##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended January 31,
    2003                                                  
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                                 

Commission File Number: 000-28797

Niku Corporation


(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 77-0473454                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)
|                                                                  
|305 Main Street, Redwood City, CA                                  |  | 94063                                   
|(Address of principal executive
    offices)                       |  | (Zip Code)                              

Registrants telephone number, including
area code:

(650) 298-4600


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

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

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

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

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

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

The number of shares outstanding of the
registrants common stock as of April 14, 2003 was
11,853,646.

DOCUMENTS INCORPORATED BY REFERENCE

The registrants definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on
June 25, 2003 is incorporated by reference in Part III
of this Form 10-K to the extent stated herein.



---






---

TABLE OF CONTENTS



|                                         |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|TABLE OF CONTENTS                       
|PART I                                  
|                                         | Item 1. Business                                                                             
|                                         | Item 2. Properties                                                                           
|                                         | Item 3. Legal Proceedings                                                                    
|                                         | Item 4. Submission of Matters to a Vote of Security Holders                                  
|Part II                                 
|                                         | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                         | Item 6. Selected Consolidated Financial Data                                                 
|                                         | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                         | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                         | Item 8. Financial Statements and Supplementary Data                                          
|INDEPENDENT AUDITORS REPORT            
|                                         | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 
|PART III                                
|                                         | Item 10. Directors and Executive Officers of the Registrant                                  
|                                         | Item 11. Executive Compensation                                                              
|                                         | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                         | Item 13. Certain Relationships and Related Transactions                                      
|                                         | Item 14. Controls and Procedures                                                             
|                                         | Item 15. Exhibits, Financial Statement Schedules and Reports on 8-K                          
|SIGNATURES                              
|CERTIFICATION OF CHIEF FINANCIAL OFFICER
|Exhibit Index                           
|EXHIBIT 3.03                            
|EXHIBIT 10.03                           
|EXHIBIT 10.04                           
|EXHIBIT 10.20                           
|EXHIBIT 23.01                           
|EXHIBIT 99.01                           
|EXHIBIT 99.02                           



---



##### Table of Contents






TABLE OF CONTENTS

|               |  |                                                                                           |    |      |    | 
|-------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                           |    | Page
|               |  |                                                                                           |    |     
|PART I        
|Item 1.        |  | Business                                                                                  |    |      | 2  | 
|Item 2.        |  | Properties                                                                                |    |      | 13 | 
|Item 3.        |  | Legal Proceedings                                                                         |    |      | 13 | 
|Item 4.        |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 14 | 
|PART II       
|Item 5.        |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |    |      | 14 | 
|Item 6.        |  | Selected Consolidated Financial Data                                                      |    |      | 15 | 
|Item 7.        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 16 | 
|Item 7A.       |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |      | 31 | 
|Item 8.        |  | Financial Statements and Supplementary Data                                               |    |      | 31 | 
|Item 9.        |  | Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure  |    |      | 60 | 
|PART III      
|Item 10.       |  | Directors and Executive Officers of the Registrant                                        |    |      | 60 | 
|Item 11.       |  | Executive Compensation                                                                    |    |      | 60 | 
|Item 12.       |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |      | 60 | 
|Item 13.       |  | Certain Relationships and Related Transactions                                            |    |      | 60 | 
|Item 14.       |  | Controls and Procedures                                                                   |    |      | 61 | 
|PART IV       
|Item 15.       |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |    |      | 61 | 
|Signatures     |  |                                                                                           | 63 |     
|Certifications |  |                                                                                           | 64 |     

1



---



##### Table of Contents



Forward  Looking
Statements

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




PART I






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

We provide portfolio management software for
large enterprises. Our principal customers within these
enterprises are information technology departments, new product
development groups and consulting organizations. Our software
provides management and governance of projects, programs and
portfolios for these customers, enabling them to achieve control
and predictability in their key initiatives. Our software is
based on a web services architecture and offers a broad range of
functionality including project management, resource management,
portfolio management, project costing and financial planning, as
well as specific project-based methodologies such as Six Sigma.

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

Products

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

Niku 6 is composed of a layer of core
functionality as well as specific functional modules. Core
functionality includes collaboration, workflow, knowledge
management, reporting, calendaring and integration with
Microsoft Outlook and Lotus Notes. Beyond the core
functionality, Niku 6 is divided into a series of modules
which may be licensed separately or as an integrated suite. The
modules contained in Niku 6 are described below.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Project
    Management.Niku 6 helps
    organizations manage projects from origination to completion. In
    the project management module, Niku 6 provides complete
    functionality for planning, estimating, scheduling, time capture
    and analysis, as well as bi-directional integration with
    Microsoft Project.                                                                                                                
|
| |  | Resource
    Management.Niku 6 offers
    capabilities to ensure that the right people are working on the
    right things at the right time. Included in Niku 6s
    resource management module are capacity planning and demand
    management, as well as functionality for resource requisition,
    resource allocation and resource evaluation. Using this
    functionality, customers can view and manage resource schedules
    and

2



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | can reserve and allocate resources in real time
    while tracking employee backgrounds and levels of experience in
    different specialties.                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Portfolio Management.Niku 6 allows customers to
    manage groups of projects, to aggregate them into programs and
    to analyze project portfolios on a return on investment,
    benefits stream and balanced scorecard basis. Niku 6 also
    offers a customizable portfolio dashboard that simplifies risk
    management across the portfolio.                                                                                                                                                            
|
| |  | Financial
    Planning.Niku 6 offers
    project-based financial planning capabilities. Included in the
    financial planning module are project budgeting, forecasting and
    analysis functionality, as well as full support for
    interdepartmental and intercompany chargebacks and allocations.                                                                                                                                                                                                         
|
| |  | Project
    Costing.Niku 6 provides
    project costing capabilities. The core of these capabilities is
    a billing and invoicing engine that accommodates multiple bill
    and cost rate matrices and provides flexibility in financial
    organizational structuring. To support the needs of global
    operations, the project costing module has both multilingual and
    multicurrency capabilities.                                                                                                  
|
| |  | Niku Studio.Niku 6 contains an authoring environment known as Niku
    Studio. Using Niku Studio, customers can create custom pages,
    modify user interfaces and develop portlets tailored to their
    specific needs. Niku Studio also includes editing functionality
    for both menus and charts.                                                                                                                                                                                                        
|
| |  | Methodology
    Author.Customers wishing to
    create or customize project-based methodologies may license the
    methodology author module in Niku 6. This module contains
    delivery templates including forms, training documents and
    worksheets, task and role planning capabilities and best
    practice creation and modification tools. In addition to these
    methodology authoring tools, Niku offers separate products
    containing specific pre-packaged methodologies such as Six Sigma.

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

Technology and Architecture

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

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

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

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

3



---



##### Table of Contents



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

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

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

Customers

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

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

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

Research and Development

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

Sales and Marketing

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

Services and Support

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

4



---



##### Table of Contents



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 and IT organizations.
Competing software vendors include:



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

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

Intellectual Property

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

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

We rely to a large degree on copyright laws with
respect to our software, but we have not made any copyright
registration with any government entity with respect to our
products. Although registration is not required to obtain
protection under copyright laws, our failure to register may
limit our ability to seek certain remedies available under such
laws. We are currently pursuing one patent application but no
patent has issued. We received U.S. registration of the
trademarks Niku, the Niku logo, and Do What Matters. These
registrations may not provide us with significant protection for
our trademarks.

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

Employees

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

5



---



##### Table of Contents



Available Information

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

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

FACTORS THAT MAY AFFECT FUTURE
RESULTS

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

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

We were incorporated in January 1998 and began
licensing our software in December 1998. We cannot forecast
operating results based on our historical results because our
operating history is limited and our business is changing
rapidly. For example, in fiscal 2002, we introduced a major new
release of our software and implemented a restructuring program,
and in fiscal 2003 we continued our restructuring program. We
have limited visibility into our future revenue, especially
license revenue, which is heavily concentrated in the third
month of each quarter. Since we forecast our expenses based in
part on future revenue projections, our operating results would
be adversely affected if we cannot meet those revenue
projections.

We incurred losses throughout our operating
history until recently, and we may incur losses in the
future.

We reported net income under Generally Accepted
Accounting Principles (GAAP) of $5.7 million in the quarter
ended January 31, 2003. Without a gain of $5.0 million
for proceeds from a legal settlement, the GAAP net income would
have been $659,000. Prior to these results, we experienced GAAP
losses for almost every quarter of our history, and we have yet
to record a net income for any annual period. On a GAAP basis,
we had net loss of $37.8 million in the year ended
January 31, 2003. We had an accumulated deficit of
$499.7 million as of January 31, 2003. Although our
financial results have improved recently, no assurance can be
given that these improvements will continue, and we may incur
losses in the future.

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

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



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | our ability to attract new customers and retain
    and sell additional products and services to current customers;
|
| |  | changes in the pricing of our products and
    services or those of our competitors;                               
|
| |  | the renewal or non-renewal of annual maintenance
    contracts to our customers;                                   
|
| |  | the demand for professional services to implement
    our products and our efficiency in rendering such services;  

6



---



##### Table of Contents





| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | the announcement or introduction of new products
    or services by us or our competitors;        
|
| |  | variability in the mix of our product and
    services revenue in any quarter; and                
|
| |  | the amount and timing of operating expenses and
    capital expenditures relating to the business.

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

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

Our total revenue was $48.4 million in
fiscal 2003, compared to $67.5 million in fiscal 2002. Our
license revenue was $18.7 million in fiscal 2003, compared
to $32.0 million in fiscal 2002. While we cannot
specifically correlate the impact of macro-economic conditions
on our sales activities, we believe that the economic conditions
and international conflicts have contributed to a decrease in
demand in our market, and in particular, have increased the
average length of our sales cycles and decreased the size of our
license transactions. To the extent that the current economic
climate worsens or that the global economy fails to improve or
information technology spending in our market does not increase
due international conflicts or otherwise, the demand for our
products and services, and therefore future revenue, may be
further reduced. We may not be able to respond to future revenue
reductions in a sufficiently timely manner to avoid increases in
future losses. Even if the current decline abates, corporations
may not increase their information technology spending or we may
be unable to maintain or improve revenue levels.

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

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

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

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

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

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

7



---



##### Table of Contents



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

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

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

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

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

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

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

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

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



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | currency exchange rate fluctuations, particularly
    if we sell our products in denominations other than
    U.S. dollars;                    
|
| |  | seasonal fluctuations in purchasing patterns in
    other countries, particularly declining sales during summer
    months in European markets;
|
| |  | tariffs, export controls and other trade barriers;                                                                                             
|
| |  | difficulties in collecting accounts receivable in
    foreign countries;                                                                       
|
| |  | the burdens of complying with a wide variety of
    foreign laws;                                                                              

8



---



##### Table of Contents





| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | reduced protection for intellectual property
    rights in some countries; and                       
|
| |  | the need to develop internationalized versions of
    our products and marketing and sales materials.

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

The market for our products and services is
competitive, dynamic and subject to frequent technological
changes. We expect the intensity of competition and the pace of
change to increase in the future. Our products compete with
products of varying functionality offered by competing software
vendors and products that have been developed by potential
customers in-house developments and IT organizations.
Competing software vendors include:



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

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

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

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



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

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

We have recently experienced a leadership
transition.

In November 2002, Joshua Pickus, our chief
financial officer, succeeded Farzad Dibachi as our president and
chief executive officer. In January 2003, we hired Michael
Shahbazian as our new chief financial officer. In
November 2002, our executive vice president of strategy and
planning, who was the wife of our former chief executive
officer, also resigned. Our success will depend to a significant
extent on the ability of these

9



---



##### Table of Contents



executives to function effectively in their new
roles and on our ability to retain the services of
Mr. Pickus, Mr. Shahbazian and other key employees. We
do not have employment contracts for a defined term with our
employees. If we lose the services of one or more of our
executives or key employees, including if one or more of our
executives or key employees decided to join a competitor or
otherwise compete directly or indirectly with us, this could
harm our business.


We have limited working capital.

