  |   | AccumulatedDeficit |   |  | TotalStockholdersEquity (Deficit) |       
|                                                                                                           |  | Shares       |  | Amount         |   | Shares |                          |   | Amount |                                 |        |   |                                 |   |         |                                           
|Balances as of January 31, 2002                                                                            |  | 7,818,625    |  | $              | 1 |        | (454,166                 | ) |        | $                               | (3,570 | ) |                                 | $ | 514,025 |                                            |  | $ | (15,325            | ) |  | $                                  | (1,418 | ) |  | $ | (227 | ) |  | $ | (461,929 | ) |  | $ | 31,557  |  
|Net Loss                                                                                                   |  |              |  |                |   |        |                          |   |        |                                 |        |   |                                 |   |         |                                            |  |   |                    |   |  |                                    |        |   |  |   |      |   |  |   | (37,794  | ) |  |   | (37,794 | )
|Foreign currency translation adjustment                                                                    |  |              |  |                |   |        |                          |   |        |                                 |        |   |                                 |   |         |                                            |  |   |                    |   |  |                                    |        |   |  |   | 158  |   |  |   |         |   |  |   | 158     |  
|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                             |  | 40,000       |  |                |  |        |                         |   |        |                                 |       |   |                                 |   | 872     |                                            |  |   |                   |   |  |                                    |       |   |  |   |     |   |  |   |         |   |  |   | 872     |  
|Issuance of common stock in connection with the settlement with former employees of Proamics               |  | 4,841        |  |                |  |        |                         |   |        |                                 |       |   |                                 |   | 37      |                                            |  |   |                   |   |  |                                    |       |   |  |   |     |   |  |   |         |   |  |   | 37      |  
|Repurchase of common stock in settlement of notes receivable from stockholder                              |  |             |  |                |  |        | (125,000                 | ) |        |                                 | (675   | ) |                                 |   |        |                                            |  |   |                   |   |  |                                    | 1,349  |   |  |   |     |   |  |   |         |   |  |   | 674     |  
|Recovery of escrow shares from acquisitions                                                                |  |             |  |                |  |        | (40,518                  | ) |        |                                 | (812   | ) |                                 |   |        |                                            |  |   |                   |   |  |                                    |       |   |  |   |     |   |  |   |         |   |  |   | (812    | )
|Issuance of warrants in connection with restructuring activities                                           |  |             |  |                |  |        |                         |   |        |                                 |       |   |                                 |   | 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  | )
|                                                                                                           |  |              |  |                |   |        |                          |   |        |                                 |        |   |                                 |   |         |                                            |  |   |                    |   |  |                                    |        |   |  |   |      |   |  |   |          |   |  |   |         |  
|Balances as of January 31, 2003                                                                            |  | 9,384,180    |  |                | 1 |        | (619,684                 | ) |        |                                 | (5,057 | ) |                                 |   | 500,981 |                                            |  |   | (107               | ) |  |                                    |       |   |  |   | (69  | ) |  |   | (499,723 | ) |  |   | (3,974  | )
|Net Income                                                                                                 |  |              |  |                |   |        |                          |   |        |                                 |        |   |                                 |   |         |                                            |  |   |                    |   |  |                                    |        |   |  |   |      |   |  |   | 117      |   |  |   | 117     |  
|Foreign currency translation adjustment                                                                    |  |              |  |                |   |        |                          |   |        |                                 |        |   |                                 |   |         |                                            |  |   |                    |   |  |                                    |        |   |  |   | 425  |   |  |   |         |   |  |   | 425     |  
|Issuance of common stock in connection with the exercise of employee stock options                         |  | 105,644      |  |                |  |        |                         |   |        |                                 |       |   |                                 |   | 151     |                                            |  |   |                   |   |  |                                    |       |   |  |   |     |   |  |   |         |   |  |   | 151     |  
|Issuance of common stock and warrants in connection with private placement, net of financing costs of $337 |  | 3,088,230    |  |                |  |        |                         |   |        |                                 |       |   |                                 |   | 10,163  |                                            |  |   |                   |   |  |                                    |       |   |  |   |     |   |  |   |         |   |  |   | 10,163  |  
|Issuance of common stock in connection with consulting services provided                                   |  | 3,462        |  |                |  |        |                         |   |        |                                 |       |   |                                 |   | 20      |                                            |  |   |                   |   |  |                                    |       |   |  |   |     |   |  |   |         |   |  |   | 20      |  
|Deferred stock compensation related to stock option grants (related to repriced options)                   |  |             |  |                |  |        |                         |   |        |                                 |       |   |                                 |   | 188     |                                            |  |   | (188               | ) |  |                                    |       |   |  |   |     |   |  |   |         |   |  |   |        |  
|Amortization of stock-based compensation                                                                   |  |             |  |                |  |        |                         |   |        |                                 |       |   |                                 |   |        |                                            |  |   | 293                |   |  |                                    |       |   |  |   |     |   |  |   |         |   |  |   | 293     |  
|                                                                                                           |  |              |  |                |   |        |                          |   |        |                                 |        |   |                                 |   |         |                                            |  |   |                    |   |  |                                    |        |   |  |   |      |   |  |   |          |   |  |   |         |  
|Balances as of January 31, 2004                                                                            |  | 12,581,516   |  |                | 1 |        | (619,684                 | ) |        |                                 | (5,057 | ) |                                 |   | 511,503 |                                            |  |   | (2                 | ) |  |                                    |       |   |  |   | 356  |   |  |   | (499,606 | ) |  |   | 7,195   |  
|Net Income                                                                                                 |  |              |  |                |   |        |                          |   |        |                                 |        |   |                                 |   |         |                                            |  |   |                    |   |  |                                    |        |   |  |   |      |   |  |   | 4,032    |   |  |   | 4,032   |  
|Foreign currency translation adjustment                                                                    |  |              |  |                |   |        |                          |   |        |                                 |        |   |                                 |   |         |                                            |  |   |                    |   |  |                                    |        |   |  |   | 171  |   |  |   |         |   |  |   | 171     |  
|Issuance of common stock in connection with the exercise of employee stock options                         |  | 661,117      |  |                |  |        |                         |   |        |                                 |       |   |                                 |   | 3,361   |                                            |  |   |                   |   |  |                                    |       |   |  |   |     |   |  |   |         |   |  |   | 3,361   |  
|Issuance of common stock in connection with the exercise of warrants                                       |  | 307,643      |  |                |  |        |                         |   |        |                                 |       |   |                                 |   | 137     |                                            |  |   |                   |   |  |                                    |       |   |  |   |     |   |  |   |         |   |  |   | 137     |  
|Issuance of common stock in connection with public offering, net of financing costs of $3,050              |  | 2,058,778    |  |                | 1 |        |                         |   |        |                                 |       |   |                                 |   | 35,552  |                                            |  |   |                   |   |  |                                    |       |   |  |   |     |   |  |   |         |   |  |   | 35,553  |  
|Stock compensation related to stock option grants                                                          |  |             |  |                |  |        |                         |   |        |                                 |       |   |                                 |   | 1,053   |                                            |  |   |                   |   |  |                                    |       |   |  |   |     |   |  |   |         |   |  |   | 1,053   |  
|Amortization of stock-based compensation                                                                   |  |             |  |                |  |        |                         |   |        |                                 |       |   |                                 |   |        |                                            |  |   | 2                  |   |  |                                    |       |   |  |   |     |   |  |   |         |   |  |   | 2       |  
|Tax benefit for stock options                                                                              |  |             |  |                |  |        |                         |   |        |                                 |       |   |                                 |   | 76      |                                            |  |   |                   |   |  |                                    |       |   |  |   |     |   |  |   |         |   |  |   | 76      |  
|                                                                                                           |  |              |  |                |   |        |                          |   |        |                                 |        |   |                                 |   |         |                                            |  |   |                    |   |  |                                    |        |   |  |   |      |   |  |   |          |   |  |   |         |  
|Balances as of January 31, 2005                                                                            |  | 15,609,054   |  | $              | 2 |        | (619,684                 | ) |        | $                               | (5,057 | ) |                                 | $ | 551,682 |                                            |  | $ |                   |   |  | $                                  |       |   |  | $ | 527  |   |  | $ | (495,574 | ) |  | $ | 51,580  |  
|                                                                                                           |  |              |  |                |   |        |                          |   |        |                                 |        |   |                                 |   |         |                                            |  |   |                    |   |  |                                    |        |   |  |   |      |   |  |   |          |   |  |   |         |  



See accompanying notes
to consolidated financial statements.



