##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

Form 10-K

For Annual and Transition Reports


Pursuant to Sections 13 or
15(d)


of the Securities Exchange Act of
1934


(Mark One)

|  |                                              
|- | ---------------------------------------------
|þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended October 31,
2001

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 0-29251

FIREPOND, INC.


(Exact name of registrant as specified in its
charter)


|                                                                                                                                                           |  |                                                               
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------
|                                                                                                                                                          
|Delaware(State or Other Jurisdiction of
	Incorporation or Organization)890 Winter Street,
	Waltham, Massachusetts(Address of principal executive
	offices) |  | 41-1462409(I.R.S. Employer
	Identification No.)02451(Zip Code)

(781) 487-8400

(Registrants telephone number, including
area code)


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

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $0.01 par value


(Title of Class)


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

The aggregate market value of voting stock held
by non-affiliates of the Registrant was approximately
$25,433,178 as of December 31, 2001 based on the closing
price of the Common Stock as reported on the Nasdaq Stock Market
for that date. There were 37,348,861 shares of the
Registrants Common Stock issued and outstanding on
December 31, 2001.

Documents Incorporated by Reference

Portions of the Registrants definitive
proxy statement, which is expected to be filed not later than
120 days after the Registrants fiscal year ended
October 31, 2001, to be delivered in connection with the
Registrants Annual Meeting of Stockholders, are
incorporated by reference into Part III of this
Form 10-K.









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TABLE OF CONTENTS



|                                                 |                                                                                              |  |  |  |  |  |  | 
|------------------------------------------------ | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                          
|                                                 | Item 1.Business                                                                             
|                                                 | Item 2.Properties                                                                           
|                                                 | Item 3.Legal Proceedings                                                                    
|                                                 | Item 4.Submission of Matters to a Vote of the Security Holders                              
|PART II                                         
|                                                 | Item 5.Market for Registrants Common Stock and Related Stockholder Matters                  
|                                                 | Item 6.Selected Consolidated Financial Data                                                 
|                                                 | Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                 | Item 7A.Quantitative and Qualitative Disclosures About Market Risk                          
|                                                 | Item 8.Financial Statements and Supplementary Data                                          
|                                                 | Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                        
|                                                 | Item 10.Directors and Executive Officers of the Registrant                                  
|                                                 | Item 11.Executive Compensation                                                              
|                                                 | Item 12.Security Ownership of Certain Beneficial Owners and Management                      
|                                                 | Item 13.Certain Relationships and Related Transactions                                      
|PART IV                                         
|                                                 | Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|EX-10.3 Amended and Restated 1997 Stock Option  
|EX-10.4 Amended and Restated 1999 Stock Option  
|EX-10.5 Amended and Restated 1999 Director Plan 
|EX-10.7 Form of Stock Option Agreement-Directors
|EX-10.8 Form of Stock Option Agreement-Others   
|EX-10.11 Relocation Agreement                   
|EX-10.12 Offer Letter-Joel Radford              
|EX-10.13 Offer Letter-John Keighley             
|EX-10.14 Amendment to Offer Letter-John Keighley
|EX-10.15 Offer Letter-Cem Tanyel                
|EX-10.17 Amendment to Lease of 890 Winter Street
|EX-10.18 Lease of 1401 Los Gamos                
|EX-21.1 Subsidiaries                            
|EX-23.1 Consent of Arthur Andersen LLP          



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TABLE OF CONTENTS

|           |  |                                                                                        |    |          |    | 
|---------- |  | -------------------------------------------------------------------------------------- | -- | -------- | -- | 
|           |  |                                                                                        |    | Page No.
|           |  |                                                                                        |    |         
|Part I     |  |                                                                                        |    |         
|Item 1.    |  | Business                                                                               |    |          | 2  | 
|Item 2.    |  | Properties                                                                             |    |          | 18 | 
|Item 3.    |  | Legal Proceedings                                                                      |    |          | 18 | 
|Item 4.    |  | Submission of Matters to a Vote of the Security
	Holders                               |    |          | 19 | 
|Part II    |  |                                                                                        |    |         
|Item 5.    |  | Market for Registrants Common Equity and
	Related Stockholder Matters                 |    |          | 20 | 
|Item 6.    |  | Selected Consolidated Financial Data                                                   |    |          | 20 | 
|Item 7.    |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |    |          | 22 | 
|Item 7A    |  | Quantitative and Qualitative Disclosures about
	Market Risk                            |    |          | 35 | 
|Item 8.    |  | Consolidated Financial Statements and
	Supplementary Data                              |    |          | 35 | 
|Item 9.    |  | Changes in Disagreements with Accountants on
	Accounting and Financial Disclosures     |    |          | 35 | 
|Part III   |  |                                                                                        |    |         
|Item 10.   |  | Directors and Executive Officers of the Registrant                                     |    |          | 35 | 
|Item 11.   |  | Executive Compensation                                                                 |    |          | 35 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
	and Management                        |    |          | 35 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                         |    |          | 35 | 
|Part IV    |  |                                                                                        |    |         
|Item 14.   |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |    |          |    | 
|           |  | Financial Statements                                                                   |    |          | 36 | 
|Signatures |  |                                                                                        | 37 |         

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PART I



| |                                                    
| | ---------------------------------------------------
| | Special Note Regarding Forward-Looking
	Information

Certain statements contained in this Annual
Report on Form 10-K, including information with respect to
our future business plans, constitute forward-looking
statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange
Act. For this purpose, any statements contained herein that are
not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the
words believes, plans,
expects, intends and similar expressions
are intended to identify forward-looking statements. There are a
number of important factors that could cause our results to
differ materially from those indicated by such forward-looking
statements. These factors include those set forth in the section
titled Factors that May Affect Future Results and Market
Price of our Common Stock.

Readers are cautioned not to place undue reliance
on the forward-looking statements, including statements
regarding the Companys expectations, beliefs, intentions
or strategies regarding the future, which speak only as of the
date of this Annual Report on Form 10-K. The Company
undertakes no obligation to release publicly any updates to the
forward-looking statements included herein after the date of
this document.




Item 1.     Business

Firepond Solutions

Firepond is a leading provider of intelligent
guided selling and online customer assistance solutions. With
our complementary guided selling and guided service software
suites, todays enterprises can accelerate acquisition of
new customers, improve satisfaction of existing customers and
make both new and existing customers more profitable over the
long-term.

The Companys product lines leverage
advanced intelligence engines and patented automation technology
to drive new revenue streams, increase profitability, and manage
customer interactions across all channels and throughout the
sales and service cycle. Our SalesPerformerTM Suite
of guided selling software products help companies improve their
sales performance across all selling channels, with products for
web selling, field sales, channel sales, sales configuration,
and sales administration. In addition, our complementary
eServicePerformerTM Suite of guided service software
products delivers superior online service experiences at every
eCustomer touchpoint, with web, email and live assistance
products.

Fireponds SalesPerformer Suite provides a
comprehensive spectrum of interactive selling functionality to
help companies rapidly and cost-effectively acquire customers
across Web, and through direct and indirect sales channels.
Further, the SalesPerformer products simplify the traditionally
complex sale by streamlining and accelerating the sales
cycle  from customer profiling and opportunity
management to needs analysis and product recommendations to
highly accurate price optimization and order configuration.
Sales stages that had previously taken days or weeks 
such as detailed product configuration, accurate pricing
application, delivering financing options, and proposal
generation  are completed on the spot.

Fireponds eServicePerformer Suite initiates
and maintains excellent customer relationships while
simultaneously reducing costs to increase customer loyalty
before, during and after the sale. eServicePerformer products
automate and streamline customer assistance operations to
provide intelligence and flexibility in managing and responding
to emails, web self-service and live online customer
interaction, all which reduce contact center costs.

Fireponds customer base includes some of
the biggest names in global industry today and represents a
broad range of market segments.