As of January 31, 2003, we had cash and cash
equivalents of $16.7 million, including bank borrowings
under a term loan of $4.75 million as of January 31,
2003, of which $250,000 plus interest was repaid in March 2003.
In addition, in the first quarter of fiscal 2004, we completed a
private placement with net proceeds to us of approximately
$10.3 million. We believe that cash from operations and
existing cash will be sufficient to meet our current
expectations for working capital and expense requirements for at
least the next twelve months based on, among other things, our
current revenue and expense projections. However, we may require
additional financing. If we were unable to raise capital in the
event of ongoing losses and depletion of our available cash
resources, the absence of funding would have a material adverse
effect on our business. If we issue additional equity
securities, stockholders will experience additional dilution and
the new equity securities may have rights, preferences or
privileges senior to those of the then existing holders of our
common stock.

We may continue to incur stock-based
compensation expense or gain in future periods.

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

In October 2002, we cancelled options to
purchase 55,000 shares of common stock held by our chief
executive officer and immediately granted him options to
purchase 150,000 shares of common stock at a price of $1.50,
which was the closing price of our common stock on the grant
date. As a result, based on the closing price of our common
stock of $4.19 on January 31, 2003, we recorded $96,000 in
stock-based compensation in fiscal 2003. To the extent that
our stock price increases above $4.19 in future periods, we will
need to record additional stock-based compensation expense.

On April 15, 2003, we announced a voluntary
stock option exchange program for our employees. Under the
program, our employees will be given the opportunity to exchange
outstanding stock options previously granted to them with an
exercise price greater than or equal to $7.50 per share for a
new option exercisable for 1.15 shares for each share subject to
the tendered options, to be granted at a future date, at least
six months and a day from the cancellation date. The exercise
price of these new stock options will be equal to the fair
market value of our common stock on the date of grant. On the
grant date, the new stock options will be vested as to the
number of stock options that would have been vested on such date
had the old stock options not been tendered plus the number of
shares that would have been vested had the old option been
exercisable for 15% more shares. Our chief executive officer,
chief financial officer and members of the board of directors
are not eligible to participate in the program. The exchange
program is not expected to result in any additional

10



---



##### Table of Contents



compensation charges or variable plan accounting.
To the extent that our employees exchange outstanding stock
options that were repriced on November 12, 2001, our
stock-based compensation related to such repriced options will
be reduced or eliminated, but no assurance can be given that
employees will participate in the option exchange program.


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

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

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

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

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

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

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

In recent years, there has been significant
litigation in the United States involving patents and other
intellectual property rights, particularly in the software
industry. We could become subject to intellectual property
infringement claims as the number of our competitors grows and
our products and services increasingly overlap with competitive
offerings. In addition, as part of our product licenses, we
agree to indemnify our customers against claims that our
products infringe upon the intellectual property rights of

11



---



##### Table of Contents



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


We must continue to meet the listing
requirements for the Nasdaq SmallCap Market to remain
listed.

We must meet the continued listing criteria for
the Nasdaq SmallCap Market to maintain our listing. Those
criteria include (1) a $35 million market value of
listed securities or stockholders equity of
$2.5 million or $500,000 in net income from continuing
operations, (2) a $1.00 bid price, (3) 500,000 public
held shares, (4) a $1 million market value of public
held shares, (5) two market makers, and (6) 300 round
lot shareholders. Failure to maintain compliance with any of
these standards could, after applicable grace periods, result in
the delisting of our common stock, which would significantly
limit the liquidity and trading market of our stock and could
adversely affect its price.

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

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



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

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

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

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



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

12



---



##### Table of Contents





| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | requiring two-thirds of the outstanding shares to
    approve amendments to some provisions of our certificate of
    incorporation and bylaws;
|
| |  | requiring a majority of the stockholders to call
    stockholders meetings; and                                                                
|
| |  | prohibiting stockholder actions by written
    consent.                                                                                        

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

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

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






|        |           
|------- | ----------
|Item 2. | Properties

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

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

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






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

In August 2001, Goldman, Sachs and Co.,
Dain Rauscher Wessels, U.S. Bancorp Piper Jaffray
and Thomas Weisel Partners, the managing underwriters of
our initial public offering (the IPO), Niku, and
certain of our officers and directors, were named as defendants
in a number of purported securities class actions in United
States District Court for the Southern District of New York
arising out of our initial public offering in February 2000. The
complaints in these actions allege, among other things, that the
registration statement and prospectus filed with the Securities
and Exchange Commission for purposes of the IPO were false and
misleading because they failed to disclose that Goldman, Sachs
and Co., Dain Rauscher Wessels, U.S. Bancorp
Piper Jaffray and Thomas Weisel Partners, the managing
underwriters, allegedly (i) solicited and received
commissions from certain investors in exchange for allocating to
them shares of Company stock in connection with the IPO and
(ii) entered into agreements with their customers to
allocate such stock to those customers in exchange for the
customers agreeing to purchase additional shares of ours in the
aftermarket at pre-determined prices. On August 8, 2001 the
Court ordered that these actions, along with hundreds of IPO
allocation cases against other issuers and underwriters, 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 and
underwriters. By order dated October 8, 2002, the Court
dismissed our officers and directors from the case without
prejudice. In an opinion issued on February 19,

13



---



##### Table of Contents



2003, the Court granted in part and denied in
part the motions to dismiss. The complaints against us were not
dismissed as a matter of law. These cases remain at a
preliminary stage and no discovery proceedings have taken place
in relation to the issuers. We believe that the claims asserted
against us in these cases are without merit and we intend to
defend vigorously against them. These cases seek compensatory
damages in unspecified amounts as well as other relief.







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

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

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

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

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

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




Part II






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

Market Information for Common Stock

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

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

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

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

14



---



##### Table of Contents



Sales of Unregistered Securities

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

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

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

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

In February 2003, we issued 1,549,735 shares of
our common stock at a price of $3.35 per share and issued
warrants to purchase 193,720 shares of our common stock at a
price of $0.40 per warrant share in connection with the initial
closing of a private placement. The aggregate offering price for
the securities issued in the initial closing was
$5.3 million, resulting in net proceeds of approximately
$5.2 million. The warrants have an exercise price of $3.40.
These shares and warrants were issued in a private placement
exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) and Regulation D of the Act.
In April 2003, we issued 1,538,495 shares of common stock at a
price of $3.35 per share and warrants to purchase 192,314 shares
of common stock at a price of $0.40 per warrant share in
connection with the subsequent closing of the private placement.
The aggregate offering price for the securities issued in the
subsequent closing was $5.2 million, resulting in net
proceeds of approximately $5.1 million. These warrants have
an exercise price of $3.40. These shares and warrants were
issued in a private placement exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) and
Regulation D of the Act. Total net proceeds from the
private placement were approximately $10.3 million.

Stockholders of Record

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




Item 6.     Selected
Consolidated Financial Data

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

15



---



##### Table of Contents



calendar month end so fiscal 2003 ended on
January 31, 2003. For presentation purposes, fiscal years
prior to fiscal 2003 refers to the periods calendar month
end.


Consolidated Statement of Operations
Data:

|                                                                  |  |                                       |         |      |  |      |          |      |  |      |          |   |  |   |         |   |  |   |        |  
|----------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | ------- | - |  | - | ------ | -
|                                                                  |  |                                      
|                                                                  |  | Years Ended January 31,              
|                                                                  |  |                                      
|                                                                  |  | 2003                                  |         | 2002 |  | 2001 |          | 2000 |  | 1999
|                                                                  |  |                                       |         |      |  |      |          |      |  |     
|                                                                  |  |                                      
|                                                                  |  | (in thousands, except per share data)
|Total revenue                                                     |  | $                                     | 48,410  |      |  | $    | 67,466   |      |  | $    | 68,922   |   |  | $ | 8,157   |   |  | $ | 15     |  
|Cost of revenue                                                   |  |                                       | 13,739  |      |  |      | 35,481   |      |  |      | 20,622   |   |  |   | 2,620   |   |  |   | 4      |  
|Gross profit                                                      |  |                                       | 34,671  |      |  |      | 31,985   |      |  |      | 48,300   |   |  |   | 5,537   |   |  |   | 11     |  
|Operating loss                                                    |  |                                       | (43,530 | )    |  |      | (294,014 | )    |  |      | (141,000 | ) |  |   | (37,036 | ) |  |   | (3,150 | )
|Net loss                                                          |  |                                       | (37,794 | )    |  |      | (291,546 | )    |  |      | (130,876 | ) |  |   | (36,487 | ) |  |   | (3,020 | )
|Basic and diluted net loss per share                              |  | $                                     | (4.96   | )    |  | $    | (39.20   | )    |  | $    | (19.57   | ) |  | $ | (56.08  | ) |  | $ | (6.19  | )
|Shares used in computing basic and diluted net
    loss per share |  |                                       | 7,618   |      |  |      | 7,437    |      |  |      | 6,687    |   |  |   | 651     |   |  |   | 488    |  

Consolidated Balance Sheet Data:

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






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

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

Overview

We provide portfolio management software for
large enterprises. Our principal customers within these
enterprises are information technology departments, new product
development groups and consulting organizations. Our software
provides management and governance of projects, programs and
portfolios for these customers, enabling them to achieve control
and predictability in their key initiatives. Our software is
based on a web services architecture and offers a broad range of
functionality including project management, resource management,
portfolio management, project costing and financial planning, as
well as specific project-based methodologies such as Six Sigma.

16



---



##### Table of Contents



Critical Accounting Policies, Methods and
Estimates

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

Revenue
Recognition

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

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

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

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

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

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

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

17



---



##### Table of Contents



support is determined based upon the
customers annual renewal rates for this element. We sell
our implementation services separately and have established VSOE
on that basis.


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

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

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

Accounts
Receivable

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

Impairment
Assessment

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

There were no asset impairment and other charges
in fiscal 2003 except for an impairment charge of a strategic
equity investment made in April 2000. We have regularly
performed an impairment assessment of this $500,000 investment.
In performing an impairment assessment, we consider the private
companys current solvency, future access to capital and
recent equity transactions. Based on an analysis of these
factors in fiscal

18



---



##### Table of Contents



2003, we determined that the investment
impairment was other than temporary. The carrying value of our
strategic equity investment was zero at January 31, 2003.


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

Restructuring
Reserves for Vacated Leased Facilities

We have recorded restructuring charges in
connection with vacating certain leased facilities pursuant to
our restructuring program. Costs associated with vacated leased
facilities include remaining lease liabilities and brokerage
fees, offset by estimated sublease income. Estimated sublease
income is determined by taking into consideration the type and
condition of the subject property, information regarding the
local commercial real estate market and expectations about time
to obtain a sublessee provided by local commercial real estate
brokerages. We regularly review these estimates and to the
extent that these estimates change due to changes in market
conditions, the ultimate restructuring expenses for vacated
leases could vary by material amounts. For example, we recorded
$2.4 million in net lease commitment costs on vacated
leases in fiscal 2003 related to restructuring activities
in fiscal 2002 primarily due to adjustments to estimated
future sublease income for certain facilities vacated in fiscal
2002.

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

Private Placement of Common Stock and Warrants
to Purchase Common Stock

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

19



---



##### Table of Contents



of the remaining 1,538,495 shares of our common
stock and warrants to purchase 192,314 shares of common stock in
connection with the subsequent closing of this private placement
and we issued such common stock and warrants. Total estimated
net proceeds from the private placement approximated
$10.3 million. Total shares and warrants outstanding
following the private placement were approximately 11,853,646
(including options exercised subsequent to January 31,
2003) and 405,617, respectively.


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



| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On an actual basis; and                                                                                                                                                                                                  
|
| |  | On a pro forma basis to reflect the issuance of
    3,088,230 shares of our common stock in connection with the
    private placement discussed above resulting in total net
    proceeds of approximately $10.3 million.

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

The share numbers above exclude:



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

Reverse Stock Split

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

20



---



##### Table of Contents



Repricing of Stock Options

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

In October 2002, we cancelled options to purchase
55,000 shares of common stock held by our chief executive
officer and granted him options to purchase 150,000 shares of
common stock at a price of $1.50, which was the closing price of
our common stock on the grant date. As a result, based on the
closing price of our common stock of $4.19 on January 31,
2003, we recorded $96,000 in stock-based compensation in fiscal
2003. To the extent that our stock price increases above $4.19
in future periods, we will need to record additional stock-based
compensation expense.