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NIKU CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                                  |  | Years Ended January 31, |       
|                                                                                                  |  | 2005                    |        |   | 2004 |   |        | 2003 | 
|Cash flows from operating activities:                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Net Income (loss)                                                                                 |  | $                       | 4,032  |   |      | $ | 117    |      |  | $ | (37,794 | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |  |                         |        |   |      |   |        |      |  |   |         |  
|Depreciation                                                                                      |  |                         | 938    |   |      |   | 1,646  |      |  |   | 3,429   |  
|Stock-based compensation                                                                          |  |                         | 1,130  |   |      |   | 293    |      |  |   | (3,647  | )
|Restructuring                                                                                     |  |                         |       |   |      |   | 85     |      |  |   | 14,370  |  
|Asset impairment                                                                                  |  |                         |       |   |      |   |       |      |  |   | 500     |  
|Provision for (recovery on) doubtful accounts receivable                                          |  |                         | (48    | ) |      |   | 368    |      |  |   | 59      |  
|Issuance of stock for service                                                                     |  |                         |       |   |      |   | 20     |      |  |   |        |  
|Gain on sale of property and equipment                                                            |  |                         | (10    | ) |      |   | (14    | )    |  |   |        |  
|Forgiveness of notes receivable from stockholder                                                  |  |                         |       |   |      |   |        |      |  |   | 116     |  
|Interest accrued on notes receivable from stockholders                                            |  |                         |       |   |      |   |       |      |  |   | (46     | )
|Changes in operating assets and liabilities:                                                      |  |                         |        |   |      |   |        |      |  |   |         |  
|Accounts receivable                                                                               |  |                         | (5,051 | ) |      |   | (951   | )    |  |   | 5,492   |  
|Prepaid expenses and other current assets                                                         |  |                         | (163   | ) |      |   | (658   | )    |  |   | 3,387   |  
|Accounts payable                                                                                  |  |                         | 810    |   |      |   | (2,102 | )    |  |   | (857    | )
|Accrued liabilities                                                                               |  |                         | 4,018  |   |      |   | 895    |      |  |   | (8,019  | )
|Accrued restructuring                                                                             |  |                         | (454   | ) |      |   | (3,602 | )    |  |   | 685     |  
|Deferred revenue                                                                                  |  |                         | 1,597  |   |      |   | (70    | )    |  |   | (1,528  | )
|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Net cash provided by (used in) operating activities                                               |  |                         | 6,799  |   |      |   | (3,973 | )    |  |   | (23,853 | )
|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Cash flows from investing activities:                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Purchases of property and equipment                                                               |  |                         | (181   | ) |      |   | (175   | )    |  |   | (2,493  | )
|Proceeds from sale of property and equipment                                                      |  |                         | 15     |   |      |   | 40     |      |  |   |        |  
|Releases of investments from restricted cash                                                      |  |                         | 544    |   |      |   | 229    |      |  |   | 13,089  |  
|Deposits and other assets                                                                         |  |                         | 590    |   |      |   | 255    |      |  |   | 359     |  
|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Net cash provided by investing activities                                                         |  |                         | 968    |   |      |   | 349    |      |  |   | 10,955  |  
|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Cash flows from financing activities:                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Proceeds from issuance of common stock upon exercise of stock options and warrants                |  |                         | 3,498  |   |      |   | 151    |      |  |   | 397     |  
|Proceeds from issuance of common stock and warrants in connection with private placement          |  |                         |       |   |      |   | 10,163 |      |  |   |        |  
|Proceeds from issuance of common stock in connection with public offering                         |  |                         | 35,553 |   |      |   |       |      |  |   |        |  
|Repayment of bank line of credit                                                                  |  |                         | (4,250 | ) |      |   |       |      |  |   | (27,000 | )
|Proceeds from (repayments of) bank borrowings, net                                                |  |                         |       |   |      |   | (500   | )    |  |   | 4,750   |  
|Repayment of debt and capital lease obligations                                                   |  |                         | (319   | ) |      |   | (85    | )    |  |   | (210    | )
|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Net cash provided by (used in) financing activities                                               |  |                         | 34,482 |   |      |   | 9,729  |      |  |   | (22,063 | )
|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                              |  |                         | 42,249 |   |      |   | 6,105  |      |  |   | (34,961 | )
|Effect of exchange rate changes                                                                   |  |                         | 167    |   |      |   | 425    |      |  |   | 46      |  
|Cash and cash equivalents, beginning of year                                                      |  |                         | 23,200 |   |      |   | 16,670 |      |  |   | 51,585  |  
|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Cash and cash equivalents, end of year                                                            |  | $                       | 65,616 |   |      | $ | 23,200 |      |  | $ | 16,670  |  
|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Supplemental disclosures of cash flow information:                                                |  |                         |        |   |      |   |        |      |  |   |         |  
|Cash paid for interest during the year                                                            |  | $                       | 42     |   |      | $ | 138    |      |  | $ | 143     |  
|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Cash paid for taxes during the year                                                               |  | $                       | 224    |   |      | $ | 183    |      |  | $ | 277     |  
|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Noncash investing and financing activities:                                                       |  |                         |        |   |      |   |        |      |  |   |         |  
|Repurchases of common stock in settlement of notes receivable from stockholders                   |  | $                       |       |   |      | $ |       |      |  | $ | 675     |  
|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Deferred stock-based compensation                                                                 |  | $                       |       |   |      | $ | 188    |      |  | $ | 4,106   |  
|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Reversal of deferred stock-based compensation                                                     |  | $                       |       |   |      | $ |       |      |  | $ | 18,666  |  
|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Reversal of stock-based compensation due to employee terminations                                 |  | $                       |       |   |      | $ | 2      |      |  | $ | 658     |  
|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Property and equipment acquired under capital lease                                               |  | $                       | 998    |   |      | $ | 263    |      |  | $ |        |  
|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  



See accompanying notes
to consolidated financial statements.



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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 provides IT management and governance software for the
enterprise.



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, restructuring, depreciation
and amortization, sales returns, taxes, impairment, 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. These reclassifications have no impact on
previously reported net income (loss) or stockholders equity.



On November 21, 2002, the Company effected a one-for-ten reverse stock split of its outstanding common stock. All information regarding common stock, stock options, warrants and income (loss) per share amounts 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.
The Company considers auction rate notes to be short-term investments. As of January 31, 2005 and 2004, the Company did not hold any auction rate notes.



Derivative Financial Instruments



The Company uses derivative instruments, mainly foreign exchange contracts, to reduce its exposure to foreign currency rate changes on receivables,
payables and intercompany balances denominated in a non-



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



functional currency. The objective of these contracts is to reduce or eliminate, and efficiently manage, the economic impact of currency exchange rate
movements on the Companys operating results as effectively as possible. There were no foreign exchange contracts outstanding as of January 31, 2005 and 2004.



Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for
changes in the fair value of a derivative instrument depends on the intended use of the derivative instrument and the resulting designation. The Company does not designate its foreign exchange forward contracts as accounting hedges as defined by
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and, accordingly, adjusts these instruments to fair value through operations. Gains and losses on forward contracts are included in the consolidated statement of
operations and comprehensive income (loss) under the caption Other income (expense), net. The Company does not hold or issue financial instruments for speculative or trading purposes.



Financial Instruments and Concentration of Credit Risk



The carrying value of the Companys financial instruments, including
cash and cash equivalents, 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. The carrying value of cash and cash
equivalents approximates estimated market value at January 31, 2005 and 2004.



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 regularly reviews past due invoices 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. Periodically the Company performs an
analysis against actual write offs to determine if the reserve is adequate and adjustments are made accordingly. 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 shorter of the lease term or the useful life. 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. Property and equipment under capital leases are stated at the present value of
minimum lease payments. Property and equipment held under capital leases are amortized straight line over the estimated useful life of the asset.



Impairment of Long-lived Assets and Other Assets



The Company accounts for the impairment and disposal of long-lived assets utilizing Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, (SFAS 144).



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



SFAS 144 requires that long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization, be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. The recoverability of an asset is measured by comparing the carrying amount of an asset group to the estimated undiscounted
future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds it estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset
group exceeds the fair value of the asset group. Assets to be disposed are separately presented in the balance sheet and reported at the lower of the amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities
of a disposed group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet. As of January 31, 2005 and 2004, there were no assets classified as held for sale.



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 with regard to implementation remain, (3) the fee is fixed or determinable, and (4) collectibility is probable. The Company defines 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 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 if required by the terms of the contract. If undelivered features or
services exist in an arrangement which are essential to the functionality of the delivered product, revenue is recognized when these features or services are delivered. If there are sales to channel partners, they are generally recognized upon
sell-through to the end-user customer.



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 and revenue for these arrangements 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 the Companys credit review process, revenue is recognized when the fee is collected.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Revenue from multiple-element software arrangements is recognized using the residual value method.
The determination of the fair value of maintenance, support, implementation and hosting 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, implementation, and hosting services components of its perpetual license arrangements. VSOE for maintenance and support is determined based upon the customers renewal rates for this
element. VSOE for implementation services is determined based upon the engagement labor rates for this element. VSOE for hosting services is determined based upon the rates applicable to the duration of the hosting arrangement, when the same element
is sold separately.



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. The Companys software products are fully functional upon delivery and do not require significant modifications. The
customer may implement the software using its 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.



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 the
Company has been paid, and (3) license transactions in which one of the four revenue recognition criteria has not been met but cash has been received.



Indemnification and warranty provisions within the Companys customer license and service agreements are generally consistent with those prevalent in
the Companys industry. The duration of the Companys product warranties generally does not exceed 90 days following delivery of the Companys products. The Company has not historically incurred significant obligations under customer
indemnification or warranty provisions. Accordingly, the Company does not maintain accruals for potential customer indemnification or warranty-related obligations.



Research and Development



Research and development costs are expensed as incurred until technological feasibility 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. The period between
the achievement of technological feasibility and the general release of the Companys products has been of short duration. Acquired core and developed technologies are amortized on a straight-line basis 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. Amounts which could have been capitalized under this Statement, after consideration of the above
factors, were immaterial to the Companys results of operations and financial position.



Advertising Expense



Advertising costs are expensed as incurred and totaled $1.9 million, $0.9 million, and $0.6 million in the years ended January 31, 2005, 2004 and 2003, respectively.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Stock-Based Compensation



The Company uses the intrinsic-value method to account for all of its employee stock-based compensation plans in accordance
with Accounting Principles Board (APB) No. 25 (APB No. 25), Accounting for Stock Issued to Employees and Financial Accounting Standards Board (FASB) Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock
Compensation  An Interpretation of APB Opinion No. 25. Deferred stock based compensation is recorded on the date of grant if the exercise price of the stock award is less than the market value of the underlying common stock on the date of
grant. 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.