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Strategy

Our mission is to be the leading provider of
intelligence-driven software systems that solve the most
difficult aspects of customer acquisition and retention and
quantifiably improve sales and service effectiveness. To achieve
this goal, key elements of our strategy include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Market and sell our products and services to
	our sweet spot vertical market
	segments.We currently offer our
	SalesPerformer Suite of guided selling solutions to primarily
	the discrete manufacturing, insurance, and telecommunications
	sectors and offer our eServicePerformer Suite of guided service
	solutions to a broader spectrum of enterprises across a number
	of vertical industries. Firepond has targeted and will continue
	to target selected vertical industries with complex products,
	services or channel relationships as well as organizations with
	a distributed and connected customer base or dealer/broker
	network. Target vertical markets include insurance and financial
	services, manufacturing, high technology, telecommunications,
	and transportation. We believe that our focused pursuit of these
	targeted markets increases our ability to offer solutions that
	meet the unique needs of our target customers, which may vary
	greatly across industry segments.                                                                                                                                                                                
|
| |  | Continue to develop and implement leading-edge
	products.We will continue to seek to
	provide products that deliver the most robust functionality and
	that provide our customers the greatest return on their
	investment To this end, we have assembled a world-class
	engineering organization and continue to invest in research and
	development activities. In addition, we have tremendous depth in
	our domain expertise with both of our product suites from a
	professional services standpoint. Although we will plan to work
	with systems integrator partners more in fiscal 2002, we will
	continue to maintain our own professional services organization
	and leverage the many years of domain expertise of these
	individuals to help us successfully, and more rapidly implement
	our software solutions.                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Work with partners to extend our
	footprint.Our partner program is
	focused on developing four types of relationships:
	(1) strategic implementation relationships focused on
	co-selling; (2) complementary software relationships
	focused on pre-built integration and co-selling;
	(3) complementary technology relationships focused on
	hardware and platform standards; and (4) indirect
	distribution channels. Our current alliances include companies
	such as Accenture, Cap Gemini Ernst & Young,
	Intelligroup, IBM, Logica, Deutsche Telekom, Fujitsu, Hitachi,
	BEA, Technology Solutions Company, SilverStream, Cognos,
	Hyperion and Aspect Communications. These alliances help extend
	our market coverage from both a sales and implementation
	perspective, provide us with new business leads, and allow us to
	provide our customers with a broader solution. We will seek to
	strengthen our relationship with partners that support our
	global strategy and partners that work with our key clients.                                                                                                                                                                  
|
| |  | Offer Packaging and Pricing Flexibility to
	Strategically Penetrate Global 5000
	Accounts.We offer suites of products
	which may be purchased as separate components or as an
	enterprise platform for integrated e-business sales and service
	solutions. This has allowed us to penetrate accounts that differ
	greatly in their current stages of developing and implementing
	their e-business strategies. When we are successful in selling
	our independent component offerings, we create future
	opportunities for up-selling customers to our enterprise
	platform. In addition, we offer a migration path to an
	enterprise platform for integrated e-business sales and
	marketing solutions to increase the likelihood that we will
	successfully sell our independent components to accounts that
	are not yet ready for enterprise-wide solutions. We also offer
	innovative pricing alternatives such as annual licensing and
	transaction-based pricing that provide our customers with a wide
	variety of licensing options. We will continue to package and
	price our product offerings in a fashion designed to remove
	sales barriers and create recurring revenue streams.
|
| |  | Maintain Our International
	Presence.During fiscal 2001, we
	leveraged our investment in our global infrastructure to target
	leading businesses worldwide. We believe that our international
	presence is an asset and a competitive differentiator and are
	committed to maintaining our presence in the geographies in
	which we currently operate. In addition, we plan to use new
	customers and existing and new partner relationships to
	complement our infrastructure and grow market share in
	international markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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Firepond Products

Firepond provides two complementary software
suites  the SalesPerformer Suite of guided selling
solutions and the eServicePerformer Suite of guided service
solutions.

SalesPerformer Suite:Powered by a patented sales
configuration intelligence engine, Fireponds
SalesPerformer Suite unifies Web, direct and indirect sales
efforts, without challenging and frustrating channel
integration. By using the SalesPerformer Suite, companies with
complex products or services can sell more consistently through
whichever channel the customer chooses, and reap the benefit of
lower sales costs, increased conversion rates, and simpler sales
administration.

SalesPerformer products make it easier for
customers to buy and for sales channels to sell. These solutions
also ensure that the right products are sold to the right
customers at the right price points  simultaneously
building customer satisfaction and boosting company
profitability. The SalesPerformer Suite automates the
consultative process of matching products and services to a
customers exact specifications  from analyzing
customers needs and comparing and recommending product
features, to configuring products and presenting accurate and
consistent price quotes.

The SalesPerformer Suite makes it easy to
maintain a unified, global perspective of each customers
interactions across all sales channels. All customer and
transaction data is stored in one database accessed by each
selling application. This data repository continually gathers
activity and preferences, so a companys sales are always
based on the most up-to-date customer information. One set of
business rules, product data, and pricing powers selling through
multiple channels, greatly simplifying maintenance.
Additionally, the SalesPerformer Suite makes it easier to track
and update valuable customer profile information across sales
channels to develop more timely and effective sales and
marketing strategies.

Fireponds SalesPerformer products provide a
comprehensive spectrum of interactive selling functionality to
help companies rapidly and cost-effectively acquire customers
across Web, and through direct and indirect sales channels.

eServicePerformer Suite:Fireponds eServicePerformer
Suite helps ensure that Internet interactions translate into
profitable sales and exceptional customer satisfaction and
retention, without increasing an organizations customer
service costs. The eServicePerformer Suite provides customers
with knowledgeable, responsive help  whether they are
visiting a companys Web site, communicating by email, or
seeking real-time assistance from customer service
representatives. The eServicePerformer solutions engage visitors
with intelligent Web self-service, deliver rapid, accurate, and
consistent email responses, and provide a smooth transfer to
live assistance for instant answers.

Driven by intelligence engines and automation
technologies, and leveraging natural language processing,
Fireponds eServicePerformer products enhance the quality
of customer service operations by allowing companies to
replicate best practices across a variety of interactions, and
replicate knowledge across multiple channels. With
eServicePerformer products handling routine and mundane
inquiries automatically, an organizations customer service
staff is able to concentrate on more interesting challenges,
increasing overall job satisfaction.

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The table below provides a list of each component
within the two complementary product suites and a brief
description of the features of each such component.

|                                    |  |                                                                                                                                                                                                                                                               
|----------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Firepond Products                   |  | Description                                                                                                                                                                                                                                                   
|                                    |  |                                                                                                                                                                                                                                                               
|SalesPerformer Suite Components     |  |                                                                                                                                                                                                                                                               
|SalesPerformer Configurator         |  | Industry-leading configuration engine for
	interactive selling of complex products and services, including
	needs analysis, complex product recommendation and
	configuration, pricing configuration and quotation, and
	presentation and proposal generation.
|Web SalesPerformer                  |  | A complete system for interactive selling of
	complex products and services via the Internet.                                                                                                                                                                 
|Field SalesPerformer                |  | A complete system for interactive selling of
	complex products and services via a direct sales force that
	applies best practices and maximizes sales force effectiveness
	in every selling interaction.                                                      
|Channel SalesPerformer              |  | A complete system for interactive selling of
	complex products and services via a channel organization, such
	as a dealer or broker network that ensures the delivery of a
	consistent and accurate selling interaction across all partner
	networks.         
|eServicePerformer
	Suite Components |  |                                                                                                                                                                                                                                                               
|eServicePerformer Contact Center    |  | A knowledge-based customer service agent
	productivity center that provides contact center managers with
	the tools necessary to create satisfactory customer interactions
	across all online touch-points.                                                   
|eServicePerformer Answer            |  | A knowledge-based email response management
	system that rapidly interprets incoming customer inquiries and
	generates accurate responses that can be sent directly to online
	customers or to customer service agents for review prior to
	distribution.     
|eServicePerformer Concierge         |  | A knowledge-based guided service solution that
	delivers web content or text answers to online customer
	inquiries, guiding the interaction through the most appropriate
	service channel.                                                                    
|eServicePerformer Converse          |  | A knowledge-based live interaction system that
	enables companies to interact and collaborate with their online
	customers in real-time.                                                                                                                      

Firepond Product Packaging and
Pricing

Firepond offers a variety of packaging and
pricing options for the SalesPerformer and eServicePerformer
Suites, to achieve flexibility in aligning our technology with
companies in different stages of executing their e-business
strategies. Customers seeking an enterprise platform for
integrated e-business sales and service may license the entire
SalesPerformer Suite and the entire eServicePerformer Suite.
Conversely, selected components of each suite are available as
individual packaged solutions tailored to specific sales or
service channels or specific vertical industry segments to meet
a companys diverse channel selling needs. With each of
these channel solutions, additional functional and technology
components are available as options. By offering this variety of
packaging options, we allow our customers to make strategic
investments in our technology, without necessarily committing to
a larger enterprise platform.