On April 15, 2003, we announced a voluntary
stock option exchange program for our employees. Under the
program, our employees will be given the opportunity to exchange
outstanding stock options previously granted to them with an
exercise price greater than or equal to $7.50 per share for a
new option exercisable for 1.15 shares for each share subject to
the tendered options, to be granted at a future date, at least
six months and a day from the cancellation date. The exercise
price of these new stock options will be equal to the fair
market value of our common stock on the date of grant. On the
grant date, the new stock options will be vested as to the
number of stock options that would have been vested on such date
had the old stock options not been tendered plus the number of
shares that would have been vested had the old option been
exercisable for 15% more shares. Our chief executive officer,
chief financial officer and members of the board of directors
are not eligible to participate in the program. The exchange
program is not expected to result in any additional compensation
charges or variable plan accounting. To the extent that our
employees exchange outstanding stock options that were repriced
on November 12, 2001, our stock-based compensation related
to such repriced options will be reduced or eliminated, but no
assurance can be given that employees will participate in the
option exchange program.

Pro Forma Financial Results

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

21



---



##### Table of Contents



Results of Operations

|                                                |                                                          |                          |      |      |       |      |      |       |        |    |      |      |        |   
|----------------------------------------------- | -------------------------------------------------------- | ------------------------ | ---- | ---- | ----- | ---- | ---- | ----- | ------ | -- | ---- | ---- | ------ | --
|                                                |                                                          |                         
|                                                |                                                          | Years Ended January 31, 
|                                                |                                                          |                         
|                                                |                                                          | 2003                     |      | 2002 |       | 2001
|                                                |                                                          |                          |      |      |       |     
|Revenue:                                        |                                                          |                          |      |      |       |      |      |       |        |    |      |     
|                                                | License                                                  |                          |      | 38.7 | %     |      |      | 47.4  | %      |    |      | 69.1 | %     
|                                                | Services                                                 |                          |      | 61.3 |       |      |      | 52.6  |        |    |      | 30.9 |       
|                                                |                                                          |                          |      |      |       |      |      |       |        |    |      |     
|                                                |                                                          | Total revenue            |      |      | 100.0 |      |      |       | 100.0  |    |      |      | 100.0  |   
|                                                |                                                          |                          |      |      |       |      |      |       |        |    |      |     
|Cost of revenue:                                |                                                          |                          |      |      |       |      |      |       |        |    |      |     
|                                                | License                                                  |                          |      | 2.0  |       |      |      | 2.5   |        |    |      | 4.4  |       
|                                                | Services                                                 |                          |      | 26.4 |       |      |      | 36.2  |        |    |      | 25.5 |       
|                                                | Impairment of licensed technology                        |                          |      |     |       |      |      | 13.9  |        |    |      |     |       
|                                                |                                                          |                          |      |      |       |      |      |       |        |    |      |     
|                                                |                                                          | Total cost of revenue    |      |      | 28.4  |      |      |       | 52.6   |    |      |      | 29.9   |   
|                                                |                                                          |                          |      |      |       |      |      |       |        |    |      |     
|                                                | Gross profit                                             |                          |      | 71.6 |       |      |      | 47.4  |        |    |      | 70.1 |       
|                                                |                                                          |                          |      |      |       |      |      |       |        |    |      |     
|Operating expenses:                             |                                                          |                          |      |      |       |      |      |       |        |    |      |     
|                                                | Sales and marketing                                      |                          |      | 47.7 |       |      |      | 105.1 |        |    |      | 98.7 |       
|                                                | Research and development                                 |                          |      | 24.6 |       |      |      | 51.7  |        |    |      | 53.7 |       
|                                                | General and administrative                               |                          |      | 17.4 |       |      |      | 22.5  |        |    |      | 19.0 |       
|                                                | Asset impairment and other                               |                          |      | 1.0  |       |      |      | 205.9 |        |    |      |     |       
|                                                | Amortization of goodwill and other intangible
    assets |                          |      |     |       |      |      | 40.5  |        |    |      | 52.2 |       
|                                                | Restructuring and other                                  |                          |      | 78.3 |       |      |      | 36.1  |        |    |      | 2.8  |       
|                                                | Stock-based compensation                                 |                          |      | (7.5 | )     |      |      | 21.4  |        |    |      | 42.1 |       
|                                                | Merger related expenses                                  |                          |      |     |       |      |      |      |        |    |      | 6.2  |       
|                                                |                                                          |                          |      |      |       |      |      |       |        |    |      |     
|                                                |                                                          | Total operating expenses |      |      | 161.5 |      |      |       | 483.2  |    |      |      | 274.7  |   
|                                                |                                                          |                          |      |      |       |      |      |       |        |    |      |     
|                                                |                                                          | Operating loss           |      |      | (89.9 | )    |      |       | (435.8 | )  |      |      | (204.6 | ) 
|Interest income and other income (expense), net |                                                          |                          | 12.2 |      |       |      | 4.2  |       |        |    | 15.2 |     
|Interest expense                                |                                                          |                          | (0.4 | )    |       |      | (0.5 | )     |        |    | (0.5 | )   
|                                                |                                                          |                          |      |      |       |      |      |       |        |    |      |     
|                                                |                                                          | Net loss                 |      |      | (78.1 | )%   |      |       | (432.1 | )% |      |      | (189.9 | )%
|                                                |                                                          |                          |      |      |       |      |      |       |        |    |      |     

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

Revenue

License.License
revenue consists of revenue from licenses of our software
products. License revenue was $18.7 million,
$32.0 million and $47.6 million in fiscal 2003, 2002
and 2001, respectively, decreasing 41.5% in fiscal 2003 from
fiscal 2002 and decreasing 32.8% in fiscal 2002 from fiscal
2001. The year-over-year decrease in license revenue in absolute
dollars was primarily attributable to a slowdown in corporate
information technology spending.

Services.Services
revenue consists of revenue from the delivery of implementation
services and maintenance and support contracts. Services revenue
from implementation services in fiscal 2003, 2002 and 2001 was
$11.5 million, $14.8 million and $12.9 million,
respectively, decreasing 22.7% in fiscal 2003 from fiscal 2002
and increasing 14.9% in fiscal 2002 from fiscal 2001. The
decrease in services revenue from implementation services in
absolute dollars in fiscal 2003 from fiscal 2002 was primarily
attributable to a decrease in the size of the implementation
services organization pursuant to the restructuring program we
implemented in fiscal 2002 and 2003 and a decrease in license
revenue that led to a decrease in demand for implementation
services. The increase in services revenue from implementation
services in absolute dollars in fiscal 2002 from fiscal 2001 was
primarily attributable to an increase in customer
implementations. Service

22



---



##### Table of Contents



revenue from maintenance and support contracts
was $18.2 million, $20.7 million and $8.4 million
in fiscal 2003, 2002 and 2001, respectively, decreasing 11.8% in
fiscal 2003 from fiscal 2002 and increasing 145.6% in fiscal
2002 from fiscal 2001. The decrease in services revenue from
maintenance and support in absolute dollars in fiscal 2003 from
fiscal 2002 was primarily attributable to a decrease in the
number of supported users for maintenance renewals and a
decrease in amortization of deferred maintenance revenue we
assumed from the ABT acquisition in August 2000. The increase in
services revenue from maintenance and support contracts in
absolute dollars in fiscal 2002 from fiscal 2001 was primarily
attributed to new maintenance contracts and maintenance renewals
relating to a larger installed base.




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

Cost of license
revenue.Cost of license revenue
includes royalties due to third parties and product packaging,
documentation and shipping costs. Cost of license revenue was
$977,000, $1.7 million and $3.0 million in fiscal
2003, 2002 and 2001, respectively, representing 5.2%, 5.3% and
6.4% of total license revenue in the respective year. The
decrease in cost of license revenue in absolute dollars in
fiscal 2003 from fiscal 2002 was primarily attributable to a
decline in license revenue and the introduction of Niku 6 in
fiscal 2002, which required lower royalties due to third parties
than certain prior products. The decrease in absolute dollars in
fiscal 2002 from fiscal 2001 was primarily attributable to a
decline in license revenue that decreased royalties due to third
parties.

Cost of services
revenue.Cost of services revenue
includes salaries and related expenses for our implementation
services and maintenance and support personnel and the costs of
third parties contracted to provide implementation services to
our customers. Cost of services revenue was $12.8 million,
$24.4 million and $17.6 million in fiscal 2003, 2002
and 2001, respectively, representing 43.0%, 68.8% and 82.5% of
total services revenue in each respective year. The decrease in
cost of services revenue in absolute dollars in fiscal 2003 from
fiscal 2002 was primarily attributable to reductions in
headcount pursuant to the restructuring program we implemented
in fiscal 2002 and 2003, reduction in costs for third parties
contracted to implement our products and increased efficiencies
within the implementation services organization. The increase in
cost of services revenue in absolute dollars in fiscal 2002 from
fiscal 2001 was primarily attributable to an increase in costs
for third parties contracted to implement our products and
increases in personnel and personnel-related expenses in the
first six months of fiscal 2002 compared to the first six months
of fiscal 2001, offset in part by later reductions in headcount.
Cost of services revenue as a percentage of total services
revenue decreased in each sequential year primarily as a result
of the reductions in headcount.

Impairment of licensed
technology.There was no impairment of
licensed technology in fiscal 2003 or fiscal 2001. In fiscal
2002, we determined that the carrying value of certain royalties
that we had prepaid for the right to third party licensed
technology would not be realized. We recorded $9.4 million
in impairment of licensed technology, including
$8.5 million from prepaid royalties and $850,000 from
royalties paid in fiscal 2002, in each case on third-party
technologies which we did not include with our products to the
extent required under the applicable contracts or at all due to
a change in our product plan.



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

Sales and marketing.Sales and marketing expenses consist primarily of salaries,
advertising, commissions, bonuses, travel and bad debt expense.
Sales and marketing expenses were $23.1 million,
$70.9 million and $68.0 million in fiscal 2003, 2002
and 2001, respectively, representing 47.7%, 105.1% and 98.7% of
total revenue in each respective year. The decrease in sales and
marketing expenses in absolute dollars in fiscal 2003 from
fiscal 2002 was primarily attributable to a $17.9 million
reduction in salaries, benefits and other employer related costs
resulting from reductions in headcount and salary reductions
effected pursuant to the restructuring program we implemented in
fiscal 2002 and 2003 and a decrease of $9.0 million in bad
debt expense resulting from an increase in collection rates.
Sales and marketing expenses also decreased due to a
$6.1 million decrease in commissions and bonuses, a
$3.7 million decrease in advertising, a $2.8 million
decrease in travel and a $2.7 million decrease in outside
travel. The increase in sales and marketing expenses in absolute
dollars in fiscal 2002 from fiscal 2001 was primarily
attributable to an increase of $6.6 million in bad debt
expenses necessitated primarily by the deterioration in the
credit of certain customer accounts caused

23



---



##### Table of Contents



by a significant downturn in the industries in
which we sell and a contraction of the overall economy. Sales
and marketing expenses in absolute dollars in fiscal 2002 also
increased from fiscal 2001 due to higher salaries attributable
to higher headcount in the first six months of fiscal 2002
compared to the first six months of fiscal 2001 and increases of
$1.8 million in commissions and bonuses, offset in part by
later reductions in headcount and a decrease of
$9.7 million in advertising costs.


Research and
development.Research and development
expenses consist primarily of personnel and related expenses
associated with the development of new products, the enhancement
of existing products and quality assurance and testing costs.
Research and development expenses were $11.9 million,
$34.9 million and $37.0 million in fiscal 2003, 2002
and 2001, respectively, representing 24.6%, 51.7% and 53.7% of
total revenue in each respective year. The decrease in research
and development expenses in absolute dollars in fiscal 2003 from
fiscal 2002 was primarily attributable to a $17.9 million
reduction in salaries, benefits and other employer related costs
resulting from reductions in headcount and salary reductions
effected pursuant to the restructuring program we implemented in
fiscal 2002 and 2003, a decrease of $6.2 million in
facilities allocation and a $2.2 million decrease in
outside services primarily related to third-party development
services. The decrease in research and development expenses in
absolute dollars in fiscal 2002 from 2001 was primarily
attributable to a $2.2 million decrease in outside
services, a $1.3 million decrease in travel costs relating
to the development of our products and a $919,000 decrease in
salaries, benefits and other employer related costs resulting
from reductions in headcount, offset in part by a
$2.8 million increase in facilities allocation.