The resulting
stock-based compensation is amortized over the expected life of the stock option, generally four years, using the method described in FASB Interpretation No. 28 (FIN 28), Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans  An Interpretation of APB Opinions No. 15 and 25. Total stock-based compensation is attributable to the following functional groups (in thousands):



|                           |  |                         |       |      |   |      |  |   |        |  
|-------------------------- |  | ----------------------- | ----- | ---- | - | ---- |  | - | ------ | -
|                           |  | Years Ended January 31, |      
|                           |  | 2005                    |       | 2004 |   | 2003 | 
|Services                   |  | $                       | 42    |      | $ | 130  |  | $ | (288   | )
|Sales and marketing        |  |                         | 58    |      |   | 15   |  |   | (1,761 | )
|Research and development   |  |                         | 942   |      |   | 52   |  |   | (1,541 | )
|General and administrative |  |                         | 13    |      |   | 96   |  |   | (57    | )
|                           |  |                         |       |      |   |      |  |   |        |  
|                           |  | $                       | 1,055 |      | $ | 293  |  | $ | (3,647 | )
|                           |  |                         |       |      |   |      |  |   |        |  



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 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
stock options repriced 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. The deferred stock-based compensation has been fully amortized as of January 31, 2005.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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



|                                                                                                                                 |  |                         |        |   |      |   |        |      |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                                                                 |  | Years Ended January 31, |       
|                                                                                                                                 |  | 2005                    |        |   | 2004 |   |        | 2003 | 
|Net income (loss), as reported                                                                                                   |  | $                       | 4,032  |   |      | $ | 117    |      |  | $ | (37,794 | )
|Add: Stock-based employee compensation expenses included in reported net income (loss), zero tax effect                          |  |                         | 1,055  |   |      |   | 293    |      |  |   | (3,647  | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, zero tax
effect |  |                         | (3,551 | ) |      |   | (3,304 | )    |  |   | (1,654  | )
|                                                                                                                                 |  |                         |        |   |      |   |        |      |  |   |         |  
|Pro forma net income (loss)                                                                                                      |  | $                       | 1,536  |   |      | $ | (2,894 | )    |  | $ | (43,095 | )
|                                                                                                                                 |  |                         |        |   |      |   |        |      |  |   |         |  
|Income (loss) per share:                                                                                                         |  |                         |        |   |      |   |        |      |  |   |         |  
|Basic  as reported                                                                                                              |  | $                       | 0.32   |   |      | $ | 0.01   |      |  | $ | (4.96   | )
|                                                                                                                                 |  |                         |        |   |      |   |        |      |  |   |         |  
|Diluted  as reported                                                                                                            |  | $                       | 0.30   |   |      | $ | 0.01   |      |  | $ | (4.96   | )
|                                                                                                                                 |  |                         |        |   |      |   |        |      |  |   |         |  
|Basic  pro forma                                                                                                                |  | $                       | 0.12   |   |      | $ | (0.24  | )    |  | $ | (5.66   | )
|                                                                                                                                 |  |                         |        |   |      |   |        |      |  |   |         |  
|Diluted  pro forma                                                                                                              |  | $                       | 0.11   |   |      | $ | (0.24  | )    |  | $ | (5.66   | )
|                                                                                                                                 |  |                         |        |   |      |   |        |      |  |   |         |  



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



|                        |  |                                |   |  |                              |   |  |      |   |  |      |  |      |  |      |  
|----------------------- |  | ------------------------------ | - |  | ---------------------------- | - |  | ---- | - |  | ---- |  | ---- |  | ---- | -
|                        |  | Employee Stock Options Granted |   |  | Employee Stock Purchase Plan |  
|                        |  | Years Ended January 31,        |   |  | Years Ended January 31,      |  
|                        |  | 2005                           |   |  | 2004                         |   |  | 2003 |   |  | 2005 |  | 2004 |  | 2003 |  
|Expected life (years)   |  | 6.42                           |   |  | 3.06                         |   |  | 2.00 |   |  |     |  |     |  | 1.25 |  
|Risk-free interest rate |  | 2.85                           | % |  | 2.11                         | % |  | 1.70 | % |  |     |  |     |  | 1.70 | %
|Volatility              |  | 119                            | % |  | 141                          | % |  | 158  | % |  |     |  |     |  | 158  | %



The weighted-average
fair value of options granted was $11.91, $3.04, and $3.27 per share in the years ended January 31, 2005, 2004 and 2003, respectively. The weighted-average fair value of purchase rights granted was $3.56 per share in the year ended January 31, 2003.
The Employee Stock Purchase Plan was suspended on July 31, 2002.



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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Net Income (Loss) per Share



Basic net income (loss) per share is computed by dividing net income by the weighted-average number of outstanding shares of
common stock, excluding shares of restricted stock subject to repurchase. Diluted net income (loss) per share is computed by dividing net income by the sum of weighted-average number of shares of common stock outstanding and, the potential number of
dilutive common shares outstanding during the period. Potential common shares consist of the shares issuable upon exercise of stock options, and shares issuable upon exercise of stock warrants. using the treasury stock method.



The following table sets forth the computation of basic and diluted income
(loss) per share (in thousands, except per share amounts):



|                                                                                                                                       |  |                         |        |      |   |        |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------- | -
|                                                                                                                                       |  | Years Ended January 31, |       
|                                                                                                                                       |  | 2005                    |        | 2004 |   | 2003   | 
|Numerator:                                                                                                                             |  |                         |        |      |   |        |  |   |         |  
|Net income (loss)                                                                                                                      |  | $                       | 4,032  |      | $ | 117    |  | $ | (37,794 | )
|Denominator:                                                                                                                           |  |                         |        |      |   |        |  |   |         |  
|Denominator for basic income per share  Weighted average shares outstanding                                                           |  |                         | 12,729 |      |   | 11,560 |  |   | 7,618   |  
|Employee stock options                                                                                                                 |  |                         | 633    |      |   | 326    |  |   |        |  
|Denominator for diluted income per share  Adjusted weighted average shares outstanding, assuming exercise of common equivalent
shares |  |                         | 13,362 |      |   | 11,886 |  |   | 7,618   |  
|                                                                                                                                       |  |                         |        |      |   |        |  |   |         |  
|Basic income (loss) per share                                                                                                          |  | $                       | 0.32   |      | $ | 0.01   |  | $ | (4.96   | )
|Diluted income (loss) per share                                                                                                        |  | $                       | 0.30   |      | $ | 0.01   |  | $ | (4.96   | )



The following table
sets forth the potential common shares that were excluded from the net income (loss) per share computations because the exercise prices were greater than the average market price of the common shares during the period and were therefore not dilutive
(in thousands):



|                                    |  |                         |  |       |  |      
|----------------------------------- |  | ----------------------- |  | ----- |  | -----
|                                    |  | Years Ended January 31,
|                                    |  | 2005                    |  | 2004  |  | 2003 
|Shares issuable under stock options |  | 326                     |  | 1,283 |  | 1,497
|Shares issuable under warrants      |  |                        |  | 5     |  | 20   



The weighted-average
exercise price of options outstanding as of January 31, 2005, 2004 and 2003 was $8.88, $6.19 and $9.74 per share, respectively. No restricted stock subject to repurchase was outstanding as of January 31, 2005, 2004 and 2003. The weighted-average
exercise price of warrants as of January 31, 2005, 2004 and 2003 was $3.40, $4.72 and $27.18 per share, respectively.



Comprehensive Income



Comprehensive income includes, in addition to net income (loss), foreign currency translation adjustments. Tax effects of the other components
of comprehensive income have not been material.



Foreign Currency
Translation



The functional currency of the
Companys foreign subsidiary 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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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 other income (expense), net and amounted to $(40,000), $(120,000) and $166,000 for the years
ended January 31, 2005, 2004 and 2003, respectively.



Recent Accounting
Pronouncements



In December 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R) and the SEC released Staff Accounting Bulletin No. 107 (SAB 107), Topic 14: Share-Based
Payment. SFAS 123R and SAB 107 will be effective in the third quarter of fiscal 2006 and will result in the recognition of substantial compensation expense relating to the Companys employee stock option plans. The Company currently uses
the intrinsic value method to measure compensation expense for stock-based awards to its employees. Under this standard, the Company generally does not recognize any compensation related to stock option grants the Company issues under its stock
option plans. Under the new rules, the Company is required to adopt a fair-value-based method for measuring the compensation expense related to employee stock awards. This will lead to substantial additional compensation expense. The paragraph
entitled Stock-Based Compensation included in Note 1 to these consolidated financial statements provides the pro forma net income and earnings per share as if the Company had used a fair-value-based method similar to the methods required
under SFAS 123R to measure the compensation expense for employee stock awards during fiscal 2005, 2004 and 2003.



In June 2004, the Emerging Issues Task Force (EITF) issued EITF No. 03-01, The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments (EITF 03-01). EITF 03-01 includes new guidance for evaluating and recording impairment losses on debt and equity investments, as well as new disclosure requirements for investments that are deemed
to be temporarily impaired. The accounting guidance of EITF 03-01 was initially effective for reporting periods beginning after June 15, 2004, while the disclosure requirements for debt and equity securities accounted for under SFAS 115,
Accounting for Certain Investments in Debt and Equity Securities, are effective for annual periods ending after December 15, 2003. In September 2004, the FASB issued a final FASB Staff Position, FSP EITF 03-01-1, that delays the effective
date for the measurement and recognition guidance of EITF 03-01. The Company will evaluate the effect of adopting the recognition and measurement guidance when the final consensus is reached.



2.    Repricing and Exchange 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.



On April 15, 2003, the Company announced a voluntary stock option exchange program for its employees. Under the program, employees were given the opportunity to exchange outstanding stock options previously



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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 new stock options are 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, members of the board of directors and
non-employees were not eligible to participate in this program. This 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.