We also offer a wide variety of pricing options
to our customers. We currently offer our packaged software
solutions and options on a price per user or group of concurrent
users basis. We also offer transaction-based

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pricing that ties the overall cost of owning our
software to the value provided to the customer. To date,
substantially all of our licenses have been perpetual licenses.
License fees for our products typically range from approximately
several hundred thousand dollars to several million dollars for
our SalesPerformer product line and from approximately fifty
thousand to five hundred thousand dollars for our
eServicePerformer product line.


Firepond announced major upgrades to both its
SalesPerformer and eServicePerformer Suites in fiscal 2001.
Fireponds SalesPerformer Suite was originally announced in
December 2000 while the eServicePerformer Suite became available
in February 2001, after the Company completed its acquisition of
Brightware, Inc. Prior to December 2000, our product line
consisted of the Firepond Application Suite, including Firepond
Commerce, Firepond Sales, Firepond Sales Manager, and Firepond
Business Rule Engine. Version 1.0 of the Firepond
Application Suite was released in October 1999, and Version 2.0
was released in July 2000. The SalesPerformer Suite is a
renaming of the components that comprised the Firepond
Application Suite and a repackaging of these components to
provide an offering of different channel selling solutions and
available options that closely align with the needs of our
target customers.

Professional Services and Support

We offer a range of professional services
worldwide that help companies use the packaged software
functionality of the SalesPerformer and eServicePerformer suites
to create deployments that are highly specific to their
businesses. Our worldwide professional services personnel
typically have extensive experience in the deployment of
enterprise-scale selling systems. When we assist companies in
the implementation of our product suite, or one of its
components, we help them determine how their individual selling
strategies can be reflected in our packaged technology.

We have developed an innovative approach and
rigorous methodology for industry-specific implementations.
Offered in specific vertical industries, our vertical
implementation templates ensure rapid and successful deployment
of applications. Our expert professional services team worldwide
help customers and third party integrators implement products
which have been licensed.

Quality training offers the most effective way
for customers to derive maximum benefit from their investment.
We train users around the world, and we tailor training
materials to the unique requirements of individual customers.

We offer comprehensive support of the eService
and SalesPerformer suites to our customers and partners
worldwide. Support services are provided under annual software
maintenance contracts. These contracts are renewable at the
customers option and provide for online access to product
documentation & FAQs, support by e-mail or telephone to
report problems or request technical assistance, and
notification of service pack and upgrade availability. 24x7
phone support is available for critical issues. Technical
support also provides data maintenance, enhancement, and
end-user support services, not covered by the maintenance
agreement, on a time & materials.

Our technical support analysts are highly trained
and average over four years of experience with Firepond. Support
centers are located in our offices in Fleet, United Kingdom;
Mankato, Minnesota; Minneapolis, Minnesota; San Rafael,
California and Tokyo, Japan.

Sales and Marketing

We market and sell our products primarily through
our direct sales force, which is located throughout North
America, Europe and Japan. In North America, the Firepond sales
organization is focused on our targeted vertical markets, with
resources assigned to insurance and financial services,
manufacturing, high technology, telecommunications and
transportation. In Europe and Japan, the Firepond sales
organization is

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deployed by geographic region, but focuses on the
same vertical markets that we target in North America. We market
and sell to other regions in Asia through a third party
distributor.


We have multi-disciplined sales teams that
consist of sales, technical and sales support professionals. Our
senior management also takes an active role in our sales
efforts. Frequently, we use SalesPerformer Workbench to develop
customer-specific demonstrations of Web SalesPerformer and Field
and Channel SalesPerformers to support selling cycles which we
or our partners then use as a basis for the actual full-scale
implementations. We typically direct our sales efforts to the
chief executive officer, the chief information officer, the vice
presidents of sales and marketing and other senior executives
responsible for e-business or multiple selling strategies at our
customers organizations.

We have sales offices in Waltham, Massachusetts;
Bloomington, Minnesota; Mankato, Minnesota; San Rafael,
California Naarden, The Netherlands; Fleet, England; Paris,
France and Tokyo, Japan.

A key element of our growth strategy is the
formation of strategic relationships with industry leaders whose
business offerings complement our own. We believe that these
relationships allow us to scale our business rapidly and
effectively, by enabling the expansion of our:



| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | global brand exposure;                                                          
|
| |  | pipeline of qualified sales opportunities;                                      
|
| |  | capacity to effectively implement our software
	offerings for new customers; and
|
| |  | ability to deliver enhanced value to our
	customers.                            

Firepond has successfully established
relationships with large, international systems integrators and
consulting services companies, including Cap Gemini Ernst &
Young, Intelligroup, IBM, Logica, Deutsche Telekom, Fujitsu,
Hitachi and BEA. We intend to expand these relationships and add
new relationships in this area to increase our capacity to sell
and implement our products on a global basis. With existing
partners, such as Cap Gemini Ernst & Young and Intelligroup,
we align our relationships to coincide with our target vertical
markets, including the healthcare/ insurance,
telecommunications, and automotive market sectors. We will
continue to pursue relationships that augment our vertical
market strategy.

Fireponds marketing organization utilizes a
variety of programs to support our sales efforts, including
market and product research analysis, product and strategy
updates with industry analysts, public relations activities and
speaking engagements, internet-based and direct mail marketing
programs, seminars and trade shows, brochures, data sheets and
white papers and web site marketing.

As of October 31, 2001, Fireponds
sales and marketing organization consisted of 48 employees.

Customers

Firepond has targeted and will continue to target
selected vertical industries with complex products, services or
channel relationships as well as organizations with a
distributed and connected customer base or dealer/broker
network. Target vertical markets include insurance and financial
services, manufacturing, high technology, telecommunications and
transportation. The following is a list of some of our
better-known customers to whom we have provided our products or
services in fiscal 2001:



| |                             | 
| | --------------------------- | 
| | ABB                         | 
| | Abbey National              | 
| | AT&T Wireless               | 
| | Bank of Ireland             | 
| | Bank of Scotland            | 
| | BestBuy.com                 | 
| | Borders.com                 | 
| | Blue Cross and Blue Shield  | 
| | of Minnesota                | 
| | BT Ignite                   | 
| | Compaq                      | 
| | Continental Airlines        | 
| | Empire BlueCross BlueShield | 
| | France Telecom              | 
| | Freightliner                | 
| | Golden 1 Credit Union       | 
| | Hitachi Construction        | 
| | Machinery                   | 
| | Horizon Blue Cross Blue     | 
| | Shield of New Jersey        | 
| | John Deere                  | 
| | Nationwide Building Society | 
| | Renault V.I.                | 
| | Ricoh                       | 
| | SBLI Mutual Life            | 
| | Scania                      | 
| | Sikorsky Aircraft Company   | 
| | Steelcase                   | 
| | TD Waterhouse               | 
| | Telenordia                  | 
| | Ticketmaster.com            | 
| | Virgin Mobile               | 

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In fiscal 2001, Freightliner accounted for more
than 10% of our total revenue. In fiscal 2000, General Motors
and Freightliner each accounted for more than 10% of our total
revenue. In fiscal 1999, General Motors and Blue Cross Blue
Shield of Minnesota each accounted for more than 10% of our
total revenue.

Research and Development

As of October 31, 2001, Firepond employed 58
people in research and development throughout its U.S. offices.
This team is responsible for product planning, design and
development of functionality within the SalesPerformer and
eServicePerformer Suites, general release and quality assurance
functions, third party integration and developing templates for
target vertical industries.

In 2001 we contracted with two third party
offshore companies to provide software development and
implementation services on an outsourced basis: EPAM Systems and
Elbrus. EPAM Systems, based in Minsk, Belarus, provide software
developers dedicated to our SalesPerformer related projects.
Similarly, Elbrus, based in Moscow, Russia, provides software
developers dedicated to our eServicePerformer related projects.
Both of these companies assist Firepond to develop products and
application functionality based on specifications provided by
Firepond engineering personnel.

As of October 31, 2001, Firepond had a total
of 32 active contract engineers. Of these 32, 25 were EPAM
contractors and 5 were Elbrus contractors. The number of
contract engineers was reduced during the course of our 2001
fiscal year. Firepond management plans to continue to reduce the
level of offshore involvement in software development and
implementation from the October 31, 2001 levels.

Firepond research and development expenses were
$18.8 million for fiscal 2001, $15.3 million for
fiscal 2000, and $9.6 million for fiscal 1999. We expect to
continue to invest in research and development in the future.