General and
administrative.General and
administrative expenses consist primarily of salaries and other
related costs for finance, human resource, information
technology and legal department employees, as well as
professional services fees. General and administrative expenses
were $8.4 million, $15.2 million and
$13.1 million in fiscal 2003, 2002 and 2001, respectively,
representing 17.4%, 22.5% and 19.0% of total revenue in each
respective year. The decrease in general and administrative
expenses in absolute dollars in fiscal 2003 from 2002 was
primarily attributable to a $5.3 million reduction in
salaries, benefits and other employer related costs resulting
from reductions in headcount and salary reduction effected
pursuant to the restructuring program we implemented in fiscal
2002 and 2003, a $7.1 million decrease in facilities
expense and a $1.5 million decrease in professional
services fees, offset in part by a decrease in facilities
allocation to other departments. The increase in general and
administrative expenses in absolute dollars in fiscal 2002 from
2001 was primarily attributable to a $1.4 million increase
in salaries, benefits and other employer related costs and a
$768,000 increase in bonus expenses.

Asset impairment and
other.In fiscal 2003, we performed an
impairment assessment of a $500,000 strategic equity investment
we made in a private company in April 2000. In performing an
impairment assessment, we consider the private companys
current solvency, future access to capital and recent equity
transactions. Based on an analysis of these factors in fiscal
2003, we determined that the investment impairment was other
than temporary and recorded $500,000 in asset impairment charges.

In the first quarter of fiscal 2002, we performed
an impairment assessment of our goodwill and other intangible
assets recorded in connection with our various acquisitions due
to a change in our product plan related to certain acquired
technologies. This assessment was based on the expected future
cash flows from goodwill and intangible assets over their
remaining useful lives. As a result of this assessment, we
recorded $24.5 million in asset impairment charges. This
amount included $21.7 million to write down the net book
value of certain goodwill and other intangible assets from our
acquisitions of Legal Anywhere, bSource, 600 Monkeys and Alyanza
to zero except for the carrying value of Legal Anywheres
goodwill and customer lists which was reduced to their estimated
fair value of $1.8 million. In the second quarter of fiscal
2002, we also performed an additional impairment assessment of
goodwill and other intangible assets recorded in connection with
our acquisitions of ABT, Proamics and Legal Anywhere. This
assessment was performed primarily due to a significant decline
in our stock price which resulted in the net book value of our
assets significantly exceeding our market capitalization. As a
result of this assessment, we recorded $114.4 million in
asset impairment charges in the second quarter of fiscal 2002
which reduced the fair value of goodwill and other intangible
assets related to our acquisitions of ABT, Proamics and Legal
Anywhere to zero. The estimate of the fair value was based on
the estimated future discounted cash flows for the remaining
life of the goodwill and other intangible assets with a discount
rate of 25% and an estimated terminal value. The assumptions
supporting the

24



---



##### Table of Contents



estimated cash flows, including the discount rate
and an estimated terminal value, reflect managements best
estimates. The discount rate was based upon the weighted average
cost of capital for comparable companies. In fiscal 2002, we
recorded $138.9 million in asset impairment charges,
consisting of $136.1 million relating to goodwill and other
intangible assets, $1.9 million in accelerated depreciation
for internally used software and $874,000 to write off fixed
assets that we no longer utilized.


Amortization of goodwill and other intangible
assets.There was no amortization of
goodwill and other intangible assets in fiscal 2003 because all
goodwill and other intangibles assets were written off in fiscal
2002. Amortization of goodwill and other intangible asset was
$27.3 million and $35.9 million in fiscal 2002 and
2001, respectively. Amortization of goodwill and other
intangible assets included amortization of developed and core
technologies of approximately $6.5 million and
$10.2 million in fiscal 2002 and 2001, respectively.

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

Severance

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

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

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

Net
Lease Commitment Costs on Vacated Facilities

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

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

We ceased to pay rent on a lease in New York, New
York for a facility we vacated in fiscal 2002, and the landlord
has drawn upon a letter of credit of $2.6 million secured
by a certificate of deposit. We also creased to

25



---



##### Table of Contents



pay rent on the leases for certain other smaller
facilities that we have vacated. We are seeking to terminate
these leases or sublease these facilities.


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

Computer
and Car Leases

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

Other
Restructuring Charges

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

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

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

Restructuring
in Fiscal 2002

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

Stock-based
compensation.Amortization of
stock-based compensation was $(3.6) million, $14.4 million
and $29.0 million in fiscal 2003, 2002 and 2001,
respectively. The recovery of stock-based compensation in fiscal
2003 was attributable to variable accounting applied to our
stock options that were repriced in the fourth quarter of fiscal
2002, which resulted in $4.8 million in recovery of
stock-based compensation in fiscal 2003, offset by
$1.2 million in other stock-based compensation. The
decrease in amortization of stock-based compensation in fiscal
2002 from fiscal 2001 was primarily attributed to employee
terminations and the effects of having applied Financial
Accounting Standard Board (FASB) Interpretation No. 28,
offset in part by additional $5.4 million in stock-based
compensation we recorded in connection with the repricing of our
stock options in the fourth quarter of fiscal 2002. Out
stock-based compensation may decrease in future periods if a
majority of our employees participate in the option exchange
program that was recently commenced.

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

26



---



##### Table of Contents



Interest and Other Income,
Net

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

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

Liquidity and Capital Resources

Since inception, we have financed our operations
through private and public sales of our capital stock, bank
loans, equipment leases, and cash from sales of our products and
delivery of related services. The cash from these sources is
used for working capital for our business. As of
January 31, 2003, we had cash and cash equivalents of
$16.7 million. We also had current portion of restricted
cash and restricted cash in the amount of $229,000 and
$1.1 million, respectively, in the form of certain
certificates of deposit securing letters of credit for two
leased facilities. We had bank borrowings under a term loan of
$4.75 million as of January 31, 2003, of which
$250,000 plus interest was repaid in March 2003. As of
January 31, 2003, we had working capital of
$1.2 million, compared to working capital of
$11.0 million as of January 31, 2002. The decrease in
working capital as of January 31, 2003 was primarily
attributed to decreases in cash and cash equivalents, current
portion of restricted cash, net accounts receivable, and prepaid
expenses and other current assets, offset in part by decreases
in bank borrowings and accrued liabilities.

In February 2003, we entered into a common stock
and warrant purchase agreement with various investors led by
Walden VC, providing for the issuance of 3,088,230 shares of our
common stock at a price of $3.35 per share and warrants to
purchase 386,034 shares of common stock at a price of $0.40 per
share in a connection with a private placement. The warrants
have an exercise price of $3.40. In February 2003, we issued
1,549,735 shares of our common stock and warrants to purchase
193,720 shares of common stock in connection with initial
closing of this private placement. In April 2003, our
stockholders approved the issuance of the remaining 1,538,495
shares of our common stock and warrants to purchase 192,314
shares of common stock in connection with the subsequent closing
of this private placement and we issued such common stock and
warrants. Total estimated net proceeds from the private
placement approximated $10.3 million. Total shares and
warrants outstanding following the private placement were
approximately 11,853,646 (included options exercised subsequent
to January 31, 2003) and 405,617, respectively.

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



| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On an actual basis; and                                                                                                                                                                                                  
|
| |  | On a pro forma basis to reflect the issuance of
    3,088,230 shares of our common stock in connection with the
    private placement discussed above resulting in total net
    proceeds of approximately $10.3 million.

27



---



##### Table of Contents



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

The share numbers above exclude:



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

Net cash used in operating activities was
$23.9 million, $73.9 million and 87.0 million in
fiscal 2003, 2002 and 2001, respectively. Net cash used in
operating activities in fiscal 2003 was primarily attributed to
a net loss of $37.8 million and a decrease in accrued
liabilities, offset in part by non-cash restructuring charges,
and a decrease in accounts receivable, depreciation expenses and
a decrease in prepaid expenses and other current assets. Net
cash used in operating activities in fiscal 2002 was primarily
attributable to a net loss of $291.5 million, offset in
part by impairment charges, amortization of goodwill and other
intangible assets, restructuring charges, stock-based
compensation, provision for doubtful account receivable and a
decrease in net accounts receivable. Net cash used in operating
activities in fiscal 2001 was primarily attributable to a net
loss of $130.9 million and increases in net accounts
receivable and prepaid and other current assets, offset in part
by amortization of goodwill and other intangible assets and
stock-based compensation.

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

28



---



##### Table of Contents



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

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

We currently have a term loan for
$5.0 million from a financial institution. We entered into
this loan in September 2002. The term loan is secured by our
tangible and intangible assets, accrues interest at 7.50% per
annum and matures on February 15, 2004. We are required to
make quarterly payments of principal and interest on a five-year
amortization schedule. We repaid $250,000 plus interest in
December 2002 and $250,000 plus interest in March 2003. On the
maturity date, the remaining principal balance of
$3.5 million is due. This term loan has certain financial
covenants, including covenants relating to cash on hand, revenue
and operating expenses. In January 2003, we agreed with the
financial institution that we would not repay a portion of the
term loan with the proceeds of a legal settlement we received in
December 2002. As of January 31, 2003, we were not in
compliance with a covenant relating to revenue. We received a
waiver for such covenant in February 2003.

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

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

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

We have working capital of $1.2 million as
of January 31, 2003. We believe that cash from operations
and existing cash, including approximately $10.3 million in
net proceeds from a private placement we completed in

29



---



##### Table of Contents



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


Recent Accounting Pronouncements

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

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

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

In November 2002, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation (FIN)
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN No. 45 provides expanded
accounting guidance surrounding liability recognition and
disclosure requirements related to guarantees, as defined by
this Interpretation. We had no existing guarantees as of
January 31, 2003, and we do not expect that the adoption of
FIN No. 45 will have a material effect on our financial
position or results of operations. Indemnification and warranty
provisions within our customer license and service agreements
are generally consistent with those prevalent in our industry.
The duration of our product warranties generally does not exceed
90 days following delivery of our products. We have not
incurred significant obligations under customer indemnification
or warranty provision historically and do not expect to incur
significant obligations in the future. Accordingly, we do not
maintain accruals for potential customer indemnification or
warranty-related obligations.

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities. FIN
No. 46 expands upon existing accounting guidance that
addresses when a company should include in its financial

30



---



##### Table of Contents



statements the assets, liabilities and activities
of another entity. A variable interest entity is a corporation,
partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the
entity to support its activities. FIN No. 46 requires a
variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the
variable interest entitys activities or is entitled to
receive a majority of the entitys residual returns or
both. The consolidation requirements of FIN No. 46 apply
immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period
beginning after June 15, 2003. We are currently evaluating
the impact of FIN No. 46 on our financial statements and
related disclosures.







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

We develop products in the United States and
market our products in North America and Europe and to a lesser
degree in Asia. As a result, our financial results may be
affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in foreign markets.
Approximately 36.5% of our total revenue was made in currencies
other than U.S. dollars in fiscal 2003. Although we are
exposed to the general foreign currency exchange rate risk
described above, we do not expect any material adverse effect on
our consolidated financial position, results of operations or
cash flows due to movements in any specific foreign currency. We
currently do not use financial instruments to hedge operating
expenses of our European subsidiaries. We will continue to
assess the need to utilize financial instruments to hedge
currency exposures on an ongoing basis.

Our exposure to market risk for changes in
interest rates relates primarily to our cash and cash
equivalents and outstanding debt obligations. We do not use
derivative financial instruments for speculative or trading
purposes. Our cash and cash equivalents consist primarily of
demand deposits, certificates of deposits and money market
accounts that mature in three months or less. Due to the
short-term nature of our cash and cash equivalents, we believe
that there is no material market or interest rate risk exposure
on our cash and cash equivalents. Due to the fixed interest rate
of our indebtedness, a 5% decrease in interest rate would not
have a material effect on our consolidated financial position
and results of operations. Therefore, no quantitative tabular
disclosures are required.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                         |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                                         |  | Page
|                                                                                                                         |  |     
|Independent Auditors Report                                                                                             |  |      | 32 | 
|Consolidated Balance Sheets as of
    January 31, 2003 and 2002                                                          |  |      | 33 | 
|Consolidated Statements of Operations and
    Comprehensive Loss for the Years Ended January 31, 2003,
    2002 and 2001 |  |      | 34 | 
|Consolidated Statements of Stockholders
    Equity (Deficit) for the Years Ended January 31, 2003, 2002
    and 2001    |  |      | 35 | 
|Consolidated Statements of Cash Flows for the
    Years Ended January 31, 2003, 2002 and 2001                            |  |      | 36 | 
|Notes to Consolidated Financial Statements                                                                               |  |      | 37 | 

31



---



##### Table of Contents






INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders 
 of Niku Corporation:

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

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

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



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

Mountain View, California

February 21, 2003, except as to Note 12,


which is as of March 16, 2003 and
Note 18,


which is as of April 15, 2003.