On November 14, 2003, the Company granted 598,842 new stock options under this stock option exchange program with an exercise price of $8.85, which was
equal to the fair market value of its common stock on that date. As a result of this stock option exchange program, the Company was no longer incurring stock-based compensation for approximately 298,000 outstanding stock options that were previously
repriced in November 2001 and subsequently cancelled on May 13, 2003. The Company will continue to incur stock-based compensation for outstanding stock options that were previously repriced in November 2001 and not tendered pursuant to the stock
option exchange program to the extent the price of our common stock on the last day of any quarter exceeds the price at which the options were repriced. Based on the stock price of $9.65 at the end of January 31, 2004, the Company recorded
approximately $0.1 million of stock-based compensation charges in fiscal year 2004 relating to approximately 70,000 repriced but not tendered options. The Company also recorded $0.1 million in amortization of other stock-based compensation charges
not associated with the repriced option exchange program in fiscal 2004. Based on the stock price of $19.70 at the end of January 31, 2005, the Company recorded approximately $0.6 million of stock-based compensation charges in fiscal year 2005
relating to approximately 66,000 repriced but not tendered options outstanding at the beginning of fiscal 2005, adjusted for exercises and cancellations during the year. As of January 31, 2005, approximately 23,000 of these repriced options were
outstanding.



3.    Restructuring



As of January 31, 2005, the restructuring reserve consisted of the following
(in thousands):



|                                       |  |   |        |  
|-------------------------------------- |  | - | ------ | -
|Future lease payments                  |  | $ | 13,943 |  
|Less: contractual sublease income      |  |   | (1,753 | )
|Less: estimated sublease income        |  |   | (4,916 | )
|Commission and other sublease expenses |  |   | 211    |  
|Other costs (primarily legal)          |  |   | 303    |  
|                                       |  |   |        |  
|Total                                  |  | $ | 7,788  |  
|                                       |  |   |        |  



As of January 31,
2005, future lease payments, net of contractual and estimated sublease income, relating to the remaining facilities vacated pursuant to our restructuring programs, amounted to $2.0 million, $1.6 million, $1.1 million, $0.9 million, and $0.8 million
for the twelve months ended January 31, 2006, 2007, 2008, 2009 and 2010 respectively, and $0.9 million thereafter.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The table below represents the restructuring activities in fiscal 2005, 2004 and 2003 (in thousands):



|                                          |  |                            |      |   |                            |   |        |       |  |   |                  |   |  |                   |        |   |                          |   |        |                      |  |   |         |   |  |                  |      |   |  |   |        |   |  |   |         |   |  |   |         |  
|----------------------------------------- |  | -------------------------- | ---- | - | -------------------------- | - | ------ | ----- |  | - | ---------------- | - |  | ----------------- | ------ | - | ------------------------ | - | ------ | -------------------- |  | - | ------- | - |  | ---------------- | ---- | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                          |  | 2002 Restructuring Program |      |   | 2003 Restructuring Program |   |        | Total | 
|                                          |  | EmployeeSeverance          |      |   | Net LeaseCommitmentCosts   |   |        | Other |  |   | 2002ProgramTotal |   |  | EmployeeSeverance |        |   | Net LeaseCommitmentCosts |   |        | Computerand CarLease |  |   | Other   |   |  | 2003ProgramTotal |      |  
|Balance at January 31, 2002               |  | $                          | 265  |   |                            | $ | 10,666 |       |  | $ | 1,067            |   |  | $                 | 11,998 |   |                          | $ |       |                      |  | $ |        |   |  | $                |     |   |  | $ |       |   |  | $ |        |   |  | $ | 11,998  |  
|Costs Accrued                             |  |                            | 91   |   |                            |   | 2,437  |       |  |   | (924             | ) |  |                   | 1,604  |   |                          |   | 3,912  |                      |  |   | 23,015  |   |  |                  | 346  |   |  |   | 9,039  |   |  |   | 36,312  |   |  |   | 37,916  |  
|Cash payments, net of subleasing proceeds |  |                            | (356 | ) |                            |   | (7,049 | )     |  |   | (747             | ) |  |                   | (8,152 | ) |                          |   | (2,881 | )                    |  |   | (12,921 | ) |  |                  | (43  | ) |  |   | (9,918 | ) |  |   | (25,763 | ) |  |   | (33,915 | )
|Adjustments                               |  |                            |     |   |                            |   | (25    | )     |  |   | 777              |   |  |                   | 752    |   |                          |   |       |                      |  |   | (6,459  | ) |  |                  |     |   |  |   | 1,467  |   |  |   | (4,992  | ) |  |   | (4,240  | )
|                                          |  |                            |      |   |                            |   |        |       |  |   |                  |   |  |                   |        |   |                          |   |        |                      |  |   |         |   |  |                  |      |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance at January 31, 2003               |  |                            |     |   |                            |   | 6,029  |       |  |   | 173              |   |  |                   | 6,202  |   |                          |   | 1,031  |                      |  |   | 3,635   |   |  |                  | 303  |   |  |   | 588    |   |  |   | 5,557   |   |  |   | 11,759  |  
|Costs Accrued                             |  |                            |     |   |                            |   | 2,243  |       |  |   | (33              | ) |  |                   | 2,210  |   |                          |   | (5     | )                    |  |   | 656     |   |  |                  | 5    |   |  |   | (218   | ) |  |   | 438     |   |  |   | 2,648   |  
|Cash payments, net of subleasing proceeds |  |                            |     |   |                            |   | (980   | )     |  |   | (140             | ) |  |                   | (1,120 | ) |                          |   | (1,026 | )                    |  |   | (3,585  | ) |  |                  | (229 | ) |  |   | (120   | ) |  |   | (4,960  | ) |  |   | (6,080  | )
|Adjustments                               |  |                            |     |   |                            |   | (73    | )     |  |   |                 |   |  |                   | (73    | ) |                          |   |       |                      |  |   | (116    | ) |  |                  |     |   |  |   | 104    |   |  |   | (12     | ) |  |   | (85     | )
|                                          |  |                            |      |   |                            |   |        |       |  |   |                  |   |  |                   |        |   |                          |   |        |                      |  |   |         |   |  |                  |      |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance at January 31, 2004               |  |                            |     |   |                            |   | 7,219  |       |  |   |                 |   |  |                   | 7,219  |   |                          |   |       |                      |  |   | 590     |   |  |                  | 79   |   |  |   | 354    |   |  |   | 1,023   |   |  |   | 8,242   |  
|Costs Accrued                             |  |                            |     |   |                            |   | 1,669  |       |  |   |                 |   |  |                   | 1,669  |   |                          |   |       |                      |  |   | 279     |   |  |                  | (48  | ) |  |   | (71    | ) |  |   | 160     |   |  |   | 1,829   |  
|Cash payments, net of subleasing proceeds |  |                            |     |   |                            |   | (1,628 | )     |  |   |                 |   |  |                   | (1,628 | ) |                          |   |       |                      |  |   | (531    | ) |  |                  | (12  | ) |  |   | (112   | ) |  |   | (655    | ) |  |   | (2,283  | )
|                                          |  |                            |      |   |                            |   |        |       |  |   |                  |   |  |                   |        |   |                          |   |        |                      |  |   |         |   |  |                  |      |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance at January 31, 2005               |  | $                          |     |   |                            | $ | 7,260  |       |  | $ |                 |   |  | $                 | 7,260  |   |                          | $ |       |                      |  | $ | 338     |   |  | $                | 19   |   |  | $ | 171    |   |  | $ | 528     |   |  | $ | 7,788   |  
|                                          |  |                            |      |   |                            |   |        |       |  |   |                  |   |  |                   |        |   |                          |   |        |                      |  |   |         |   |  |                  |      |   |  |   |        |   |  |   |         |   |  |   |         |  



The Company expects
that of the restructuring and other charges accrued as of January 31, 2005, other exit costs, primarily related to legal and administrative costs for liquidation of various foreign subsidiaries, will be paid no later than December 2005, and the net
lease commitments on vacated leased facilities will be paid no later than February 2011.



Fiscal 2005



In fiscal
2005, the Company increased its reserves resulting in a restructuring charge of $1.8 million primarily related to net lease commitments to reflect the Companys current assessment of sublease opportunities for vacated facilities. Revisions to
its estimated liabilities could materially impact the Companys operating results and financial position in future periods if anticipated events and key assumptions, such as the time and amounts of sublease rental income change from previous
estimates. The Company will revise the estimated liability, if necessary.



Fiscal 2004



In fiscal
2004, the Company increased its reserves resulting in a restructuring charge of $2.6 million related to $2.9 million in net lease commitments to reflect its assessment at that time of sublease opportunities for vacated facilities, offset by a $0.1
million decrease in the reserve for dissolving certain inactive subsidiaries.



Fiscal 2003



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 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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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.



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 a 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.



In September 2003, the Company entered into an agreement to sublease the
facility located on 7th Avenue in New York City for a term through April 20, 2005. The Companys sublease income under this arrangement is approximately $1.1 million. This agreement has been extended through June 2005.



In addition to the 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.



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



4.    Asset Impairment



There were no asset impairment charges in fiscal 2005 and fiscal 2004. There was an asset impairment in fiscal 2003 relating to a strategic equity investment made in April 2000. In April 2000, the Company purchased 75,000 shares of a
private companys common stock at $6.67 per share. The Company regularly performed an impairment assessment of this $500,000 investment. In performing an impairment assessment, the Company



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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 income (loss) in fiscal 2003.