Competition

The market for guided selling and guided service
solutions is intensely competitive, fragmented and subject to
rapid technological change. The principal competitive factors in
this market include:



| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | adherence to emerging Internet-based technology
	standards;                        
|
| |  | comprehensiveness of applications;                                                 
|
| |  | adaptability, flexibility and scalability;                                         
|
| |  | real-time, interactive capability with customers,
	partners, vendors and suppliers;
|
| |  | ability to support vertical industry requirements;                                 
|
| |  | ease of application use and deployment;                                            
|
| |  | speed of implementation;                                                           
|
| |  | customer service and support; and                                                  
|
| |  | initial price and total cost of ownership.                                         

Because we offer both independent packaged
applications, as well as an enterprise platform for integrated
e-business sales and service solutions, we consider a number of
companies in different market categories to be our competitors.
Companies focused on providing sales configuration solutions for
e-commerce and traditional sales channels include Selectica and
Trilogy Software. Companies focused on providing online customer
interaction solutions, specifically email response management
systems, included KANA Communications and eGain. Companies that
offer enterprise platforms for customer relationship management
include Oracle Corporation, SAP and Siebel Systems. There are a
substantial number of other companies focused on providing
Internet-based software applications for customer relationship
management that may offer competitive products in the future. We
believe that the market for guided selling and guided service
solutions is still in its formative stage, and that no currently
identified competitor represents a dominant presence in this
market.

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We expect competition to increase as a result of
software industry consolidation. For example, a number of
enterprise software companies have acquired point solution
providers to expand their product offerings. Our competitors may
also package their products in ways that may discourage users
from purchasing our products. Current and potential competitors
may establish alliances among themselves or with third parties
or adopt aggressive pricing policies to gain market share. In
addition, new competitors could emerge and rapidly capture
market share.

Although we believe we have advantages over our
competitors in terms of the functionality and comprehensiveness
of our solution, as well as our targeted vertical focus, there
can be no assurance that we can maintain our competitive
position against current and potential competitors, especially
those with longer operating histories, greater name recognition
or substantially greater financial, technical, marketing,
management, service, support and other resources.

Intellectual Property

We believe our intellectual property rights are
significant and that the loss of all or a substantial portion of
our intellectual property rights could seriously harm our
success and ability to compete. We rely on a combination of
copyright, patent, trade secret, trademark, and other
intellectual property laws, nondisclosure agreements and other
protective measures to protect our proprietary rights. There can
be no assurance that our intellectual property protection
measures will be sufficient to prevent misappropriation of our
technology. Some of our contracts with our customers contain
escrow arrangements with a third party escrow agent which
provide these companies with access to our source code and other
intellectual property upon the occurrence of specified events.
Further, from time to time, we have licensed our source code to
customers and other partners. This access could enable these
companies to use our intellectual property and source code
creating a risk of disclosure or other inappropriate use. A
third-party development organization located in Minsk, Belarus
has access to our source code and other intellectual property
rights. Despite our contractual protections, this access could
enable them to use our intellectual property and source code to
wrongfully develop and manufacture competing products, which
would adversely affect our performance and ability to compete.
In addition, we cannot be certain that others will not
independently develop substantially equivalent intellectual
property, gain access to our trade secrets or intellectual
property, or disclose our intellectual property or trade
secrets. Furthermore, the laws of many foreign countries do not
protect our intellectual property to the same extent as the laws
of the United States. From time to time, we may desire or be
required to renew or to obtain licenses from others to enable us
to develop and market commercially viable products effectively.
There can be no assurances that any necessary licenses will be
available on reasonable terms, if at all.

From time to time, third parties may assert
claims or initiate litigation against us or our technology
partners alleging that our existing or future products infringe
their proprietary rights. We could be increasingly subject to
infringement claims as the number of products and competitors in
the market for our technology grows and the functionality of
products overlaps. In addition, we may in the future initiate
claims or litigation against third parties for infringement of
our proprietary rights to determine the scope and validity of
our proprietary rights. Any claims, with or without merit, could
be time-consuming, result in costly litigation and diversion of
technical and management personnel, or require us to develop
non-infringing technology or enter into royalty or licensing
agreements. Royalty or licensing agreements, if required, may
not be available on acceptable terms, if at all.

Employees

At October 31, 2001, we had a total of 271
employees, of which 58 were in research and development, 48 were
in sales and marketing, 44 were in finance and administration,
and 121 were in professional services and support. None of our
employees is represented by a labor union. We consider our
relations with our employees to be good.

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Factors That May Affect Future Results and
Market Price of our Common Stock

As defined under the safe harbor provisions of
The Private Securities Litigation Reform Act of 1995, except for
the historical information contained herein, some of the matters
discussed in this filing contain forward-looking statements
regarding future events that are subject to risks and
uncertainties. The following factors, among others, could cause
actual results to differ materially from those described by such
statements.

A continued slowdown in information technology
spending could reduce the sale of our products

Average license fees for our SalesPerformer Suite
typically range from approximately several hundred thousand
dollars to several million dollars. Often this represents a
significant IT capital expenditure for the companies to which we
target our sales efforts. In addition, regardless of the cost of
our products, many companies may elect not to pursue information
technology projects which may incorporate either of our product
suites, or our individual components, as a result of the global
information technology spending slowdown. As a result, if the
current global slowdown in IT spending should continue, whether
resulting from a weakened economy or other factors, we may be
unable to maintain or increase our sales volumes and achieve our
targeted revenue growth.

If e-business selling and customer service
solutions are not widely adopted, we may not be
successful

Our products address a new and emerging market
for e-business and services solutions. The failure of this
market to develop, or a delay in the development of this market,
would seriously harm our business. The success of our products
depends substantially upon the widespread adoption of the
Internet as a primary medium for commerce and business
applications. The Internet infrastructure may not be able to
support the demands placed on it by the continued growth upon
which our success depends. Moreover, critical issues concerning
the commercial use of the Internet, such as security,
reliability, cost, accessibility and quality of service, remain
unresolved and may negatively affect the growth of Internet use
or the attractiveness of commerce and business communication
over the Internet. In addition, we expect to derive the majority
of our product license revenue in the future from the Firepond
Application Suite and its component products, which were
released in October 1999, and renamed and repackaged as the
SalesPerformer Suite in December 2000. Our business depends on
the successful customer acceptance of this new suite of products
and we expect that we will continue to depend on revenue from
new and enhanced versions of the SalesPerformer Suite our
business would be harmed if our target customers do not adopt
and expand their use of the SalesPerformer Suite and its
component products.

We depend on key personnel and must attract
and retain qualified personnel to be successful

Our success depends upon the continued
contributions of our senior management and sales and engineering
personnel, who perform important functions, and would be
difficult to replace. Specifically, we believe that our future
success is highly dependent on Klaus P. Besier, our
chairman and chief executive officer, and other senior
management, sales and engineering personnel. The loss of the
services of any key personnel, particularly senior management,
sales personnel and engineers, could seriously harm our business.

All members of our senior management team have
joined Firepond since May 1997, and we continue to experience
turnover at the senior management level. This places a
significant burden on our management and our internal resources.
If we are not able to maintain adequate infrastructure to
support and manage our operations effectively our business could
be harmed.

We depend on our direct sales force for nearly
all of our current sales and our growth depends on the ability
of our direct sales force to increase sales to a level that will
allow us to reach and maintain profitability. Our ability to
increase our sales will depend on our ability to train and
retain top quality sales people who are able to target
prospective customers senior management, and who can
productively and efficiently generate and service large
accounts. Competition for these individuals is intense, and we
may not be able to attract, assimilate or retain highly
qualified personnel in the future. Turnover among our sales
staff has been significant and a number of our employees have
left or been terminated. If we are unable to retain qualified
sales

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personnel, or if newly hired personnel fail to
develop the necessary skills or to reach productivity when
anticipated, we may not be able to increase sales of our
products and services.


In addition, our success depends in large part
upon our ability to attract, train, motivate and retain highly
technical, skilled employees, particularly software engineers
and professional services personnel. Our failure to attract and
retain the highly trained technical personnel that are integral
to our product development, professional services and support
teams may limit our ability to develop new products or product
enhancements, and implement our products successfully.

Our workforce reductions and financial
performance may adversely affect the morale and performance of
our personnel and our ability to hire new personnel.