32



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share
data)


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

See accompanying notes to consolidated financial
statements.

33



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS

(in thousands, except share and per share
data)


|                                                                  |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |          |          |  
|----------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ----- | ------- | ------- | ---- | ------ | -------- | -------- | - | ------ | -------- | -------- | -
|                                                                  |                                                                                                                                                                           |                         
|                                                                  |                                                                                                                                                                           | Years Ended January 31, 
|                                                                  |                                                                                                                                                                           |                         
|                                                                  |                                                                                                                                                                           | 2003                     |       | 2002    |         | 2001
|                                                                  |                                                                                                                                                                           |                          |       |         |         |     
|Revenue:                                                          |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|                                                                  | License                                                                                                                                                                   |                          | $     | 18,712  |         |      | $      | 31,974   |          |   | $      | 47,613   |         
|                                                                  | Services                                                                                                                                                                  |                          |       | 29,698  |         |      |        | 35,492   |          |   |        | 21,309   |         
|                                                                  |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|                                                                  |                                                                                                                                                                           | Total revenue            |       |         | 48,410  |      |        |          | 67,466   |   |        |          | 68,922   |  
|                                                                  |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|Cost of revenue:                                                  |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|                                                                  | License                                                                                                                                                                   |                          |       | 977     |         |      |        | 1,688    |          |   |        | 3,043    |         
|                                                                  | Services (exclusive of stock-based compensation
    of $(288), $1,129 and $991 for the years ended January 31,
    2003, 2002 and 2001, respectively)                     |                          |       | 12,762  |         |      |        | 24,407   |          |   |        | 17,579   |         
|                                                                  | Impairment of licensed technology                                                                                                                                         |                          |       |        |         |      |        | 9,386    |          |   |        |         |         
|                                                                  |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|                                                                  |                                                                                                                                                                           | Total cost of revenue    |       |         | 13,739  |      |        |          | 35,481   |   |        |          | 20,622   |  
|                                                                  |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|                                                                  |                                                                                                                                                                           | Gross profit             |       |         | 34,671  |      |        |          | 31,985   |   |        |          | 48,300   |  
|                                                                  |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|Operating expenses:                                               |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|                                                                  | Sales and marketing (exclusive of stock-based
    compensation of $(1,761), $5,042 and $16,860 for the years ended
    January 31, 2003, 2002 and 2001, respectively)     |                          |       | 23,102  |         |      |        | 70,927   |          |   |        | 68,041   |         
|                                                                  | Research and development (exclusive of
    stock-based compensation of $(1,541), $5,844 and $5,264 for the
    years ended January 31, 2003, 2002 and 2001, respectively) |                          |       | 11,896  |         |      |        | 34,856   |          |   |        | 37,031   |         
|                                                                  | General and administrative (exclusive of
    stock-based compensation of $(57), $2,387 and $5,930 for the
    years ended January 31, 2003, 2002 and 2001, respectively)  |                          |       | 8,434   |         |      |        | 15,205   |          |   |        | 13,108   |         
|                                                                  | Asset impairment and other                                                                                                                                                |                          |       | 500     |         |      |        | 138,923  |          |   |        |         |         
|                                                                  | Amortization of goodwill and other intangible
    assets                                                                                                                  |                          |       |        |         |      |        | 27,333   |          |   |        | 35,902   |         
|                                                                  | Restructuring and other                                                                                                                                                   |                          |       | 37,916  |         |      |        | 24,353   |          |   |        | 1,910    |         
|                                                                  | Stock-based compensation                                                                                                                                                  |                          |       | (3,647  | )       |      |        | 14,402   |          |   |        | 29,045   |         
|                                                                  | Merger related expenses                                                                                                                                                   |                          |       |        |         |      |        |         |          |   |        | 4,263    |         
|                                                                  |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|                                                                  |                                                                                                                                                                           | Total operating expenses |       |         | 78,201  |      |        |          | 325,999  |   |        |          | 189,300  |  
|                                                                  |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|                                                                  |                                                                                                                                                                           | Operating loss           |       |         | (43,530 | )    |        |          | (294,014 | ) |        |          | (141,000 | )
|Interest income and other income (expense), net                   |                                                                                                                                                                           |                          | 5,938 |         |         |      | 2,792  |          |          |   | 10,455 |         
|Interest expense                                                  |                                                                                                                                                                           |                          | (202  | )       |         |      | (324   | )        |          |   | (331   | )       
|                                                                  |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|                                                                  |                                                                                                                                                                           | Net loss                 |       | $       | (37,794 | )    |        | $        | (291,546 | ) |        | $        | (130,876 | )
|                                                                  |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|Basic and diluted net loss per share                              |                                                                                                                                                                           | $                        | (4.96 | )       |         | $    | (39.20 | )        |          | $ | (19.57 | )       
|                                                                  |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|Shares used in computing basic and diluted net
    loss per share |                                                                                                                                                                           |                          | 7,618 |         |         |      | 7,437  |          |          |   | 6,687  |         
|                                                                  |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|Comprehensive loss:                                               |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|                                                                  | Net loss                                                                                                                                                                  |                          | $     | (37,794 | )       |      | $      | (291,546 | )        |   | $      | (130,876 | )       
|                                                                  | Foreign currency translation adjustments                                                                                                                                  |                          |       | 158     |         |      |        | (225     | )        |   |        | (2       | )       
|                                                                  | Unrealized (loss) gain on short-term investments                                                                                                                          |                          |       |        |         |      |        | (26      | )        |   |        | 26       |         
|                                                                  |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         
|                                                                  |                                                                                                                                                                           | Comprehensive loss       |       | $       | (37,636 | )    |        | $        | (291,797 | ) |        | $        | (130,852 | )
|                                                                  |                                                                                                                                                                           |                          |       |         |         |      |        |          |          |   |        |         

See accompanying notes to consolidated financial
statements.

34



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

(in thousands, except share and per share
data)


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

See accompanying notes to consolidated financial
statements.

35



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(in thousands)


|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |          |        |         |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------- | ------ | ------- | ------- | -------- | ------- | ------ | ------- | -------- | ------ | ------- | ------- | -
|                                                         |                                                                                                               |                                                                                               
|                                                         |                                                                                                               | Years Ended January 31,                                                                       
|                                                         |                                                                                                               |                                                                                               
|                                                         |                                                                                                               | 2003                                                                                           |                                                         | 2002                                  |        | 2001   
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |        
|Cash flows from operating activities:                    |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|                                                         | Net loss                                                                                                      |                                                                                                | $                                                       | (37,794                               | )      |         | $       | (291,546 | )       |        | $       | (130,876 | )     
|                                                         | Adjustments to reconcile net loss to net cash
    used in operating activities                                |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |          |       
|                                                         |                                                                                                               | Depreciation                                                                                   |                                                         |                                       | 3,429  |         |         |          | 5,424   |        |         |          | 4,110  |        
|                                                         |                                                                                                               | Amortization of debt discount                                                                  |                                                         |                                       |       |         |         |          |        |        |         |          | 340    |        
|                                                         |                                                                                                               | Amortization of goodwill and other intangible
    assets                                       |                                                         |                                       |       |         |         |          | 27,333  |        |         |          | 35,902 |        
|                                                         |                                                                                                               | Stock-based compensation                                                                       |                                                         |                                       | (3,647 | )       |         |          | 14,402  |        |         |          | 29,045 |        
|                                                         |                                                                                                               | Impairment of licensed technology                                                              |                                                         |                                       |       |         |         |          | 8,536   |        |         |          |       |        
|                                                         |                                                                                                               | Restructuring and other                                                                        |                                                         |                                       | 14,370 |         |         |          | 14,863  |        |         |          |       |        
|                                                         |                                                                                                               | Asset impairment and other                                                                     |                                                         |                                       | 500    |         |         |          | 138,923 |        |         |          |       |        
|                                                         |                                                                                                               | Exercise of stock options for service received                                                 |                                                         |                                       |       |         |         |          |        |        |         |          | 132    |        
|                                                         |                                                                                                               | Provision for doubtful accounts receivable                                                     |                                                         |                                       | 59     |         |         |          | 9,010   |        |         |          | 2,429  |        
|                                                         |                                                                                                               | Revenue resulting from nonmonetary exchanges for
    computer equipment, software and services |                                                         |                                       |       |         |         |          |        |        |         |          | (630   | )      
|                                                         |                                                                                                               | Expense resulting from nonmonetary exchanges for
    services                                  |                                                         |                                       |       |         |         |          |        |        |         |          | 311    |        
|                                                         |                                                                                                               | Forgiveness of notes receivable from stockholder                                               |                                                         |                                       | 116    |         |         |          | 248     |        |         |          |       |        
|                                                         |                                                                                                               | Interest forgiven (accrued) on notes receivable
    from stockholders                          |                                                         |                                       | (46    | )       |         |          | 141     |        |         |          | (282   | )      
|                                                         |                                                                                                               | Changes in operating assets and liabilities:                                                   |                                                         |                                       |        |         |         |          |         |        |         |          |        |        
|                                                         |                                                                                                               |                                                                                                | Accounts receivable                                     |                                       |        | 5,492   |         |          |         | 18,373 |         |          |        | (20,313 | )      
|                                                         |                                                                                                               |                                                                                                | Prepaid expenses and other current assets               |                                       |        | 3,387   |         |          |         | 2,572  |         |          |        | (11,881 | )      
|                                                         |                                                                                                               |                                                                                                | Accounts payable                                        |                                       |        | (857    | )       |          |         | (5,882 | )       |          |        | (1,029  | )      
|                                                         |                                                                                                               |                                                                                                | Accrued liabilities                                     |                                       |        | (8,019  | )       |          |         | (7,672 | )       |          |        | (94     | )      
|                                                         |                                                                                                               |                                                                                                | Accrued restructuring                                   |                                       |        | 685     |         |          |         | (342   | )       |          |        | 935     |        
|                                                         |                                                                                                               |                                                                                                | Deferred revenue                                        |                                       |        | (1,528  | )       |          |         | (8,264 | )       |          |        | 4,918   |        
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|                                                         |                                                                                                               |                                                                                                |                                                         | Net cash used in operating activities |        |         | (23,853 | )        |         |        | (73,881 | )        |        |         | (86,983 | )
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|Cash flows from investing activities:                    |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|                                                         | Purchases of property and equipment                                                                           |                                                                                                |                                                         | (2,493                                | )      |         |         | (13,457  | )       |        |         | (12,619  | )     
|                                                         | Purchases of short-term investments                                                                           |                                                                                                |                                                         |                                      |        |         |         | (21,171  | )       |        |         | (112,734 | )     
|                                                         | Sales and maturities of short-term investments                                                                |                                                                                                |                                                         |                                      |        |         |         | 66,364   |         |        |         | 84,406   |       
|                                                         | Releases (purchases) of investments for
    restricted cash                                                   |                                                                                                |                                                         | 13,089                                |        |         |         |         |         |        |         | (14,487  | )     
|                                                         | Acquisitions, net of cash received                                                                            |                                                                                                |                                                         |                                      |        |         |         |         |         |        |         | (6,125   | )     
|                                                         | Deposits and other assets                                                                                     |                                                                                                |                                                         | 359                                   |        |         |         | 533      |         |        |         | (1,645   | )     
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|                                                         |                                                                                                               |                                                                                                | Net cash provided by (used in) investing
    activities |                                       |        | 10,955  |         |          |         | 32,269 |         |          |        | (63,204 | )      
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|Cash flows from financing activities:                    |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|                                                         | Proceeds from initial public offering of common
    stock, net                                                |                                                                                                |                                                         |                                      |        |         |         |         |         |        |         | 202,481  |       
|                                                         | Proceeds from issuance of common stock                                                                        |                                                                                                |                                                         | 397                                   |        |         |         | 1,795    |         |        |         | 2,733    |       
|                                                         | Treasury stock repurchased                                                                                    |                                                                                                |                                                         |                                      |        |         |         | (3,570   | )       |        |         |         |       
|                                                         | Repurchase of common stock                                                                                    |                                                                                                |                                                         |                                      |        |         |         | (11      | )       |        |         |         |       
|                                                         | Proceeds from repayment of notes receivable from
    stockholders                                             |                                                                                                |                                                         |                                      |        |         |         |         |         |        |         | 24       |       
|                                                         | Proceeds (repayment) from bank line of credit, net                                                            |                                                                                                |                                                         | (27,000                               | )      |         |         | 2,000    |         |        |         | 21,229   |       
|                                                         | Proceeds from bank term loan                                                                                  |                                                                                                |                                                         | 5,000                                 |        |         |         |         |         |        |         |         |       
|                                                         | Repayment of bank term loan                                                                                   |                                                                                                |                                                         | (250                                  | )      |         |         |         |         |        |         |         |       
|                                                         | Repayment of debt and capital lease obligations                                                               |                                                                                                |                                                         | (210                                  | )      |         |         | (465     | )       |        |         | (10,255  | )     
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|                                                         |                                                                                                               |                                                                                                | Net cash (used in) provided by financing
    activities |                                       |        | (22,063 | )       |          |         | (251   | )       |          |        | 216,212 |        
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|Net (decrease) increase in cash and cash
    equivalents |                                                                                                               |                                                                                                | (34,961                                                 | )                                     |        |         | (41,863 | )        |         |        | 66,025  |         
|Effect of exchange rate changes                          |                                                                                                               |                                                                                                | 46                                                      |                                       |        |         | (225    | )        |         |        | (2      | )       
|Cash and cash equivalents, beginning of year             |                                                                                                               |                                                                                                | 51,585                                                  |                                       |        |         | 93,673  |          |         |        | 27,650  |         
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|Cash and cash equivalents, end of year                   |                                                                                                               | $                                                                                              | 16,670                                                  |                                       |        | $       | 51,585  |          |         | $      | 93,673  |         
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|Supplemental disclosures of cash flow information:       |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|Cash paid for interest during the year                   |                                                                                                               | $                                                                                              | 143                                                     |                                       |        | $       | 309     |          |         | $      | 331     |         
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|Noncash investing and financing activities:              |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|                                                         | Repurchases of common stock in settlement of
    notes receivable from stockholders                           |                                                                                                | $                                                       | 675                                   |        |         | $       | 3,546    |         |        | $       | 40       |       
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|                                                         | Common stock issued for notes receivable                                                                      |                                                                                                | $                                                       |                                      |        |         | $       |         |         |        | $       | 3,321    |       
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|                                                         | Deferred stock-based compensation                                                                             |                                                                                                | $                                                       |                                      |        |         | $       | 19,403   |         |        | $       | 30,665   |       
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|                                                         | Reversal of deferred stock-based compensation                                                                 |                                                                                                | $                                                       | 18,666                                |        |         | $       |         |         |        | $       |         |       
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|                                                         | Common stock and redeemable convertible preferred
    stock issued and stock options assumed for acquisitions |                                                                                                | $                                                       |                                      |        |         | $       |         |         |        | $       | 126,462  |       
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|                                                         | Conversion of redeemable convertible preferred
    stock to common stock                                      |                                                                                                | $                                                       |                                      |        |         | $       |         |         |        | $       | 100,919  |       
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|                                                         | Unrealized gain on short-term investments                                                                     |                                                                                                | $                                                       |                                      |        |         | $       |         |         |        | $       | 26       |       
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|                                                         | Write-off of property and equipment to goodwill                                                               |                                                                                                | $                                                       |                                      |        |         | $       | 1,858    |         |        | $       |         |       
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         
|                                                         | Reversal of stock-based compensation due to
    employee terminations                                         |                                                                                                | $                                                       | 658                                   |        |         | $       | 9,041    |         |        | $       |         |       
|                                                         |                                                                                                               |                                                                                                |                                                         |                                       |        |         |         |          |         |        |         |         