5.    Accounts Receivable, net



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



|                                |  |             |        |   |      |   |       |  
|------------------------------- |  | ----------- | ------ | - | ---- | - | ----- | -
|                                |  | January 31, |       
|                                |  | 2005        |        |   | 2004 |  
|Unbilled accounts receivable    |  | $           | 2,760  |   |      | $ | 1,535 |  
|Accounts receivable             |  |             | 10,288 |   |      |   | 7,056 |  
|                                |  |             |        |   |      |   |       |  
|                                |  |             | 13,048 |   |      |   | 8,591 |  
|Allowance for doubtful accounts |  |             | (155   | ) |      |   | (797  | )
|                                |  |             |        |   |      |   |       |  
|                                |  | $           | 12,893 |   |      | $ | 7,794 |  
|                                |  |             |        |   |      |   |       |  



The following table
sets forth the allowance for doubtful accounts as of and for the years ended January 31, 2003, 2004 and 2005 (in thousands):



|                                 |  |                              |       |                                        |   |     |            |  |                        |       |  |   |    
|-------------------------------- |  | ---------------------------- | ----- | -------------------------------------- | - | --- | ---------- |  | ---------------------- | ----- |  | - | ---
|                                 |  | Balance atBeginning ofPeriod |       | Charged/(Reversed)to OperatingExpenses |   |     | Write-offs |  | Balance atEnd ofPeriod
|Allowance for doubtful accounts: |  |                              |       |                                        |   |     |            |  |                        |       |  |   |    
|January 31, 2003                 |  | $                            | 3,037 |                                        | $ | 59  |            |  | $                      | 2,097 |  | $ | 999
|January 31, 2004                 |  | $                            | 999   |                                        | $ | 368 |            |  | $                      | 570   |  | $ | 797
|January 31, 2005                 |  | $                            | 797   |                                        | $ | (48 | )          |  | $                      | 594   |  | $ | 155



6.    Property
and Equipment



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



|                                          |  |             |        |   |      |   |        |  
|----------------------------------------- |  | ----------- | ------ | - | ---- | - | ------ | -
|                                          |  | January 31, |       
|                                          |  | 2005        |        |   | 2004 |  
|Computer equipment and office equipment   |  | $           | 3,269  |   |      | $ | 2,733  |  
|Software                                  |  |             | 1,702  |   |      |   | 1,604  |  
|Furniture and fixtures                    |  |             | 206    |   |      |   | 581    |  
|Leasehold improvements                    |  |             | 140    |   |      |   | 173    |  
|                                          |  |             |        |   |      |   |        |  
|                                          |  |             | 5,317  |   |      |   | 5,091  |  
|Accumulated depreciation and amortization |  |             | (3,783 | ) |      |   | (3,810 | )
|                                          |  |             |        |   |      |   |        |  
|                                          |  | $           | 1,534  |   |      | $ | 1,281  |  
|                                          |  |             |        |   |      |   |        |  



Depreciation expense
was $0.9 million, $1.6 million and $3.4 million for the years ended January 31, 2005, 2004 and 2003, respectively. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three years.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Equipment under capital leases consisted of computer equipment valued at $1.3 million and $0.3
million as of January 31, 2005 and 2004, respectively. Accumulated depreciation was $0.2 million and $21,000 as of January 31, 2005 and 2004, respectively.



7.    Accrued Liabilities



Accrued liabilities consisted of the following (in thousands):



|                                            |  |             |        |      |   |      
|------------------------------------------- |  | ----------- | ------ | ---- | - | -----
|                                            |  | January 31,
|                                            |  | 2005        |        | 2004
|Accrued compensation and related costs      |  | $           | 4,755  |      | $ | 3,503
|Accrued sales/use, property and other taxes |  |             | 1,921  |      |   | 745  
|Accrued general and administrative costs    |  |             | 432    |      |   | 680  
|Accrued professional service costs          |  |             | 1,450  |      |   | 408  
|Accrued sales costs                         |  |             | 819    |      |   | 136  
|Other                                       |  |             | 1,716  |      |   | 1,603
|                                            |  |             |        |      |   |      
|                                            |  | $           | 11,093 |      | $ | 7,075
|                                            |  |             |        |      |   |      



8.    Debt



The Company had no outstanding borrowings under its bank
line of credit as of January 31, 2005. The Company had borrowings of $4.3 million as of January 31, 2004, which were repaid in February 2004. The history and terms of this credit facility are as follows: on July 18, 2003, the Company entered into a
$5.0 million line of credit with a financial institution. The line of credit is secured by the Companys tangible and intangible assets and accrues interest at the prime rate plus 0.50% per annum (5.75% as of January 31, 2005). In July 2004,
the line of credit was extended through August 2005 and certain financial covenants were amended. These amended covenants require: (1) minimum cash and cash equivalent balance equal to at least 1.25 times the outstanding principal balance at each
month end, (2) that the Company have no line of credit balance owing under the agreement for at least 30 days each calendar year, and (3) annual profitability determined in accordance with US GAAP of at least $1 (excluding restructuring charges for
vacated facilities and stock-based compensation). As of January 31, 2005, the Company was in compliance with all financial covenants.



The Company had a term loan for $5.0 million from a financial institution. The Company entered into this term loan in September 2002. The term loan was
secured by the Companys tangible and intangible assets, accrued interest at 7.50% per annum and matured on February 15, 2004. The Company was 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 was due. 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.



9.    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. The Company also occupies various other facilities in United
States and Europe. The leases for these facilities expire at various dates through February 2011. Rental expense was approximately $2.1 million, $2.2 million, and $7.0 million for the years ended January 31, 2005, 2004 and 2003, respectively.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Future minimum lease payments under noncancelable operating leases are as follows as of January 31,
2005 (in thousands):



|                       |  |                 |        |                 |           |        |               |  |   |        |   |  |   |       
|---------------------- |  | --------------- | ------ | --------------- | --------- | ------ | ------------- |  | - | ------ | - |  | - | ------
|Year Ended January 31, |  | OperatingLeases |        | Sublease Income |           |        | NetCommitment
|                       |  | Contractual     |        |                 | Estimated |        |              
|2006                   |  | $               | 3,940  |                 | $         | (510   | )             |  | $ |       |   |  | $ | 3,430 
|2007                   |  |                 | 3,795  |                 |           | (517   | )             |  |   | (675   | ) |  |   | 2,603 
|2008                   |  |                 | 3,220  |                 |           | (426   | )             |  |   | (1,083 | ) |  |   | 1,711 
|2009                   |  |                 | 2,591  |                 |           | (240   | )             |  |   | (997   | ) |  |   | 1,354 
|2010                   |  |                 | 1,969  |                 |           | (60    | )             |  |   | (1,020 | ) |  |   | 889   
|Thereafter             |  |                 | 2,064  |                 |           |       |               |  |   | (1,141 | ) |  |   | 923   
|                       |  |                 |        |                 |           |        |               |  |   |        |   |  |   |       
|Total payments         |  | $               | 17,579 |                 | $         | (1,753 | )             |  | $ | (4,916 | ) |  | $ | 10,910
|                       |  |                 |        |                 |           |        |               |  |   |        |   |  |   |       



Lease payments above,
net of contractual and estimated sublease income, relating to facilities that the Company has either vacated or terminated pursuant to its restructuring programs, amounted to $2.0 million, $1.6 million, $1.1 million, $0.9 million and $0.8 million
for the twelve months ended January 31, 2006, 2007, 2008, 2009 and 2010, respectively, and $0.9 million thereafter.



10.    Related Party Transactions



In January 2005, the Company accelerated the vesting on approximately 44,000 outstanding options in connection with a Separation, Release and
Non-Competition Agreement between the Company and a former Executive Vice President. The Company recorded approximately $0.5 million in stock-based compensation expense as a result of this transaction.



In December 2004, the Company completed an offering on Form S-3 of 3,450,000
shares of Niku common stock at $18.75 per share, of which 1,391,222 shares were offered and sold by Walden VC II, L.P. and related funds. The Company paid certain fees and expenses of the offering other than underwriter discounts and commissions
associated with the shares sold. As described below, Matt Miller is a member of the Companys board of directors. Mr. Miller disclaims beneficial ownership of any shares held by such funds except to the extent of his pecuniary interest therein.



In November 2004, the Company entered into an employment
agreement with its President and Chief Executive Officer. The agreement confirms the executives salary and the possibility of a bonus up to 100% of base pay. The agreement also provides for 12 months of severance upon termination in certain
circumstances and certain compensation upon a change in control of the Company. The agreement has an initial term of one year and is subject to renewal.



In February and April 2003, the Company completed a private placement of securities to Walden VC II, L.P., Terence and Katrina Garnett and Vector Capital
Partners II, L.L.C. among others. In connection with this financing, the Companys board of directors appointed Matt Miller, a managing partner of Walden VC II, L.P., to its board of directors. As of January 31, 2005, Walden VC II and related
funds held 338,699 shares of common stock. Mr. Miller disclaims beneficial ownership of any shares held by such funds except to the extent of his pecuniary interest therein.



In April 2003, Ravi Chiruvolu, a member of the Companys board of directors, purchased 29,412 shares, and warrants to
purchase 3,677 shares, of common stock in the 2003 private placement for an aggregate purchase price of approximately $101,000.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



In November 1999, the Company loaned $1,250,000 to its then president, vertical markets, currently
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 125,000 shares of common stock from the officer for $675,000, the fair
market value of the common stock at that time, and the officer used all of this consideration to repay the equivalent principal amount of the note. In connection with this repayment, the Company cancelled $116,000 in accrued interest, which was
recorded as compensation expense. In March and June of 2003 and March of 2004, the officer made payments in the aggregate amount of $460,000 to further reduce the principal and interest due on the loan. On April 4, 2004, the officer made a final
payment of $243,000 to repay all remaining interest and principal due on the loan.



11.    Stockholders Equity (Deficit)



Preferred Stock



The Company had 10,000,000
shares of preferred stock authorized as of January 31, 2005 and 2004. There were no shares of preferred stock issued or outstanding as of those dates.



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.



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 provide 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, 2005, there were 6,191 options outstanding and no additional options available for issuance under the 1998 Plan.



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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 increases 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, 2005, there were 2,224,042 options outstanding and 652,345 options available for issuance under the 2000 Plan.



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 certain other companies. In 2001, the Company amended the 2000 Incentive Plan to provide grants to any Company employee. 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, 2005, there were 177,623 options outstanding and 729 options available for issuance 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 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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



applicable purchase period. The Company issued 21,741 shares of common stock under the Purchase Plan in the year ended January 31, 2003 at a weighted-average
purchase price of $4.60 per share.



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. As of January 31, 2005, there were 385,640 shares available for issuance under the Purchase Plan.