In connection with our effort to streamline
operations, reduce costs and bring our staffing and
infrastructure in line with industry standards, we restructured
our organization and reduced our workforce. We terminated 81
employees and 89 consultants in April, 2001, 157 employees and
one consultant in June, 2001, and 125 employees in October,
2001. We have incurred costs aggregating of $8.5 million
associated with these workforce reductions related to severance
and other employee-related costs, and may incur further costs.
Our restructuring may also yield unanticipated consequences,
such as attrition beyond our planned reduction in workforce and
loss of employee morale and decreased performance. Continuity of
personnel is an important factor in the successful completion of
our business plan and ongoing turnover in our personnel could
materially and adversely impact our sales and marketing efforts,
current customer implementations, and our development projects.
We believe that hiring and retaining qualified individuals at
all levels is essential to our success, and there can be no
assurance that we will be successful in attracting and retaining
the necessary personnel.

Recent material litigation could result in
substantial costs and divert management attention and
resources

On October 19, 2001, General Motors
Corporation filed a complaint against us alleging certain
statutory and common law claims including breach of contract,
coercion, fraud, and unfair and deceptive trade practices.
General Motors claims relate to our original 1994
agreement with General Motors, as amended, and license
agreements, services agreements and a general release entered
into with us in May, 2000. We may incur substantial legal fees
and expenses, and the litigation may divert the attention of
some of our key management. Our defense of this litigation,
regardless of its outcome, may be costly and time-consuming.
Should the outcome of the litigation be adverse to us, we could
be required to pay significant monetary damages to the
plaintiffs, which could harm our business.

In addition, since August 1, 2001, a number
of securities class action complaints were filed against us, the
underwriters of our initial public offering, and certain of our
executives in the United States District Court for the Southern
District of New York. The complaints allege that the
underwriters of our initial public offering, Firepond and the
other named defendants violated federal securities laws by
making material false and misleading statements in the
prospectus incorporated in our registration statement on
Form S-1 filed with the SEC in November 1999. The
complaints allege, among other things, that FleetBoston
Robertson Stephens and the other underwriters solicited and
received excessive and undisclosed commissions from several
investors in exchange for which FleetBoston Robertson Stephens
and the other underwriters allocated to these investors material
portions of the restricted number of shares of common stock
issued in connection with our initial public offering. The
complaints further allege that FleetBoston Robertson Stephens
and the other underwriters entered into agreements with its
customers in which FleetBoston Robertson Stephens and the other
underwriters agreed to allocate the common stock sold in our
initial public offering to certain customers in exchange for
which such customers agreed to purchase additional shares of our
common stock in the after-market at pre-determined prices.
Securities class action litigation can result in substantial
costs and divert our managements attention and resources,
which could seriously harm our business.

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Failure to expand our relationships with third
party channels as well as systems integrators and consulting
firms would impede acceptance of our products and delay the
growth of our revenue

Our strategy includes expanding and increasing
third party channels which license and support our products,
such as resellers, distributors, OEMs, system integrators and
consulting firms. This often requires that these third parties
recommend our products to their customers and install and
support our products for their customers. To increase our
revenue and implementation capabilities, we must develop and
expand our relationships with these third parties. In addition,
if these firms fail to implement our products successfully for
their clients, we may not have the resources to implement our
products on the schedule required by the client which would
result in our inability to recognize revenue from the license of
our products to these customers.

We depend on third parties to assist in
maintaining and developing certain components and also depend
upon technology licensed to us by third parties, the loss of
which could adversely affect out competitive position

Although reduced from previous years
levels, a portion of our product development work in regard to
key components as well as some implementation services continue
to be performed by third party organizations, including
off-shore organizations in India, Russia and Belarus. In
connection with these services such organizations may from time
to time control certain components of our proprietary
technology. Unpredictable events in the political, economic and
social conditions in India, Russia and Belarus, or our failure
to effectively manage these organizations may hinder our ability
to retrieve or cause us to lose certain components of our
proprietary technology. If access to these services were to be
unexpectedly eliminated or significantly reduced, our ability to
meet development objectives vital to our ongoing strategy would
be hindered, certain components of our proprietary technology
could be lost or misappropriated, and our business could be
seriously harmed.

In addition, we license technology from a small
number of software providers for use with our products and
implementation services. We anticipate that we will continue to
license and rely on technology from third parties in the future.
This technology may not continue to be available on commercially
reasonable terms, if at all, and some of the technology we
license would be difficult to replace. The loss of the use of
this technology would result in delays in the license and
implementation of our products until equivalent technology, if
available, is identified, licensed and integrated. In turn, this
could prevent the implementation or impair the functionality of
our products, delay new product introductions, or injure our
reputation.

Our limited ability to protect our
intellectual property may harm our ability to compete

Our success and ability to compete is dependent
in part upon our proprietary technology. Any infringement of our
proprietary rights could result in significant litigation costs,
and any failure to adequately protect our proprietary rights
could result in our competitors offering similar products,
potentially resulting in loss of a competitive advantage and
decreased revenue. Existing patent, copyright, trademark and
trade secret laws afford only limited protection. In addition,
the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the
United States. Therefore, we may not be able to protect our
proprietary rights against unauthorized third party copying or
use. Furthermore, policing the unauthorized use of our products
is difficult. Some of our contractual arrangements provide third
parties with access to our source code and other intellectual
property upon the occurrence of specified events. This access
could enable these third parties to use our intellectual
property and source code to develop and manufacture competing
products, which would adversely affect our performance and
ability to compete. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the
proprietary rights of others. This litigation could result in
substantial costs and diversion of resources and could
materially adversely affect our future operating results.

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We may not achieve anticipated maintenance
revenue if we do not successfully migrate our SalesPerformer
customers to the latest version of our products and customers
cancel their maintenance agreements

Our business depends on the success and customer
acceptance of our products and the adoption of future
enhancements to those products. Customers enter into maintenance
agreements for the purpose of receiving both customer support
and the right to future enhancements of the product. When
implementing our SalesPerformer products customers may have
requirements to create customized features or functionality
outside of our base product offering. Customization of our
products is usually performed by writing additional software
code which will make it difficult for the customer to migrate to
the next version of the product. Customers who extensively
customized our products may be unwilling or unable to commit
additional resources to upgrade to the latest or next version of
our product. If our customers do not adopt the latest version of
our products, those customers may cancel their maintenance
agreements and we may not achieve our anticipated maintenance
revenue.

Our failure to successfully implement our
products in a timely manner could result in negative publicity
and reduced sales, both of which would significantly harm our
business and operating results

In the future, our customers may experience
difficulties or delays in completing the implementation of our
products. We have found that implementing our SalesPerformer
products may be more time consuming than we or our customers
anticipate. The unique configuration or integration with our
customers legacy systems, such as existing databases and
enterprise resource planning software, may be underestimated and
the deployment of our products can be delayed. Failing to meet
customer expectations on deployment of our products could result
in a loss of customers and negative publicity regarding us and
our products, which could adversely affect our ability to
attract new customers. In addition, time-consuming deployments
may also increase the amount of professional services we
allocate to each customer, thereby increasing our costs and
adversely affecting our business and operating results.

Disappointing quarterly revenue or operating
results could cause the price of our common stock to
fall

We currently derive a significant portion of our
license revenue in each quarter from a small number of
relatively large orders, and we generally recognize revenue from
our SalesPerformer Suite licenses over the related
implementation period. If we are unable to recognize revenue
from one or more substantial license sales planned for a
particular fiscal quarter, our operating results for that
quarter would be seriously harmed. In addition, the license of
our SalesPerformer Suite typically involves a substantial
commitment of resources by our customers or their consultants
over an extended period of time. The time required to complete
an implementation may vary from customer to customer and may be
protracted due to unforeseen circumstances. Because our revenue
from implementation, maintenance and training services are
largely correlated with our license revenue, a decline in
license revenue would also cause a decline in our services
revenue in the same quarter and in subsequent quarters. Because
our sales cycle is long, we may have difficulty predicting when
we will recognize revenue. If our quarterly revenue or operating
results fall below the expectations of investors or securities
analysts, the price of our common stock could fall substantially
and we could become subject to securities class-action
litigation. Litigation, if instituted, could result in
substantial costs and a diversion of managements attention
and resources, which would materially adversely affect our
business, financial condition and results of operations.

We expect to continue to incur losses and may
not be profitable in the future

We have incurred quarterly and annual losses
intermittently since we were formed in 1983, and regularly since
fiscal 1997. We incurred net losses of $28.9 million for
fiscal 1999, $16.3 million for fiscal 2000 and
$70.3 million for fiscal 2001. Although we currently plan
that we will stop incurring a net loss, excluding stock based
compensation and amortization of intangible assets, by the end
of our 2002 fiscal year, we may not achieve this goal and may
continue to incur losses on a quarterly basis and not become
profitable. Additionally, we may not grow or generate sufficient
revenue to attain profitability.