See accompanying notes to consolidated financial
statements.

36



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                                                           
|-- | --------------------------------------------------------------------------
|1. | Description of Business and Summary of
    Significant Accounting Policies



|                        | 
|----------------------- | 
|Description of Business

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

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



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

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



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

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



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

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

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



|                          | 
|------------------------- | 
|Cash and Cash Equivalents

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



|                                                   | 
|-------------------------------------------------- | 
|Derivatives Instruments and Hedging
    Activities

In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as
amended. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities as
amended by SFAS No. 137 and 138. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those

37



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

instruments at fair value. For a derivative not
designated as a hedging instrument, changes in the fair value of
the derivative are recognized in earnings in the period of
change. The Company adopted SFAS No. 133 effective
February 1, 2001 and it did not have a material effect on
the Companys consolidated financial position or results of
operations.

Financial Instruments and Concentration of
Credit Risk

The carrying value of the Companys
financial instruments, including cash and cash equivalents,
short-term investments, accounts receivable and short-term
liabilities approximates fair value. Financial instruments that
subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents and accounts receivable.
Management believes the financial risks associated with these
financial instruments are minimal. The Company maintains its
cash and cash equivalents with high quality financial
institutions. Where appropriate, the Company performs credit
evaluations of its customers, and generally does not require
collateral on accounts receivable. The Company regularly reviews
the adequacy of its accounts receivable allowance after
considering the amount of aged accounts receivable, the age of
each invoice, each customers expected ability to pay and
its collection history with each customer. The Company reviews
any invoice greater than 30 days past due to determine if
an allowance is appropriate based on the risk category using the
factors discussed above. In addition, the Company maintains a
general reserve for all invoices by applying a percentage to
each aging category. The allowance for doubtful accounts
represents the Companys best estimate, but changes in
circumstances such as our customers financial positions
may result in a requirement for additional allowances in the
future.

Property and Equipment

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

Impairment of Long-lived Assets and Other
Assets

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

Revenue Recognition

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

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

38



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(4) collectibility is probable. If there are
sales to channel partners, they are recognized upon sell-through
to the end-user customer. We define each of the four criteria
above as follows:

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

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

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

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

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

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

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

39



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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



|                         | 
|------------------------ | 
|Capitalized License Fees

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



|                         | 
|------------------------ | 
|Research and Development

Research and development costs are expensed as
incurred until technological feasibility in the form of a
working model has been established. Development costs are
capitalized beginning when a products technological
feasibility has been established and ending when the product is
available for general release to customers. Technological
feasibility is reached when the product reaches the working
model stage. To date, the Companys software has become
available for general release concurrent with the establishment
of technological feasibility and, accordingly, no development
costs have been capitalized.



|                    | 
|------------------- | 
|Advertising Expense

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



|                         | 
|------------------------ | 
|Stock-Based Compensation

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

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. This
statement amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. This
statement also amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. The Company adopted the disclosure
requirements of SFAS No. 148 in fiscal 2003.

Under the intrinsic-value method used by the
Company to account for its employee stock-based compensation, no
compensation cost has been recognized for any of stock options
granted or restricted stock sold because the exercise price of
each option or purchase price of each share of restricted stock
equaled or exceeded the fair value of the underlying common
stock as of the grant date for each stock option or purchase
date of each restricted stock share, except for stock options
granted and restricted stock sold from January 31, 1998
through February 28, 2000 and in November 2001. With
respect to the stock options granted and restricted stock sold
from January 31, 1998 to February 28, 2000 and in
November 2001, the Company

40



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

recorded deferred stock compensation for the
difference at the grant or issuance date between the exercise
price of each stock option granted or purchase price of each
restricted share sold and the fair value of the underlying
common stock and such difference is being amortized over the
vesting period, consistent with the method described in FASB
Interpretation No. 28.

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



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

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

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

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

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

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



|             | 
|------------ | 
|Income Taxes

Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement

41



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

Net Loss per Share

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

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

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

Comprehensive Loss

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

Foreign Currency Translation

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

Recent Accounting
Pronouncements

In October 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires that the fair value
of retirement obligations be recognized as a liability when they
are incurred and that the associated retirement costs be
capitalized as a long-term asset and expensed over its useful
life. The provisions of SFAS No. 143 will be effective for
fiscal years beginning after June 15, 2002. The

42



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company does not expect that the adoption of SFAS
No. 143 will have a significant effect on its financial
position or results of operations.

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

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

In November 2002, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation (FIN)
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN No. 45 provides expanded
accounting guidance surrounding liability recognition and
disclosure requirements related to guarantees, as defined by
this Interpretation. The Company had no existing guarantees as
of January 31, 2003 and it does not expect that the
adoption of FIN No. 45 will have a material effect on its
financial position or results of operations. Indemnification and
warranty provisions within the Companys customer license
and service agreements are generally consistent with those
prevalent in our industry. The duration of the Companys
product warranties generally does not exceed 90 days
following delivery of our products. The Company has not incurred
significant obligations under customer indemnification or
warranty provision historically and does not expect to incur
significant obligations in the future. Accordingly, the Company
does not maintain accruals for potential customer
indemnification or warranty-related obligations.

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

43



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

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



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

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

In October 2002, the Company cancelled options to
purchase 55,000 shares of common stock held by our chief
executive officer and immediately granted him options to
purchase 150,000 shares of common stock at a price of $1.50,
which was the closing price of our common stock on the grant
date. As a result, based on the closing price of our common
stock of $4.19 on January 31, 2003, the Company recorded
$96,000 in stock-based compensation in fiscal 2003.



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



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

In fiscal 2003, the Company implemented a
restructuring program. The Company restructured its operations
and reduced its workforce by approximately 147 employees in
fiscal 2003. These headcount reductions affected all functional
groups of the Company. The Company recorded $3.9 million in
severance costs, of which $1.0 million related to the
severance and related charges for the Companys former
chief executive officer and former executive vice president of
planning and strategy.



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

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

44



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

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

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

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

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



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

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



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

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

45



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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



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

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

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

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



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

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

46



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

lion in restructuring and other charges in the
year ended January 31, 2002 and consisted of the following
(in thousands):

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



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

There were no asset impairment and other charges
in fiscal 2003 except for an impairment charge of the
Companys strategic equity investment made in April 2000.
The Company regularly performs an impairment assessment of this
$500,000 investment. In performing an impairment assessment, the
Company considers the private companys current solvency,
future access to capital and recent equity transactions. Based
on an analysis of these factors in fiscal 2003, the Company
determined that the investment impairment was other than
temporary and recorded such impairment in asset impairment and
other charges in the accompanying consolidated statement of
operations and comprehensive loss in fiscal 2003. The carrying
value of the Companys strategic equity investment was zero
at January 31, 2003.

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

47



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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



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

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



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

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

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

48



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                       
|-- | ----------------------
|8. | Property and Equipment

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

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



|   |                    
|-- | -------------------
|9. | Accrued Liabilities

Accrued liabilities consisted of the following
(in thousands):

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



|    |     
|--- | ----
|10. | Debt

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

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

The Company has a term loan for $5.0 million
from a financial institution. The Company entered into this term
loan in September 2002. The term loan is secured by the
Companys tangible and intangible assets, accrues interest
at 7.50% per annum and matures on February 15, 2004. The
Company is required to make quarterly payments of principal and
interest on a five-year amortization schedule. The Company
repaid $250,000 plus interest in December 2002 and $250,000 plus
interest in March 2003. On the maturity date, the remaining
principal balance of $3.5 million is due. This term loan
has certain financial covenants, including covenants relating to
cash on hand, revenue and operating expenses. In January 2003,
the Company agreed with the financial institution that the
Company would not repay a portion of the term loan with the
proceeds of a legal settlement received in December 2002. As of
January 31, 2003, the Company was not in compliance with a
covenant relating to revenue. The Company received a waiver for
such covenant in February 2003.

49



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                              
|--- | -----------------------------
|11. | Commitments and Contingencies

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

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

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

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

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



|    |                                  
|--- | ---------------------------------
|12. | Notes Receivable from Stockholder

In November 1999, the Company loaned $1,250,000
to its then president, vertical markets, Joshua Pickus, who is
now its chief executive officer, secured by a stock pledge
agreement and personal assets, in connection with his purchase
of 125,000 shares of the Companys restricted common stock.
The loan initially accrued interest at 6.08% and was to mature
in November 2002. In May 2002, the Company extended the maturity
date of the loan to November 2004 and reduced the interest rate
to 3.21%. In July 2002, the Company repurchased these 125,000
shares of common stock from Mr. Pickus for $675,000, the
fair market value of the common stock at that time, and
Mr. Pickus used all of this consideration to repay the
equivalent principal amount of the note. In connection with this
repayment, the Company cancelled $116,000 in accrued interest,
which was recorded as compensation expense. The remaining amount
of the loan of $674,000, including $99,000 in accrued interest,
was reclassified to other assets in the second quarter of fiscal
2003 as there was no longer common stock to secure the loan.
This loan remains secured by the personal assets of
Mr. Pickus. On March 16, 2003, Mr. Pickus made a
$150,000 payment against this loan which reduced the interest
outstanding as of the date of repayment to zero and reduced the
principal outstanding to $537,000.