A summary of the status of the Companys stock option plans as of
January 31, 2005, 2004 and 2003 and changes during the years ended on those dates is presented below (excluding Purchase Plan):



|                                                                                                                        |  |                         |   |      |                               |       |        |           |   |                               |   |        |  |           |                               |  |   |      
|----------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | - | ---- | ----------------------------- | ----- | ------ | --------- | - | ----------------------------- | - | ------ |  | --------- | ----------------------------- |  | - | -----
|                                                                                                                        |  | Years Ended January 31,
|                                                                                                                        |  | 2005                    |   | 2004 |                               | 2003 
|                                                                                                                        |  | Shares                  |   |      | Weighted-AverageExercisePrice |       | Shares |           |   | Weighted-AverageExercisePrice |   | Shares |  |           | Weighted-AverageExercisePrice
|Outstanding at beginning of year                                                                                        |  | 2,366,743               |   |      | $                             | 6.19  |        | 1,496,642 |   |                               | $ | 9.74   |  | 1,489,587 |                               |  | $ | 16.21
|Granted                                                                                                                 |  | 857,662                 |   |      |                               | 13.85 |        | 1,833,425 |   |                               |   | 7.04   |  | 770,465   |                               |  |   | 4.45 
|Canceled                                                                                                                |  | (155,432                | ) |      |                               | 10.08 |        | (872,680  | ) |                               |   | 14.72  |  | (710,437  | )                             |  |   | 18.08
|Exercised                                                                                                               |  | (661,117                | ) |      |                               | 5.08  |        | (90,644   | ) |                               |   | 1.60   |  | (52,973   | )                             |  |   | 5.40 
|                                                                                                                        |  |                         |   |      |                               |       |        |           |   |                               |   |        |  |           |                               |  |   |      
|Outstanding at end of year                                                                                              |  | 2,407,856               |   |      | $                             | 8.88  |        | 2,366,743 |   |                               | $ | 6.19   |  | 1,496,642 |                               |  | $ | 9.74 
|                                                                                                                        |  |                         |   |      |                               |       |        |           |   |                               |   |        |  |           |                               |  |   |      
|Options exercisable at end of year                                                                                      |  | 1,010,855               |   |      | $                             | 6.64  |        | 918,021   |   |                               | $ | 6.13   |  | 551,890   |                               |  | $ | 17.47
|                                                                                                                        |  |                         |   |      |                               |       |        |           |   |                               |   |        |  |           |                               |  |   |      
|Weighted-average fair value of options granted during the year with exercise price equal to fair value at date of grant |  | 857,662                 |   |      | $                             | 11.91 |        | 1,833,425 |   |                               | $ | 3.04   |  | 770,465   |                               |  | $ | 3.27 



There were no stock
options granted above or below fair value at the date of grant for the years ended January 31, 2005, 2004 and 2003.



The following table summarizes information about stock options outstanding as of January 31, 2005:



|                       |  |                     |  |                                                 |  |                               |  |                 |  |                              
|---------------------- |  | ------------------- |  | ----------------------------------------------- |  | ----------------------------- |  | --------------- |  | -----------------------------
|                       |  | Options Outstanding |  | Options Exercisable                            
|Range ofExercise Price |  | NumberofShares      |  | Weighted-AverageRemainingContractualLife(Years) |  | Weighted-AverageExercisePrice |  | Number ofShares |  | Weighted-AverageExercisePrice
|$  1.00  $  4.13      |  | 586,866             |  | 7.91                                            |  | $3.21                         |  | 336,802         |  | $2.59                        
|$  4.23  $  8.65      |  | 235,487             |  | 7.96                                            |  | 6.10                          |  | 103,715         |  | 6.48                         
|$  8.85  $  8.85      |  | 805,814             |  | 8.78                                            |  | 8.85                          |  | 509,797         |  | 8.85                         
|$  9.10  $16.86       |  | 502,206             |  | 9.30                                            |  | 11.44                         |  | 60,531          |  | 10.78                        
|$16.88  $26.88        |  | 277,483             |  | 9.94                                            |  | 18.71                         |  | 10              |  | 26.88                        
|                       |  |                     |  |                                                 |  |                               |  |                 |  |                              
|                       |  | 2,407,856           |  | 8.73                                            |  | $8.88                         |  | 1,010,855       |  | $6.64                        
|                       |  |                     |  |                                                 |  |                               |  |                 |  |                              



During fiscal 2005,
the Company accelerated the vesting on approximately 44,000 outstanding options in connection with a Separation, Release and Non-Competition agreement between the Company and a former Executive Vice President. The Company recorded approximately $0.5
million in stock-based compensation expense as a result of this transaction.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Warrants



In February 2003, the Company issued 1,549,735 shares of its common stock at a price of $3.35 per share and issued warrants to purchase 193,720 shares of
its 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 had an exercise price of $3.40 per warrant. 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 a 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 also had an exercise price of $3.40 per warrant.



In
connection with the Companys restructuring program in fiscal 2003, warrants were issued in settlement of certain terminated leases. Refer to Note 3 of the Notes to Consolidated Financial Statements for additional disclosure related to these
transactions.



As of January 31, 2005, there were 3,677
warrants to purchase common stock outstanding.



12.    Income Taxes



The
Companys components of income (loss) before income taxes for the years ended January 31, 2005, 2004 and 2003 are as follows (in thousands):



|              |  |                         |       |      |   |        |      |  |   |         |  
|------------- |  | ----------------------- | ----- | ---- | - | ------ | ---- |  | - | ------- | -
|              |  | Years Ended January 31, |      
|              |  | 2005                    |       | 2004 |   |        | 2003 | 
|United States |  | $                       | 3,880 |      | $ | 1,962  |      |  | $ | (37,800 | )
|Foreign       |  |                         | 713   |      |   | (1,982 | )    |  |   | (215    | )
|              |  |                         |       |      |   |        |      |  |   |         |  
|Total         |  | $                       | 4,593 |      | $ | (20    | )    |  | $ | (38,015 | )
|              |  |                         |       |      |   |        |      |  |   |         |  



The Companys
provision for (benefit from) income taxes for the years ended January 31, 2005, 2004 and 2003 is as follows (in thousands):



|              |  |                         |     |      |   |      |      |  |   |      |  
|------------- |  | ----------------------- | --- | ---- | - | ---- | ---- |  | - | ---- | -
|              |  | Years Ended January 31, |    
|              |  | 2005                    |     | 2004 |   |      | 2003 | 
|Current:      |  |                         |     |      |   |      |      |  |   |      |  
|Federal       |  | $                       | 72  |      | $ |     |      |  | $ |     |  
|State         |  |                         | 24  |      |   | 82   |      |  |   | 37   |  
|Foreign       |  |                         | 465 |      |   | (219 | )    |  |   | (258 | )
|              |  |                         |     |      |   |      |      |  |   |      |  
|Total current |  | $                       | 561 |      | $ | (137 | )    |  | $ | (221 | )
|              |  |                         |     |      |   |      |      |  |   |      |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The reconciliation 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, |       
|                                                                         |  | 2005                    |        |   | 2004 |   |      | 2003 | 
|Tax at federal statutory rate                                            |  | $                       | 1,608  |   |      | $ | (7   | )    |  | $ | (13,307 | )
|Nondeductible expenses                                                   |  |                         | 59     |   |      |   | 40   |      |  |   | 231     |  
|Stock-based compensation                                                 |  |                         | 369    |   |      |   | 102  |      |  |   | (1,168  | )
|State income taxes                                                       |  |                         | 24     |   |      |   | 82   |      |  |   | 38      |  
|Federal AMT                                                              |  |                         | 72     |   |      |   |     |      |  |   |        |  
|Foreign rate differential                                                |  |                         | 189    |   |      |   | 475  |      |  |   | (360    | )
|Net operating loss and temporary differences (benefitted) not benefitted |  |                         | (1,760 | ) |      |   | (829 | )    |  |   | 14,345  |  
|                                                                         |  |                         |        |   |      |   |      |      |  |   |         |  
|Total                                                                    |  | $                       | 561    |   |      | $ | (137 | )    |  | $ | (221    | )
|                                                                         |  |                         |        |   |      |   |      |      |  |   |         |  



As of January 31, 2005
and 2004, the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are set out below (in thousands):



|                                |  |                         |          |   |      |   |          |  
|------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | -
|                                |  | Years Ended January 31, |         
|                                |  | 2005                    |          |   | 2004 |  
|Deferred tax assets:            |  |                         |          |   |      |   |          |  
|Net operating loss              |  | $                       | 113,181  |   |      | $ | 111,460  |  
|Tax credit carryover            |  |                         | 6,837    |   |      |   | 6,837    |  
|Accruals and reserves           |  |                         | 969      |   |      |   | 996      |  
|Restructuring costs             |  |                         | 3,238    |   |      |   | 3,224    |  
|Plant and equipment             |  |                         | 1,371    |   |      |   | 3,044    |  
|Compensation accruals           |  |                         | 285      |   |      |   | 156      |  
|                                |  |                         |          |   |      |   |          |  
|Total gross deferred tax assets |  |                         | 125,881  |   |      |   | 125,717  |  
|Valuation allowance             |  |                         | (125,881 | ) |      |   | (125,717 | )
|                                |  |                         |          |   |      |   |          |  
|Net deferred tax assets         |  | $                       |         |   |      | $ |         |  
|                                |  |                         |          |   |      |   |          |  



The net change in the
total valuation allowance from January 31, 2004 to January 31, 2005 was an increase of approximately $0.2 million. 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 $7.2 million of the valuation allowance for the 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,
2005, the Company had approximately $276 million and $184.5 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 between 2019 and 2025 if not utilized and the state net operating loss carryforwards will expire between 2006 and 2015 if not utilized. In addition, the Company had approximately $4.4 million and $2.7 million of tax credit
carryforwards for increased research expenditures for



62



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NIKU CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



federal and state purposes, respectively. The increased research credit for federal purposes will expire between 2019 and 2023 if not utilized, and the
increased research credit for state purposes can be carried over indefinitely. The Company also had approximately $0.3 million of manufacturers investment credit carryforwards for state purposes, which will expire if not utilized by 2011.