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Our results of operations will be harmed by
charges associated with stock-based compensation and charges
associated with other securities issuances by us

On June 26, 2001, we announced an offer to
allow our directors and certain eligible employees to exchange
outstanding stock options for new stock options. The number of
options granted was equal to three-fourths of the number of
options that were tendered and accepted for exchange. On
July 26, 2001, we accepted 7,179,285 options for exchange
and, on July 31, 2001 issued 5,384,384 new stock options
with an exercise price equal to $.66 per share. For financial
reporting purposes all option grants subject to the tender offer
will be treated as variable awards. Accordingly, we will be
required to record as a compensation expense, chargeable against
our reported earnings, all increases in the value of those
options, including any appreciation in the market price of the
underlying option shares, which occurs between the grant date of
that option and the date the option is exercised for those
shares or otherwise terminates unexercised. The greater the
increase in the market value of our common stock following the
date of grant, the greater the compensation expense and effect
on our reported earnings.

Difficulties and financial burdens associated
with acquisitions could harm our business and financial
results

On February 15, 2001, we acquired all of the
outstanding stock of Brightware, Inc. Our product range and
customer base have increased due in part to this acquisition.
There can be no assurance that the integration of all of the
acquired technologies will be successful or will not result in
unforeseen difficulties that may absorb significant management
attention.

In the future, we may acquire additional
businesses or product lines. The recently completed acquisition,
or any future acquisition, may not produce the revenue, earnings
or business synergies that we anticipated, and an acquired
product, service or technology might not perform as expected.
Prior to completing an acquisition, however, it is difficult to
determine if such benefits can actually be realized. The process
of integrating acquired companies into our business may also
result in unforeseen difficulties. Unforeseen operating
difficulties may absorb significant management attention, which
we might otherwise devote to our existing business. Also, the
process may require significant financial resources that we
might otherwise allocate to other activities, including the
ongoing development or expansion of our existing operations.

If we pursue a future acquisition, our management
could spend a significant amount of time and effort identifying
and completing the acquisition. If we make a future acquisition,
we could issue equity securities which would dilute current
stockholders percentage ownership, incur substantial debt,
assume contingent liabilities or incur a one-time charge.

Because we have a limited operating history as
a software company, our future success is uncertain

Although Firepond was incorporated in 1983, we
have only been focused on providing software products since
1997. Because we have only been focused on providing software
products for a short time, we have a limited operating history
pursuing this business model. The revenue and income potential
of the market for e-business sales and services solutions is
immature. As a result, our historical financial statements are
not an accurate indicator of our future operating results. In
addition, we have limited insight into trends that may emerge
and affect our business, and we cannot forecast operating
expenses based on our historical results. In evaluating
Firepond, you should consider the risks and uncertainties
frequently encountered by early stage companies in new and
rapidly evolving markets. If we are not able to successfully
address these risks, our business could be harmed.

We face possible Nasdaq delisting which would
result in a limited public market for our common stock and make
obtaining future equity financing more difficult for
us

In the past, our stock price has closed below
$1.00 for extended periods of time. If our common stock closing
bid price falls below $1.00 per share for a period of thirty
consecutive business days, Nasdaq has the right to delist the
stock if within ninety days thereafter the bid price for the
stock is not at least $1.00 per share for a minimum of ten
consecutive business days. In the event our stock price does not
rise above $1.00 for the

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required ten consecutive business days, we would
have the right to request a hearing to appeal a Nasdaq
determination that our stock should be delisted.


We cannot assure you that our bid price will
comply with the requirements for continued listing of our common
stock on the Nasdaq National Market, or that any appeal of a
decision to delist our common stock will be successful. If our
common stock loses its Nasdaq National Market status, shares of
our common stock would likely trade in the over-the-counter
market. Consequently, selling our common stock would be more
difficult because smaller quantities of shares would likely be
bought and sold, transactions could be delayed, and security
analysts and news media coverage of us may be reduced. In
addition, in the event our common stock is delisted,
broker-dealers have certain regulatory burdens imposed upon
them, which may discourage broker-dealers from effecting
transactions in our common stock, further limiting the liquidity
thereof. These factors could result in lower prices and larger
spreads in the bid and ask prices for shares of common stock.

Such delisting from the Nasdaq National Market or
further declines in our stock price could also greatly impair
our ability to raise additional necessary capital through equity
or debt financing, and significantly increase the ownership
dilution to stockholders caused by our issuing equity in
financing or other transactions. Furthermore, our delisting from
the Nasdaq National Market will likely damage our general
business reputation and thus may harm our financial condition
and operating results.

Our stock price may continue to be volatile
which may lead to losses by investors and result in securities
litigation

The trading price of our common stock has been
and may continue to be highly volatile and could be subject to
wide fluctuations in price in response to various factors, many
of which are beyond our control, including quarterly variations
in our results of operations; changes in recommendations by the
investment community or in their estimates of our revenue or
operating results; speculation in the press or investment
community; strategic actions by our competitors, such as product
announcements or acquisitions; and general market conditions.

In addition, the stock market in general and the
Nasdaq National Market and securities of Internet and software
companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or
disproportionate to their operating performance. These broad
market and industry factors may materially adversely affect the
market price of our common stock, regardless of our actual
operating performance. Litigation, if instituted, could result
in substantial costs and a diversion of managements
attention and resources, which would materially adversely affect
our business, financial condition and results of operations.

Failure to increase our international revenue
could seriously harm our business

International revenue currently accounts for a
significant percentage of our total revenue. We expect
international revenue to continue to account for a significant
percentage of total revenue in the future and we believe that we
must continue to expand our international sales activities to be
successful. However, foreign markets for our products may
develop more slowly than currently anticipated. International
revenue as a percentage of total revenue was 11% in fiscal 1999,
28% in fiscal 2000 and 36% for fiscal 2001. Our failure to
expand our international sales could have a significant negative
impact on our business.

Due to our international operations we are
subject to foreign exchange risk

We serve our customers from offices throughout
North America, Europe and Japan. Consequently, we are exposed to
fluctuations of the dollar against the foreign currencies of
those countries in which we have a substantial presence. For
each of our foreign subsidiaries, the functional currency is the
local currency. Accordingly, assets and liabilities are
translated at period-end exchange rates, and operating statement
items are translated at weighted-average rates prevailing during
the periods presented. We have exchange rate exposure in the
following principal currencies: the British Pound, Dutch
Guilder, Euro and Japanese Yen.

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Fluctuations against the US dollar can
produce significant differences in the reported value of sales
and expenses. For sales in the US which are produced outside of
the US, any weakening of the US dollar against a particular
countrys currency reduces the amount of net income
reported in US dollars. Conversely, the same weakening of
the US dollar generates an offsetting increase in the
dollar value of profits arising from sales within that country.
Any weakening of the US dollar that negatively impacts a
foreign operations trading profit will similarly reduce
the dollar value of any overhead expense located in that country.

The translation of foreign denominated assets and
liabilities at period-end exchange rates could materially and
adversely effect our reported financial position.

Failure to effectively manage our
geographically dispersed organization could have a significant
negative impact on our business operations

If we fail to manage our geographically dispersed
organization, we may fail to meet or exceed our objectives and
our revenue may decline. We perform research and development
activities in Minnesota and California, and our executive
officers and other key employees are dispersed throughout the
United States, Europe and Japan. This geographic dispersion
requires significant management resources that our locally based
competitors do not need to devote to their operations. In
addition, any future expansion of our existing international
operations and entry into additional international markets will
require significant management attention and financial resources.

Intense competition from other technology
companies could prevent us from increasing or sustaining revenue
and prevent us from achieving or sustaining
profitability

The market for integrated e-business sales and
services solutions is intensely competitive and we expect that
this competition will increase. Many of our current and
potential competitors have longer operating histories, greater
name recognition and substantially greater resources than we do.
Therefore, they may be able to respond more quickly than we can
to new or changing opportunities, technologies, standards or
customer requirements. If we are unable to compete effectively,
our revenue could significantly decline.

If we are unable to introduce new and enhanced
products on a timely basis that respond effectively to changing
technology, our revenue may decline

Our market is characterized by rapid
technological change, changes in customer requirements, frequent
new product and service introductions and enhancements, and
evolving industry standards. Advances in Internet technology or
in e-commerce software applications, or the development of
entirely new technologies to replace existing software, could
lead to new competitive products that have better performance or
lower prices than our products and could render our products
obsolete and unmarketable. In addition, if a new software
language or operating system becomes standard or is widely
adopted in our industry, we may need to rewrite portions of our
products in another computer language or for another operating
system to remain competitive. If we are unable to develop new
and enhanced products on a timely basis that respond to changing
technology, our business could be seriously harmed.