50



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                               
|--- | ------------------------------
|13. | Stockholders Equity (Deficit)

Common Shares Repurchase Program

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

1998 Stock Option Plan

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

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

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

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

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

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

51



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

issuance under the 2000 Plan will increase
automatically by a number of shares equal to 5% of the
Companys total outstanding shares on December 31 of
the preceding year. The 2000 Plan will terminate in 2010.

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

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

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

2000 Stock Incentive Plan

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

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

Employee Stock Purchase Plan

In December 1999, the Company adopted the 2000
Employee Stock Purchase Plan (Purchase Plan) and initially
reserved a total of 100,000 shares of the Companys common
stock for issuance under the Purchase Plan. On July 31,
2002, the Company suspended the Purchase Plan. The
Companys board of directors has the authority to reinstate
the Purchase Plan in the future. Withholdings under the Purchase
Plan since the last purchase period in February 2002 have been
refunded to the Companys employees. On each
January 1, the aggregate number of shares reserved for
issuance under the Purchase Plan increases automatically by a
number of shares equal to 1% of the Companys total
outstanding shares on December 31 of the preceding year.
The aggregate number of shares reserved for issuance under the
Purchase Plan may not exceed 1,000,000 shares. Generally, the
offering period is 24 months in length. The Purchase Plan
permits eligible employees to purchase common stock through
payroll deductions at a purchase price of 85% of the lower of
the fair market value of the common stock at the beginning of
the applicable offering period or the end of the applicable
purchase period. The Company issued 21,741 and 42,559 shares of
common stock under the Purchase Plan in the years ended
January 31, 2003 and 2002 at a weighted-average purchase
price of $4.60 and $29.20 per share, respectively. On
July 31, 2002, the Company suspended the Purchase Plan. The
Companys board of directors has the authority to reinstate
the Purchase Plan in the future. Withholdings under the Purchase
Plan since the last purchase period in February 2002 have been
refunded to the Companys employees.

52



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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

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

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

53



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

14. Income Taxes

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

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

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

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

54



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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

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

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

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

55



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

15. Segment Information

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

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

Disaggregated information is as follows (in
thousands):

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

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

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

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

It is impracticable to determine the breakdown of
fiscal 2001 revenue between United Kingdom and Europe and other.
The Companys long-lived assets residing in countries other
than in the United States are insignificant.

There were no customers individually representing
more than 10% of gross accounts receivables (including unbilled
accounts receivable) as of January 31, 2003 and 2002,
respectively. There were no customers individually representing
more than 10% of total revenue in fiscal 2003, 2002 and 2001,
respectively.



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

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

56



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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



|    |           
|--- | ----------
|17. | Litigation

In August 2001, Goldman, Sachs and Co., Dain
Rauscher Wessels, U.S. Bancorp Piper Jaffray and Thomas
Weisel Partners, the managing underwriters of the Companys
initial public offering (the IPO), the Company, and
certain of the Companys officers and directors, were named
as defendants in a number of purported securities class actions
in United States District Court for the Southern District of New
York arising out of the Companys initial public offering
in February 2000. The complaints in these actions allege, among
other things, that the registration statement and prospectus
filed with the Securities and Exchange Commission for purposes
of the IPO were false and misleading because they failed to
disclose that Goldman, Sachs and Co., Dain Rauscher Wessels,
U.S. Bancorp Piper Jaffray and Thomas Weisel Partners, the
managing underwriters, allegedly (i) solicited and received
commissions from certain investors in exchange for allocating to
them shares of Company stock in connection with the IPO and
(ii) entered into agreements with their customers to
allocate such stock to those customers in exchange for the
customers agreeing to purchase additional shares of ours in the
aftermarket at pre-determined prices. On August 8, 2001 the
Court ordered that these actions, along with hundreds of IPO
allocation cases against other issuers and underwriters, 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 and
underwriters. 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
were not dismissed as a matter of law. These cases remain at a
preliminary stage and no discovery proceedings have taken place
in relation to the issuers. The Company believes that the claims
asserted against it in these cases are without merit and the
Company intends to defend vigorously against them. These cases
seek compensatory damages in unspecified amounts as well as
other relief.

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



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

On February 12, 2003, the Company entered
into a common stock and warrant purchase agreement with various
investors led by Walden VC, providing for the issuance of
3,088,230 shares of the Companys common stock at a price
of $3.35 per share and warrants to purchase 386,034 shares of
common stock at a price of $0.40 per share in a connection with
a private placement. These warrants have an exercise price of
$3.40. In February 2003, the Company issued 1,549,735 shares of
its common stock and warrants to purchase 193,720

57



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

shares of common stock in connection with this
private placement. In April 2003, the Companys
stockholders approved the issuance of the remaining 1,538,495
shares of the Companys common stock and warrants to
purchase 192,314 shares of common stock in connection with this
private placement and we issued such common stock and warrants
to purchase common stock. Total estimated net proceeds from the
private placement approximated $10.3 million. Total shares
and warrants outstanding following the private placement were
11,853,646 (including options exercised subsequent to
January 31, 2003) and 405,617, respectively.

On April 15, 2003, the Company announced a
voluntary stock option exchange program for its employees. Under
the program, the Companys employees will be given the
opportunity to exchange outstanding stock options previously
granted to them with an exercise price greater than or equal to
$7.50 per share for a new option exercisable for 1.15 shares for
each share subject to the tendered options, to be granted at a
future date, at least six months and a day from the cancellation
date. The exercise price of these new stock options will be
equal to the fair market value of our common stock on the date
of grant. On the grant date, the new stock options will be
vested as to the number of stock options that would have been
vested on such date had the old stock options not been tendered
plus the number of shares that would have been vested had the
old option been exercisable for 15% more shares. The
Companys chief executive officer, chief financial officer
and members of the board of directors are not eligible to
participate in the program. The exchange program is not expected
to result in any additional compensation charges or variable
plan accounting.

58



---



##### Table of Contents



NIKU CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

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

|                                                                 |                                                          |                                       |        |             |       |          |        |           |        |             |        |             |         |          |        |           |       |   |        |       |         |   |        |        |         |   |        |         |          |   |        |        |         |  
|---------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------- | ------ | ----------- | ----- | -------- | ------ | --------- | ------ | ----------- | ------ | ----------- | ------- | -------- | ------ | --------- | ----- | - | ------ | ----- | ------- | - | ------ | ------ | ------- | - | ------ | ------- | -------- | - | ------ | ------ | ------- | -
|                                                                 |                                                          |                                      
|                                                                 |                                                          | Quarter Ended,                       
|                                                                 |                                                          |                                      
|                                                                 |                                                          | January 31,                           |        | October 31, |       | July 31, |        | April 30, |        | January 31, |        | October 31, |         | July 31, |        | April 30,
|                                                                 |                                                          | 2003                                  |        | 2002        |       | 2002     |        | 2002      |        | 2002(1)     |        | 2001(1)     |         | 2001(1)  |        | 2001(1)  
|                                                                 |                                                          |                                       |        |             |       |          |        |           |        |             |        |             |         |          |        |          
|                                                                 |                                                          |                                      
|                                                                 |                                                          | (in thousands, except per share data)
|Revenue                                                          |                                                          | $                                     | 12,015 |             |       | $        | 11,774 |           |        | $           | 10,494 |             |         | $        | 14,127 |           |       | $ | 18,280 |       |         | $ | 14,476 |        |         | $ | 17,237 |         |          | $ | 17,473 |       
|Cost of revenue                                                  |                                                          |                                       | 2,787  |             |       |          | 3,050  |           |        |             | 3,820  |             |         |          | 4,082  |           |       |   | 4,053  |       |         |   | 7,437  |        |         |   | 7,331  |         |          |   | 16,660 |       
|                                                                 |                                                          |                                       |        |             |       |          |        |           |        |             |        |             |         |          |        |           |       |   |        |       |         |   |        |        |         |   |        |         |          |   |        |       
|Gross Profit                                                     |                                                          |                                       | 9,228  |             |       |          | 8,724  |           |        |             | 6,674  |             |         |          | 10,045 |           |       |   | 14,227 |       |         |   | 7,039  |        |         |   | 9,906  |         |          |   | 813    |       
|                                                                 |                                                          |                                       |        |             |       |          |        |           |        |             |        |             |         |          |        |           |       |   |        |       |         |   |        |        |         |   |        |         |          |   |        |       
|Operating expenses:                                              |                                                          |                                       |        |             |       |          |        |           |        |             |        |             |         |          |        |           |       |   |        |       |         |   |        |        |         |   |        |         |          |   |        |       
|                                                                 | Sales and marketing                                      |                                       |        | 4,103       |       |          |        | 3,438     |        |             |        | 7,414       |         |          |        | 8,147     |       |   |        | 9,034 |         |   |        | 12,308 |         |   |        | 17,181  |          |   |        | 32,404 |        
|                                                                 | Research and development                                 |                                       |        | 1,907       |       |          |        | 1,967     |        |             |        | 3,993       |         |          |        | 4,029     |       |   |        | 4,319 |         |   |        | 8,963  |         |   |        | 10,532  |          |   |        | 11,042 |        
|                                                                 | General and administrative                               |                                       |        | 1,664       |       |          |        | 2,232     |        |             |        | 2,331       |         |          |        | 2,207     |       |   |        | 1,929 |         |   |        | 3,126  |         |   |        | 4,051   |          |   |        | 6,099  |        
|                                                                 | Asset impairment and other                               |                                       |        |            |       |          |        | 75        |        |             |        | 425         |         |          |        |          |       |   |        |      |         |   |        |       |         |   |        | 114,379 |          |   |        | 24,544 |        
|                                                                 | Amortization of goodwill and other intangible
    assets |                                       |        |            |       |          |        |          |        |             |        |            |         |          |        |          |       |   |        |      |         |   |        |       |         |   |        | 14,505  |          |   |        | 12,828 |        
|                                                                 | Restructuring and other                                  |                                       |        | 880         |       |          |        | 7,469     |        |             |        | 30,405      |         |          |        | (838      | )     |   |        | 9,374 |         |   |        | 4,138  |         |   |        | 7,749   |          |   |        | 3,092  |        
|                                                                 | Stock-based compensation                                 |                                       |        | 135         |       |          |        | 165       |        |             |        | (301        | )       |          |        | (3,646    | )     |   |        | 6,395 |         |   |        | 1,134  |         |   |        | 2,188   |          |   |        | 4,685  |        
|                                                                 | Merger related expenses                                  |                                       |        |            |       |          |        |          |        |             |        |            |         |          |        |          |       |   |        |      |         |   |        |       |         |   |        |        |          |   |        |       |        
|                                                                 |                                                          |                                       |        |             |       |          |        |           |        |             |        |             |         |          |        |           |       |   |        |       |         |   |        |        |         |   |        |         |          |   |        |       
|                                                                 |                                                          | Total operating expenses              |        |             | 8,689 |          |        |           | 15,346 |             |        |             | 44,267  |          |        |           | 9,899 |   |        |       | 31,051  |   |        |        | 29,669  |   |        |         | 170,585  |   |        |        | 94,694  |  
|                                                                 |                                                          |                                       |        |             |       |          |        |           |        |             |        |             |         |          |        |           |       |   |        |       |         |   |        |        |         |   |        |         |          |   |        |       
|                                                                 |                                                          | Operating loss                        |        |             | 539   |          |        |           | (6,622 | )           |        |             | (37,593 | )        |        |           | 146   |   |        |       | (16,824 | ) |        |        | (22,630 | ) |        |         | (160,679 | ) |        |        | (93,881 | )
|Interest and other income, net                                   |                                                          |                                       | 5,120  |             |       |          | 184    |           |        |             | 312    |             |         |          | 120    |           |       |   | 3      |       |         |   | 395    |        |         |   | 1,071  |         |          |   | 999    |       
|                                                                 |                                                          |                                       |        |             |       |          |        |           |        |             |        |             |         |          |        |           |       |   |        |       |         |   |        |        |         |   |        |         |          |   |        |       
|                                                                 |                                                          | Net income (loss)                     |        | $           | 5,659 |          |        | $         | (6,438 | )           |        | $           | (37,281 | )        |        | $         | 266   |   |        | $     | (16,821 | ) |        | $      | (22,235 | ) |        | $       | (159,608 | ) |        | $      | (92,882 | )
|                                                                 |                                                          |                                       |        |             |       |          |        |           |        |             |        |             |         |          |        |           |       |   |        |       |         |   |        |        |         |   |        |         |          |   |        |       
|Basic net income (loss) per share                                |                                                          | $                                     | 0.68   |             |       | $        | (0.88  | )         |        | $           | (5.03  | )           |         | $        | 0.04   |           |       | $ | (2.31  | )     |         | $ | (3.01  | )      |         | $ | (21.19 | )       |          | $ | (12.30 | )     
|                                                                 |                                                          |                                       |        |             |       |          |        |           |        |             |        |             |         |          |        |           |       |   |        |       |         |   |        |        |         |   |        |         |          |   |        |       
|Shares used in computing basic net income (loss)
    per share   |                                                          |                                       | 8,338  |             |       |          | 7,312  |           |        |             | 7,414  |             |         |          | 7,386  |           |       |   | 7,292  |       |         |   | 7,375  |        |         |   | 7,533  |         |          |   | 7,550  |       
|                                                                 |                                                          |                                       |        |             |       |          |        |           |        |             |        |             |         |          |        |           |       |   |        |       |         |   |        |        |         |   |        |         |          |   |        |       
|Diluted net income (loss) per share                              |                                                          | $                                     | 0.63   |             |       | $        | (0.88  | )         |        | $           | (5.03  | )           |         | $        | 0.03   |           |       | $ | (2.31  | )     |         | $ | (3.01  | )      |         | $ | (21.19 | )       |          | $ | (12.30 | )     
|                                                                 |                                                          |                                       |        |             |       |          |        |           |        |             |        |             |         |          |        |           |       |   |        |       |         |   |        |        |         |   |        |         |          |   |        |       
|Shares used in computing diluted net income
    (loss) per share |                                                          |                                       | 9,023  |             |       |          | 7,312  |           |        |             | 7,414  |             |         |          | 7,766  |           |       |   | 7,292  |       |         |   | 7,375  |        |         |   | 7,533  |         |          |   | 7,550  |       
|                                                                 |                                                          |                                       |        |             |       |          |        |           |        |             |        |             |         |          |        |           |       |   |        |       |         |   |        |        |         |   |        |         |          |   |        |       