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 periods disclosed. If an ownership change has occurred, utilization of the net operating loss and the credit carryforwards could be significantly reduced.



13.    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 maker is considered to be the team comprised of 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 revenue information is as
follows (in thousands):



|                        |  |                         |        |      |   |        |  |   |       
|----------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                        |  | Years Ended January 31,
|                        |  | 2005                    |        | 2004 |   | 2003  
|Maintenance and support |  | $                       | 17,478 |      | $ | 15,934 |  | $ | 18,243
|Implementation services |  |                         | 18,494 |      |   | 11,244 |  |   | 11,455
|                        |  |                         |        |      |   |        |  |   |       
|                        |  | $                       | 35,972 |      | $ | 27,178 |  | $ | 29,698
|                        |  |                         |        |      |   |        |  |   |       



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 (EMEA) and Australia (APAC). Revenue is attributed to the location of the customers.
Geographic information regarding the Companys revenue is as follows (in thousands):



|              |  |                         |        |      |   |        |  |   |       
|------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|              |  | Years Ended January 31,
|              |  | 2005                    |        | 2004 |   | 2003  
|United States |  | $                       | 40,409 |      | $ | 26,267 |  | $ | 30,697
|EMEA          |  |                         | 22,348 |      |   | 19,201 |  |   | 17,633
|APAC          |  |                         | 3,526  |      |   | 242    |  |   | 80    
|              |  |                         |        |      |   |        |  |   |       
|              |  | $                       | 66,283 |      | $ | 45,710 |  | $ | 48,410
|              |  |                         |        |      |   |        |  |   |       



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



63



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NIKU CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



There were no customers individually representing more than 10% of gross accounts receivables
(including unbilled accounts receivable) in fiscal 2005, 2004 and 2003. There were no customers individually representing more than 10% of total revenue in fiscal 2005, 2004, and 2003.



14.    Litigation



Final settlement papers for litigation relating to a number of initial public offerings (IPO), including our own, are in the process of being
negotiated and approved. We do not presently expect to make any payments under the pending settlements. The history of this litigation is as follows:



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 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 IPO in February 2000. The complaints in these actions alleged, among other things, that the registration statement and prospectus filed with the Securities and Exchange Commission for purposes of the IPO were false and
misleading because they failed to disclose that the managing underwriters allegedly (i) solicited and received commissions from certain investors in exchange for allocating to them shares of Company stock in connection with the IPO and (ii) entered
into agreements with their customers to allocate such stock to those customers in exchange for the customers agreeing to purchase additional shares of the Company in the aftermarket at pre-determined prices. The Company believes that the claims
asserted against it in these cases are without merit. On August 8, 2001 the Court ordered that these actions, along with hundreds of IPO allocation cases against other issuers, underwriters and directors and officers, be transferred to one judge for
coordinated pre-trial proceedings. In July 2002, omnibus motions to dismiss the complaints based on common legal issues were filed on behalf of all issuers, underwriters and directors and officers. By order dated October 8, 2002, the Court dismissed
the Companys officers and directors from the case without prejudice. In an opinion issued on February 19, 2003, the Court granted in part and denied in part the motions to dismiss. The complaints against the Company and the other issuers and
underwriters were not dismissed as a matter of law. The plaintiffs and the issuer defendants signed a Memorandum of Understanding, dated as of June 5, 2003, agreeing to settle the cases. No amount is accrued as of January 31, 2005, as a loss is not
considered probable.



From time to time, the Company is also
involved in litigation arising out of the ordinary course of its business. The Company does not know whether it will prevail in these matters nor can it assure that any remedy could be reached on commercially viable terms, if at all. Even if the
Company prevails, it may incur substantial expenses in defending against third party claims. In accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, the Company records a liability when it is both
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel
and any other information or events pertaining to a particular matter.



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NIKU CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



15.    Selected Quarterly Financial Data (Unaudited)



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



|                                                             |  |                                       |        |                 |   |              |  |   |               |   |                 |   |        |                 |   |              |   |  |               |        |  |   |        |   |  |   |        |  
|------------------------------------------------------------ |  | ------------------------------------- | ------ | --------------- | - | ------------ |  | - | ------------- | - | --------------- | - | ------ | --------------- | - | ------------ | - |  | ------------- | ------ |  | - | ------ | - |  | - | ------ | -
|                                                             |  | Quarter Ended                         |       
|                                                             |  | January 31,2005                       |        | October 31,2004 |   | July 31,2004 |  |   | April 30,2004 |   | January 31,2004 |   |        | October 31,2003 |   | July 31,2003 |   |  | April 30,2003 |       
|                                                             |  | (in thousands, except per share data) |       
|Revenue                                                      |  | $                                     | 20,015 |                 | $ | 16,564       |  | $ | 15,351        |   |                 | $ | 14,353 |                 | $ | 13,328       |   |  | $             | 12,535 |  | $ | 10,008 |   |  | $ | 9,839  |  
|Cost of revenue                                              |  |                                       | 6,013  |                 |   | 4,711        |  |   | 3,921         |   |                 |   | 3,854  |                 |   | 3,487        |   |  |               | 3,343  |  |   | 2,941  |   |  |   | 2,626  |  
|                                                             |  |                                       |        |                 |   |              |  |   |               |   |                 |   |        |                 |   |              |   |  |               |        |  |   |        |   |  |   |        |  
|Gross Profit                                                 |  |                                       | 14,002 |                 |   | 11,853       |  |   | 11,430        |   |                 |   | 10,499 |                 |   | 9,841        |   |  |               | 9,192  |  |   | 7,067  |   |  |   | 7,213  |  
|                                                             |  |                                       |        |                 |   |              |  |   |               |   |                 |   |        |                 |   |              |   |  |               |        |  |   |        |   |  |   |        |  
|Operating expenses:                                          |  |                                       |        |                 |   |              |  |   |               |   |                 |   |        |                 |   |              |   |  |               |        |  |   |        |   |  |   |        |  
|Sales and marketing                                          |  |                                       | 7,377  |                 |   | 6,385        |  |   | 5,707         |   |                 |   | 5,420  |                 |   | 4,761        |   |  |               | 4,800  |  |   | 3,364  |   |  |   | 3,582  |  
|Research and development                                     |  |                                       | 2,232  |                 |   | 2,073        |  |   | 1,886         |   |                 |   | 1,976  |                 |   | 1,883        |   |  |               | 1,901  |  |   | 1,817  |   |  |   | 1,897  |  
|General and administrative                                   |  |                                       | 1,987  |                 |   | 1,778        |  |   | 2,251         |   |                 |   | 1,800  |                 |   | 1,679        |   |  |               | 1,758  |  |   | 1,531  |   |  |   | 1,537  |  
|Restructuring and other                                      |  |                                       | 19     |                 |   |             |  |   | 1,163         |   |                 |   | 647    |                 |   | 688          |   |  |               | 312    |  |   | 1,648  |   |  |   |       |  
|Stock-based compensation                                     |  |                                       | 741    |                 |   | 326          |  |   | (188          | ) |                 |   | 176    |                 |   | 65           |   |  |               | 93     |  |   | 74     |   |  |   | 61     |  
|                                                             |  |                                       |        |                 |   |              |  |   |               |   |                 |   |        |                 |   |              |   |  |               |        |  |   |        |   |  |   |        |  
|Total operating expenses                                     |  |                                       | 12,356 |                 |   | 10,562       |  |   | 10,819        |   |                 |   | 10,019 |                 |   | 9,076        |   |  |               | 8,864  |  |   | 8,434  |   |  |   | 7,077  |  
|                                                             |  |                                       |        |                 |   |              |  |   |               |   |                 |   |        |                 |   |              |   |  |               |        |  |   |        |   |  |   |        |  
|Operating income (loss)                                      |  |                                       | 1,646  |                 |   | 1,291        |  |   | 611           |   |                 |   | 480    |                 |   | 765          |   |  |               | 328    |  |   | (1,367 | ) |  |   | 136    |  
|Interest and other income (expense), net                     |  |                                       | 223    |                 |   | 274          |  |   | 50            |   |                 |   | 18     |                 |   | 217          |   |  |               | 149    |  |   | (232   | ) |  |   | (16    | )
|                                                             |  |                                       |        |                 |   |              |  |   |               |   |                 |   |        |                 |   |              |   |  |               |        |  |   |        |   |  |   |        |  
|Income (loss) before income taxes                            |  |                                       | 1,869  |                 |   | 1,565        |  |   | 661           |   |                 |   | 498    |                 |   | 982          |   |  |               | 477    |  |   | (1,599 | ) |  |   | 120    |  
|Provision for (benefit from) income taxes                    |  |                                       | 188    |                 |   | 199          |  |   | 155           |   |                 |   | 19     |                 |   | (228         | ) |  |               | 32     |  |   | 41     |   |  |   | 18     |  
|                                                             |  |                                       |        |                 |   |              |  |   |               |   |                 |   |        |                 |   |              |   |  |               |        |  |   |        |   |  |   |        |  
|Net income (loss)                                            |  | $                                     | 1,681  |                 | $ | 1,366        |  | $ | 506           |   |                 | $ | 479    |                 | $ | 1,210        |   |  | $             | 445    |  | $ | (1,640 | ) |  | $ | 102    |  
|                                                             |  |                                       |        |                 |   |              |  |   |               |   |                 |   |        |                 |   |              |   |  |               |        |  |   |        |   |  |   |        |  
|Basic net income (loss) per share                            |  | $                                     | 0.12   |                 | $ | 0.11         |  | $ | 0.04          |   |                 | $ | 0.04   |                 | $ | 0.10         |   |  | $             | 0.04   |  | $ | (0.14  | ) |  | $ | 0.01   |  
|                                                             |  |                                       |        |                 |   |              |  |   |               |   |                 |   |        |                 |   |              |   |  |               |        |  |   |        |   |  |   |        |  
|Shares used in computing basic net income (loss) per share   |  |                                       | 13,731 |                 |   | 12,585       |  |   | 12,469        |   |                 |   | 12,116 |                 |   | 11,954       |   |  |               | 11,933 |  |   | 11,907 |   |  |   | 10,433 |  
|                                                             |  |                                       |        |                 |   |              |  |   |               |   |                 |   |        |                 |   |              |   |  |               |        |  |   |        |   |  |   |        |  
|Diluted net income (loss) per share                          |  | $                                     | 0.12   |                 | $ | 0.10         |  | $ | 0.04          |   |                 | $ | 0.04   |                 | $ | 0.10         |   |  | $             | 0.04   |  | $ | (0.14  | ) |  | $ | 0.01   |  
|                                                             |  |                                       |        |                 |   |              |  |   |               |   |                 |   |        |                 |   |              |   |  |               |        |  |   |        |   |  |   |        |  
|Shares used in computing diluted net income (loss) per share |  |                                       | 14,560 |                 |   | 13,293       |  |   | 13,079        |   |                 |   | 12,895 |                 |   | 12,429       |   |  |               | 12,461 |  |   | 11,907 |   |  |   | 10,678 |  
|                                                             |  |                                       |        |                 |   |              |  |   |               |   |                 |   |        |                 |   |              |   |  |               |        |  |   |        |   |  |   |        |  



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##### Table of Contents

Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.