If our new and complex products fail to
perform properly, our revenue would be adversely
affected

Software products as complex as ours may contain
undetected errors, or bugs, which result in product failures, or
may cause our products to fail to meet our customers
expectations. Our products may be particularly susceptible to
bugs or performance degradation because of the evolving nature
of Internet technologies and the stress that full deployment of
our products over the Internet to thousands of end-users may
cause. Product performance problems could result in loss of or
delay in revenue, loss of market share, failure to achieve
market acceptance, diversion of development resources or injury
to our reputation.

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Product liability claims related to our
customers critical business operations could result in
substantial costs

Our products are critical to the business
operations of our customers. If one of our products fails, a
customer may assert a claim for substantial damages against us,
regardless of our responsibility for the failure. Our product
liability insurance may not cover claims brought against us.
Product liability claims could require us to spend significant
time and money in litigation or to pay significant damages. Any
product liability claims, whether or not successful, could
seriously damage our reputation and our business.

Claims alleging infringement of a third
partys intellectual property could result in significant
expense to us and result in our loss of significant
rights

The software and other Internet-related
industries are characterized by the existence of frequent
litigation of intellectual property rights. From time to time,
third parties may assert patent, copyright, trademark and other
intellectual property rights to technologies that are important
to our business. Any claims, with or without merit, could be
time-consuming, result in costly litigation, divert the efforts
of our technical and management personnel, cause product
shipment delays, disrupt our relationships with our customers or
require us to enter into royalty or licensing agreements, any of
which could have a material adverse effect upon our operating
results. Royalty or licensing agreements, if required, may not
be available on terms acceptable to us, if at all. If a claim
against us is successful and we cannot obtain a license to the
relevant technology on acceptable terms, license a substitute
technology or redesign our products to avoid infringement, our
business, financial condition and results of operations would be
materially adversely affected.

Control by our executive officers, directors
and associated entities may limit your ability to influence the
outcome of director elections and other matters requiring
stockholder approval

As of December 31, 2001, our executive
officers, directors and entities associated with them own
approximately 48% of the outstanding shares of our common stock.
These stockholders have significant influence over matters
requiring approval by our stockholders, including the election
of directors and the approval of mergers or other business
combination transactions. This concentration of ownership could
have the effect of delaying or preventing a change in our
control or discouraging a potential acquirer from attempting to
obtain control of us, which in turn could have a material
adverse effect on the market price of the common stock or
prevent our stockholders from realizing a premium over the
market price for their shares of common stock.

Provisions of Delaware law and of our charter
and by-laws may make a takeover more difficult and lower the
value of our common stock

Provisions in our certificate of incorporation
and by-laws and in Delaware corporate law may make it difficult
and expensive for a third party to pursue a tender offer, change
in control or takeover attempt that is opposed by our
management. Public stockholders who might desire to participate
in such a transaction may not have an opportunity to do so, and
the ability of public stockholders to change our management
could be substantially impeded by these anti-takeover
provisions. For example, we have a staggered board of directors
and the right under our charter documents to issue preferred
stock without further stockholder approval, which could
adversely affect the holders of our common stock.

Future sales of our stock could cause our
stock price to fall

Sales of a substantial number of shares of our
common stock in the public market could cause the market price
of our common stock to decline. In addition, the sale of these
shares could impair our ability to raise capital through the
sale of additional equity securities.

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Claims may be brought against us if we hire
former employees of our competitors, which may cause us to incur
substantial costs

Companies in the software industry, whose
employees accept positions with competitors, frequently claim
that those competitors have breached, or encouraged the breach
of, noncompetition and nondisclosure agreements. These claims
have been made against us in the past, and we may receive claims
in the future as we hire additional qualified personnel. If a
claim were to be made against us, it could result in material
litigation. We could incur substantial costs in defending
ourselves against any of these claims, regardless






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

Our corporate headquarters are located in
Waltham, Massachusetts and occupy approximately 29,500 square
feet. We have entered into an agreement to reduce this to 6,980
square feet in February, 2002. Our lease for this facility
expires on December 31, 2004. We also lease space in San
Rafael, California for 30,488 square feet. This lease expires
August 31, 2010. We sublet 15,785 square feet in San
Francisco, California through March 31, 2002. In addition,
we have three facilities located in Minnesota. Our lease in
Mankato, Minnesota of approximately 21,000 square feet expires
on November 30, 2003. We are currently operating under
three separate leases in Bloomington, Minnesota all located in
the same building. One includes approximately 12,100 square feet
with a lease expiring on January 31, 2002, the second
occupies approximately 2,500 square feet and expires on
March 31, 2002, and the third includes approximately 9,100
square feet and expired November 30, 2001. We also lease
two suites in Burnsville, MN. We also lease offices in Naarden,
The Netherlands; Duesseldorf, Germany; Fleet, England; Paris,
France; Basel, Switzerland; Stockholm, Sweden; and Tokyo, Japan.






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

On October 19, 2001, General Motors
Corporation filed a complaint against us in the Superior Court
of Massachusetts, Middlesex County. The complaint alleges, among
other things, a breach of contract under agreements entered into
in 1994, as amended; anticipatory repudiation of agreements
entered into in 1994, as amended; unjust enrichment;
establishment of a constructive trust; rescission and
restitution based upon failure of consideration as well as
extortion and coercion relating to agreements entered into in
1994, as amended; breach of the covenant of good faith and fair
dealing; fraud; as well as violation of Chapter 93A of the
General Laws of the Commonwealth of Massachusetts relating to
unfair and deceptive trade practices. General Motors
claims further relate to license agreements, services agreements
and a general release entered into with us in May, 2000. The
claims generally allege, among other things, that we coerced,
extorted or otherwise caused General Motors to enter into the
May 2000 agreements under duress. On the Civil Cover Sheet for
the Superior Court of Massachusetts, Middlesex County, General
Motors claims damages in the amount of $9,000,000 exclusive of
fees, costs and multiple damages. The complaint does not demand
damages in specific dollar amounts. While we believe the claims
against us are without merit and intend to defend the action
vigorously, the litigation is in the preliminary stage and we
cannot predict the outcome with certainty. We may incur
substantial legal fees and expenses, and the litigation may
divert the attention of some of our key management. Our defense
of this litigation, regardless of its outcome, may be costly and
time-consuming. Should the outcome of the litigation be adverse
to us, we could be required to pay significant monetary damages
to the plaintiffs, which could harm our business.

Beginning in August, 2001, a number of securities
class action complaints were filed in the Southern District of
New York seeking an unspecified amount of damages on behalf of
an alleged class of persons who purchased shares of our common
stock between the date of our initial public offering and
December 6, 2000. The complaints name as defendants
Firepond and certain of its directors and officers, and
FleetBoston Robertson Stephens an underwriter of our initial
public offering. The plaintiffs allege, among other things, that
our prospectus, incorporated in the Registration Statement on
Form S-1 filed with the Securities and Exchange Commission
was materially false and misleading because it failed to
disclose that the investment banks which underwrote
Fireponds initial public offering of securities received
undisclosed and excessive brokerage commissions, and required
investors to agree to buy shares of our securities after the
initial public offering was completed at predetermined prices as
a precondition to obtaining initial public offering

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##### Table of Contents



allocations. The plaintiffs further allege that
these actions artificially inflated the price of our common
stock after the initial public offering. While we believe the
claims against us are without merit and intend to defend the
actions vigorously, the litigation is in the preliminary stage,
and we cannot predict the outcome with certainty. We may incur
substantial legal fees and expenses, and the litigation may
divert the attention of some of our key management. Our defense
of this litigation, regardless of its outcome, may be costly and
time-consuming. Should the outcome of the litigation be adverse
to us, we could be required to pay significant monetary damages
to the plaintiffs, which could harm our business.


We are also subject to various other claims and
legal actions arising in the ordinary course of business. In the
opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to
have a material effect on our business, financial condition or
results of operations.