---



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

59



---



##### Table of Contents








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

None.




PART III






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

The information required by Item 10 and
included in the proxy statement for our 2003 annual meeting of
stockholders under the headings Proposal
No. 1  Election of Directors and
Section 16(a) Beneficial Ownership Reporting
Compliance is incorporated into this report by reference.

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

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

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

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






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

The information required by Item 11 and
included in the proxy statement for our 2003 annual meeting of
stockholders under the headings Proposal
No. 1  Election of Directors,
Executive Compensation and Related Matters and
Compensation Committee Interlocks and Insider
Participation is incorporated into this report by
reference.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The information required by Item 12 and
included in the proxy statement for our 2003 annual meeting of
stockholders under the heading Stock Ownership of Certain
Beneficial Owners and Management and Equity
Compensation Plan Information is incorporated into this
report by reference.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by Item 13 and
included in the proxy statement for our 2003 annual meeting of
stockholders under the heading Certain Relationships and
Related Transactions is incorporated into this report by
reference.

60



---



##### Table of Contents








|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures

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



| |                             
| | ----------------------------
| | Changes in Internal Controls

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






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

(a) 1. Financial Statements

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

2. Financial Statements Schedules

The following financial statement schedule is
filed herein on page 66.

Schedule II  Valuation and
Qualifying Accounts

3.Exhibits



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

(b) Reports on Form 8-K



| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On December 3, 2002, we filed a current
    report on Form 8-K to announce that our common stock will
    trade on The Nasdaq SmallCap Market beginning December 3,
    2002.               
|
| | On November 7, 2002, we filed a current
    report on Form 8-K to announce the termination of the lease
    for our former headquarters at 350 Convention Way, Redwood City,
    California.

|       |          |               |  |                                                                                                                                                
|------ | -------- | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Number |          | Exhibit Title
|       |          |              
|       | 3.01(1)  |               |  | Amended and Restated Certificate of Incorporation.                                                                                             
|       | 3.02(8)  |               |  | Certificate of Amendment to the Amended and
    Restated Certificate of Incorporation, dated November 20,
    2002                             
|       | 3.03     |               |  | Registrants Amended and Restated Bylaws.                                                                                                      
|       | 4.01(1)  |               |  | Fourth Amended and Restated Investors
    Rights Agreement, dated November 18, 1999, as amended
    December 8, 1999.                         
|       | 4.02(4)  |               |  | Warrant to Purchase Common Stock of the
    Registrant by and between in Limar Realty Corp. #30 and the
    Registrant, dated October 31, 2002.
|       | 4.03(9)  |               |  | Form of Warrant to Purchase Common Stock of the
    Registrant, dated February 12, 2003.                                                       
|       | 4.04(9)  |               |  | Registration Rights Agreement by and between
    various Investors and the Registrant, dated February 12,
    2003.                            
|       | 10.01(1) |               |  | Form of Indemnification Agreement by and between
    Registrant and its directors and executive officers.                                      
|       | 10.02(1) |               |  | 1998 Stock Plan, as amended.                                                                                                                   
|       | 10.03    |               |  | 2000 Equity Incentive Plan, as amended.                                                                                                        

61



---



##### Table of Contents



|       |          |               |  |                                                                                                                                                                  
|------ | -------- | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |          | Exhibit Title
|       |          |              
|       | 10.04    |               |  | 2000 Employee Stock Purchase Plan, as amended.                                                                                                                   
|       | 10.05(2) |               |  | 2000 Stock Incentive Plan.                                                                                                                                       
|       | 10.11(1) |               |  | Restricted Stock Purchase Agreement by and
    between Joshua Pickus and the Registrant, dated November 1,
    1999.                                             
|       | 10.12(1) |               |  | Full Recourse Promissory Note by and between
    Joshua Pickus and the Registrant, dated November 11, 1999.                                                      
|       | 10.13(3) |               |  | Office Lease by and between Brugger Corporation
    and the Registrant, dated May 7, 1999.                                                                       
|       | 10.14(5) |               |  | Amended and Restated Secured Full Recourse
    Promissory Note by and between Joshua Pickus and the Registrant,
    dated May 15, 2002.                          
|       | 10.15(6) |               |  | Amended to the Lease by and between Brugger
    Corporation and the Registrant, dated July 29, 2002.                                                             
|       | 10.16(6) |               |  | Business Loan Agreement, Commercial Security
    Agreement and Promissory Note by and between Mid Peninsula Bank
    and the Registrant, dated September 9, 2002.
|       | 10.17(7) |               |  | Employment Agreement by and between Farzad
    Dibachi and the Registrant, dated October 18, 2002.                                                               
|       | 10.18(7) |               |  | Employment Agreement by and between Rhonda
    Dibachi and the Registrant, dated October 18, 2002.                                                               
|       | 10.19(4) |               |  | Voting Agreement by and between Limar Realty
    Corp. #30 and the Registrant, dated October 31, 2002.                                                           
|       | 10.20    |               |  | Voting Agreement by and between Farzad and Rhonda
    Dibachi and the Registrant, dated November 6, 2002.                                                        
|       | 10.21(9) |               |  | Common Stock and Warrant Purchase Agreement by
    and between various Investors and the Registrant, dated
    February 12, 2003.                                
|       | 21.01(3) |               |  | List of Subsidiaries.                                                                                                                                            
|       | 23.01    |               |  | Consent of KPMG LLP                                                                                                                                              
|       | 99.01    |               |  | Certification of Chief Executive Officer under
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                
|       | 99.02    |               |  | Certification of Chief Financial Officer under
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                



---



|    |                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the
    Registrants Fiscal 2000 Annual Report on Form 10-K
    filed on April 28, 2000.
|   
|(2) | Incorporated by reference to the
    Registrants Registration Statement on Form S-8 dated
    November 17, 2001.    
|   
|(3) | Incorporated by reference to the
    Registrants Fiscal 2001 Annual Report on Form 10-K
    filed on April 19, 2001.
|   
|(4) | Incorporated by reference to the Current Report
    on Form 8-K filed on November 7, 2002.                           
|   
|(5) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q filed on
    June 13, 2002.          
|   
|(6) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q filed on
    September 12, 2002.     
|   
|(7) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q filed
    December 13, 2002.         
|   
|(8) | Incorporated by reference to the Current Report
    on Form 8-K filed on November 21, 2002.                          
|   
|(9) | Incorporated by reference to the Current Report
    on Form 8-K filed on April 14, 2003.                             

62



---



##### Table of Contents






SIGNATURES

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



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



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

| |                                   
| | ----------------------------------
| |                                   
| | Joshua Pickus                     
| | President, Chief Executive Officer
| | and Chairman of the Board         
| | (Principal Executive Officer)     
|
| | Dated: April 15, 2003             

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 and 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 Officer and Chairman
    of the Board                           |  | April 15, 2003
|                                        
|/s/ MICHAEL SHAHBAZIANMichael Shahbazian |  | Chief Financial Officer (Principal Financial
    Officer and Principal Accounting Officer) |  | April 15, 2003
|                                        
|/s/ RAVI CHIRUVOLURavi Chiruvolu         |  | Director                                                                                   |  | April 15, 2003
|                                        
|/s/ MATT MILLERMatt Miller               |  | Director                                                                                   |  | April 15, 2003
|                                        
|/s/ EDWARD F. THOMPSONEdward F. Thompson |  | Director                                                                                   |  | April 15, 2003
|                                        
|/s/ PETER THOMPSONPeter Thompson         |  | Director                                                                                   |  | April 15, 2003
|                                        
|/s/ VAL E. VADENVal E. Vaden             |  | Director                                                                                   |  | April 15, 2003

63



---



##### Table of Contents



CERTIFICATION OF CHIEF EXECUTIVE
OFFICER

I, Joshua Pickus, certify that:

1. I have reviewed this annual report on
Form 10-K of Niku Corporation;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



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

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



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

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

|                     |  |                                                      
|-------------------- |  | -----------------------------------------------------
|Date: April 15, 2003 |  | /s/ JOSHUA PICKUSJoshua PickusChief Executive Officer

64



---



##### Table of Contents






CERTIFICATION OF CHIEF FINANCIAL
OFFICER

I, Michael Shahbazian, certify that:

1. I have reviewed this annual report on
Form 10-K of Niku Corporation;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



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

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



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

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

|                     |  |                                                                
|-------------------- |  | ---------------------------------------------------------------
|Date: April 15, 2003 |  | /s/ MICHAEL SHAHBAZIANMichael ShahbazianChief Financial Officer

65



---



##### Table of Contents



NIKU CORPORATION

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS


(in thousands)


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



---



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

66



---



##### Table of Contents






Exhibit Index

|       |       |               |  |                                                                                                         
|------ | ----- | ------------- |  | --------------------------------------------------------------------------------------------------------
|Number |       | Exhibit Title
|       |       |              
|       | 3.03  |               |  | Registrants Amended and Restated Bylaws.                                                               
|       | 10.03 |               |  | 2000 Equity Incentive Plan, as amended.                                                                 
|       | 10.04 |               |  | 2000 Employee Stock Purchase Plan, as amended.                                                          
|       | 10.20 |               |  | Voting Agreement by and between Farzad and Rhonda
    Dibachi and the Registrant dated November 6, 2002.
|       | 23.01 |               |  | Consent of KPMG LLP                                                                                     
|       | 99.01 |               |  | Certification of Chief Executive Officer under
    Section 906 of the Sarbanes-Oxley Act of 2002.       
|       | 99.02 |               |  | Certification of Chief Financial Officer under
    Section 906 of the Sarbanes-Oxley Act of 2002.       

67