None.



Item 9A.Controls and Procedures.



Disclosure
Controls and Procedures



The Companys management
maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and
Exchange Commissions rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.



As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.



Managements Report on Internal Control Over Financial Reporting



Managements Report on Internal Control Over Financial Reporting can be found on page 37.



Item 9B.Other Information.



None.



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##### Table of Contents

PART III



Item 10.Directors and Executive Officers of the Registrant.



The information concerning the Executive Officers of the Registrant required by this Item 10 will be contained in the proxy statement for our 2005 annual meeting of stockholders under the heading
Proposal No. 1  Election of Directors and is incorporated herein by reference. Information concerning the compliance of our officers, directors and 10% stockholders with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated by reference to the information contained in the Proxy Statement under the heading Section 16(a) Beneficial Ownership Reporting Compliance and is incorporated herein by reference.



We have adopted a Code of Business Conduct and Ethics that applies to all
employees, officers and directors, including our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Controller. This code of ethics is available on our Website located at www.niku.com under Investor
Relations and under the subheading Corporate Governance. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding any amendment to, or waiver from, a provision of this Code of Ethics by posting such
information on our Website, at the address and location specified above.



A copy of the Code of Business Conduct and Ethics will be provided, without charge, to any stockholder who requests one by writing to:



Niku Corporation

350 Main Street

Redwood City, CA 94063

Attn: Corporate Secretary



Item
11.Executive Compensation.



The information required by this item will be contained in the Proxy Statement for our 2005 Annual Meeting of Stockholders under the heading Executive Compensation and is incorporated herein by reference.



Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.



The information required by this item will be contained in the Proxy Statement for our 2005 Annual Meeting of Stockholders under the heading
Security Ownership of Certain Beneficial Owners and Management and is incorporated herein by reference.



Item 13.Certain Relationships and Related Transactions.



The information required by this item will be contained in the Proxy Statement for our 2005 Annual Meeting of Stockholders under the heading Certain Relationships and Related Transactions and is
incorporated herein by reference.



Item
14.Principal Accountant Fees and Services.



The information required by this item will be contained in the Proxy Statement for our 2005 Annual Meeting of Stockholders under the heading Principal Accountant Fees and Services and is incorporated
herein by reference.



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##### Table of Contents

PART IV



Item 15.Exhibits and Financial Statement Schedules.



| | (a) | The following documents are filed as part of this Annual Report:
| | --- | ----------------------------------------------------------------



| | 1. | Financial Statements: See Index to Consolidated Financial Statements at Item 8 of this Annual Report on Form 10-K.
| | -- | ------------------------------------------------------------------------------------------------------------------



| | 2. | All schedules have been omitted because they are not applicable, not required under the instructions, or the information requested is set forth in the consolidated financial
statements or related notes thereto.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Exhibits
| | -- | --------



The following exhibits are incorporated herein by reference or are filed as part of this Annual Report:



| | (b) | Exhibits
| | --- | --------



|          |  |                                                                                                                                                          
|--------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Number    |  | Exhibit Title                                                                                                                                            
|          | 
|3.1(1)    |  | Registrants Amended and Restated Certificate of Incorporation.                                                                                          
|          | 
|3.2(7)    |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation, dated November 20, 2002.                                              
|          | 
|3.3(9)    |  | Registrants Amended and Restated Bylaws.                                                                                                                
|          | 
|3.4       |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation, dated December 3, 2003.                                               
|          | 
|4.1(1)    |  | Fourth Amended and Restated Investors Rights Agreement, dated November 18, 1999, as amended December 8, 1999.                                           
|          | 
|4.3(8)    |  | Form of Warrant to Purchase Common Stock of the Registrant, dated February 12, 2003.                                                                     
|          | 
|4.4(8)    |  | Registration Rights Agreement by and between various Investors and the Registrant, dated February 12, 2003.                                              
|          | 
|10.1(1)   |  | Form of Indemnification Agreement by and between Registrant and its directors and executive officers.                                                    
|          | 
|10.2(1)   |  | 1998 Stock Plan, as amended.                                                                                                                             
|          | 
|10.3(9)   |  | 2000 Equity Incentive Plan, as amended.                                                                                                                  
|          | 
|10.4(9)   |  | 2000 Employee Stock Purchase Plan, as amended.                                                                                                           
|          | 
|10.5(2)   |  | 2000 Stock Incentive Plan.                                                                                                                               
|          | 
|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)  |  | Amendment to the Office 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.



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##### Table of Contents

|           |  |                                                                                                                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number     |  | Exhibit Title                                                                                                                                                                                   
|           | 
|10.19(4)   |  | Voting Agreement by and between Limar Realty Corp. #30 and the Registrant, dated October 31, 2002.                                                                                              
|           | 
|10.20(9)   |  | Voting Agreement by and between Farzad and Rhonda Dibachi and the Registrant, dated November 6, 2002.                                                                                           
|           | 
|10.21(10)* |  | Employment Agreement by and between Joshua Pickus and the Registrant, dated November 18, 2004.                                                                                                  
|           | 
|10.23(11)* |  | Separation, Release and Non-Competition Agreement by and between Mark A. Moore and the Registrant, dated January 28, 2005.                                                                      
|           | 
|21.1       |  | List of Subsidiaries.                                                                                                                                                                           
|           | 
|23.1       |  | Independent Registered Public Accounting Firms Consent   KPMG LLP.                                                                                                                            
|           | 
|24.1       |  | Power of Attorney (See the Signature page of the Annual Report on Form 10-K).                                                                                                                   
|           | 
|31.1       |  | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 14,
2005.
|           | 
|31.2       |  | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 14,
2005.
|           | 
|32.1       |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated April 14, 2005.                                           

---

|* | Indicates a management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------------------



|(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 Current Report on Form 8-K filed on November 21, 2002.
|--- | ---------------------------------------------------------------------------------------



|(8) | Incorporated by reference to the Current Report on Form 8-K filed on April 14, 2003.
|--- | ------------------------------------------------------------------------------------



|(9) | Incorporated by reference to the Registrants Annual Report on Form 10-K filed April 15, 2003.
|--- | ----------------------------------------------------------------------------------------------



|(10) | Incorporated by reference to the Current Report on Form 8-K filed on November 23, 2004.
|---- | ---------------------------------------------------------------------------------------



|(11) | Incorporated by reference to the Current Report on Form 8-K filed on February 1, 2005.
|---- | --------------------------------------------------------------------------------------



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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 CORPORATIONBy:

/s/    JOSHUA PICKUSJoshua Pickus President, Chief Executive Officerand Chairman of the Board(Principal Executive Officer)Dated: April 14, 2005




KNOW ALL PERSONS
BY THESE PRESENTS that each person whose signature appears below constitutes and appoints Joshua Pickus and Michael Shahbazian, and each of them, his true lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign any all amendments to this annual report on Form 10-K and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.



Pursuant to the requirements of the Securities Exchange Act of 1934, this
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 Officerand Chairman of the Board |  | April 14, 2005
|                                            |  |                                                            
|/s/    MICHAEL
SHAHBAZIANMichael
Shahbazian |  | Chief Financial Officer (Principal Accounting Officer)      |  | April 14, 2005
|                                            |  |                                                            
|/s/    RAVI CHIRUVOLURavi Chiruvolu         |  | Director                                                    |  | April 14, 2005
|                                            |  |                                                            
|/s/    MATT MILLERMatt Miller               |  | Director                                                    |  | April 14, 2005
|                                            |  |                                                            
|/s/    EDWARD F.
THOMPSONEdward F.
Thompson |  | Director                                                    |  | April 14, 2005
|                                            |  |                                                            
|/s/    PETER THOMPSONPeter Thompson         |  | Director                                                    |  | April 14, 2005
|                                            |  |                                                            
|/s/    SAM SPADAFORASam Spadafora           |  | Director                                                    |  | April 14, 2005



70



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##### Table of Contents

Exhibit Index



|       |  |                                                                                                                                                                                                 
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Exhibit Title                                                                                                                                                                                   
|3.4    |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation, dated December 3, 2003.                                                                                      
|       | 
|21.1   |  | List of Subsidiaries                                                                                                                                                                            
|       | 
|23.1   |  | Independent Registered Public Accounting Firms Consent  KPMG LLP.                                                                                                                             
|       | 
|31.1   |  | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 14,
2005.
|       | 
|31.2   |  | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 14,
2005.
|       | 
|32.1   |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated April 14, 2005.                                           



71