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

None

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##### Table of Contents






PART II






|        |                                                                     
|------- | --------------------------------------------------------------------
|Item 5. | Market for Registrants Common Stock and
	Related Stockholder Matters

(a) Common Stock Price Range

Our common stock is traded on The NASDAQ National
Market under the symbol FIRE. Public trading of the
common stock commenced on February 4, 2000. Prior to that,
there was no public market for the common stock. The following
table sets forth, for the periods indicated, the high and low
closing price per share of the common stock as reported by The
NASDAQ National Market, during each quarter the stock has been
publicly traded.

|                                                                  |  |      |        |     |  |   |       | 
|----------------------------------------------------------------- |  | ---- | ------ | --- |  | - | ----- | 
|                                                                  |  | High |        | Low
|                                                                  |  |      |        |    
|Second Quarter ended April 30, 2000
	(beginning February 4, 2000) |  | $    | 100.25 |     |  | $ | 15.44 | 
|Third Quarter ended July 31, 2000                                 |  | $    | 40.69  |     |  | $ | 15.75 | 
|Fourth Quarter ended October 31, 2000                             |  | $    | 21.75  |     |  | $ | 7.86  | 
|First Quarter ended January 31, 2001                              |  | $    | 12.00  |     |  | $ | 4.50  | 
|Second Quarter ended April 30, 2001                               |  | $    | 4.19   |     |  | $ | 1.50  | 
|Third Quarter ended July 31, 2001                                 |  | $    | 2.54   |     |  | $ | .66   | 
|Fourth Quarter ended October 31, 2001                             |  | $    | .90    |     |  | $ | .41   | 

(b) Holders

As of December 31, 2001, there were
approximately 165 holders of record of our common stock. This
number does not include stockholders whose shares are held in
trust by other entities. We estimate that there were
approximately 6,500 beneficial holders of our common stock on
December 31, 2001.

(c) Dividends

We have never declared or paid cash dividends on
our common stock. We currently intend to retain any earnings, if
any, for use in our business and do not anticipate paying any
cash dividends in the foreseeable future.

(d) Recent Sales of Unregistered Securities

In connection with our acquisition by merger of
Brightware, Inc. on February 15, 2001, we issued
2,825,305 shares of our common stock to the stockholders of
Brightware, of which 2,399,984 shares were placed in an
escrow account to satisfy certain indemnification obligations of
Brightware. As of January 14, 2002, 2,052,583 of these
shares have been released to us and returned to the status of
authorized but unissued shares of common stock. Our securities
were issued under Section 4(2) of the Securities Act of
1933 and Regulation D promulgated thereunder as a
transaction not involving a public offering.






|        |                                      
|------- | -------------------------------------
|Item 6. | Selected Consolidated Financial
	Data

The following selected financial data are derived
from our consolidated and combined financial statements.

When you read this selected financial data, it is
important that you also read the historical consolidated
financial statements and related notes included in this report.
The historical results are not necessarily indicative of the
operating results to be expected in the future.

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SELECTED FINANCIAL DATA

|                                            |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |         |        |        | 
|------------------------------------------- | ----------------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------ | ----- | ------ | - | ------- | ------ | ------ | 
|                                            |                                                       |                                                                        
|                                            |                                                       | Fiscal Years Ended October 31,                                         
|                                            |                                                       |                                                                        
|                                            |                                                       | 2001                                                                    |                               | 2000    |        | 1999   |   | 1998    |        | 1997  
|                                            |                                                       |                                                                         |                               |         |        |        |   |         |        |       
|                                            |                                                       |                                                                        
|                                            |                                                       | (In thousands, except per share data)                                  
|Statement of Consolidated Operations
	Data: |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |        
|Revenue:                                    |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |        
|                                            | Product-related revenue:                              |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |         |       
|                                            |                                                       | License(1)                                                              |                               | $       | 14,848 |        |   | $       | 23,128 |        |   | $       | 9,777  |        |   | $      | 1,888 |        |   | $       | 416    |       
|                                            |                                                       | Services and maintenance                                                |                               |         | 26,709 |        |   |         | 24,265 |        |   |         | 8,604  |        |   |        | 4,972 |        |   |         |       |       
|                                            |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |        
|                                            |                                                       |                                                                         | Total product-related revenue |         |        | 41,557 |   |         |        | 47,393 |   |         |        | 18,381 |   |        |       | 6,860  |   |         |        | 416    | 
|                                            | Custom development services                           |                                                                         |                               | 4,532   |        |        |   | 14,579  |        |        |   | 15,904  |        |        |   | 22,142 |       |        |   | 27,747  |       
|                                            |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |        
|                                            |                                                       |                                                                         | Total revenue                 |         |        | 46,089 |   |         |        | 61,972 |   |         |        | 34,285 |   |        |       | 29,002 |   |         |        | 28,163 | 
|                                            | Cost of revenue:                                      |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |         |       
|                                            |                                                       | License                                                                 |                               |         | 524    |        |   |         | 499    |        |   |         | 238    |        |   |        | 192   |        |   |         | 178    |       
|                                            |                                                       | Product-related services and maintenance                                |                               |         | 29,094 |        |   |         | 16,485 |        |   |         | 5,677  |        |   |        | 3,061 |        |   |         |       |       
|                                            |                                                       | Custom development services                                             |                               |         | 1,171  |        |   |         | 5,773  |        |   |         | 10,636 |        |   |        | 8,397 |        |   |         | 31,365 |       
|                                            |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |        
|                                            |                                                       |                                                                         | Total cost of revenue(2)      |         |        | 30,789 |   |         |        | 22,757 |   |         |        | 16,551 |   |        |       | 11,650 |   |         |        | 31,543 | 
|                                            |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |        
|                                            | Gross profit (loss)                                   |                                                                         |                               | 15,300  |        |        |   | 39,215  |        |        |   | 17,734  |        |        |   | 17,352 |       |        |   | (3,380  | )     
|Operating expenses:                         |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |        
|                                            | Sales and marketing(2)                                |                                                                         |                               | 25,131  |        |        |   | 27,904  |        |        |   | 23,609  |        |        |   | 13,680 |       |        |   | 8,080   |       
|                                            | Research and development(2)                           |                                                                         |                               | 18,838  |        |        |   | 15,264  |        |        |   | 9,641   |        |        |   | 8,199  |       |        |   | 3,634   |       
|                                            | General and administrative(2)                         |                                                                         |                               | 10,981  |        |        |   | 9,449   |        |        |   | 7,084   |        |        |   | 3,516  |       |        |   | 3,188   |       
|                                            | Stock-based compensation                              |                                                                         |                               | 4,470   |        |        |   | 6,680   |        |        |   | 2,597   |        |        |   | 672    |       |        |   | 450     |       
|                                            | Amortization of goodwill and other intangible
	assets |                                                                         |                               | 3,554   |        |        |   |        |        |        |   |        |        |        |   |       |       |        |   |        |       
|                                            | Restructuring charge (credit)                         |                                                                         |                               | 18,243  |        |        |   | (500    | )      |        |   | 3,027   |        |        |   |       |       |        |   | 6,712   |       
|                                            | Settlement of claim                                   |                                                                         |                               | 1,211   |        |        |   |        |        |        |   |        |        |        |   |       |       |        |   |        |       
|                                            | Acquired in-process research and development          |                                                                         |                               | 6,200   |        |        |   |        |        |        |   |        |        |        |   |       |       |        |   |        |       
|                                            |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |        
|                                            |                                                       |                                                                         | Total operating expenses      |         |        | 88,628 |   |         |        | 58,797 |   |         |        | 45,958 |   |        |       | 26,067 |   |         |        | 22,064 | 
|                                            |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |        
|                                            | Loss from operations                                  |                                                                         |                               | (73,328 | )      |        |   | (19,582 | )      |        |   | (28,224 | )      |        |   | (8,715 | )     |        |   | (25,444 | )     
|                                            | Other income (expense), net                           |                                                                         |                               | 3,047   |        |        |   | 4,677   |        |        |   | (631    | )      |        |   | (326   | )     |        |   | (1,591  | )     
|                                            |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |        
|                                            | Net loss before extraordinary items                   |                                                                         |                               | (70,281 | )      |        |   | (14,905 | )      |        |   | (28,855 | )      |        |   | (9,041 | )     |        |   | (27,035 | )     
|                                            | Loss on extinguishment of debt                        |                                                                         |                               |        |        |        |   | (1,437  | )      |        |   |        |        |        |   |       |       |        |   |        |       
|                                            |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |        
|                                            | Net loss                                              |                                                                         |                               | (70,281 | )      |        |   | (16,342 | )      |        |   | (28,855 | )      |        |   | (9,041 | )     |        |   | (27,035 | )     
|                                            | Stock dividend to preferred stockholders              |                                                                         |                               |        |        |        |   | (65,542 | )      |        |   |        |        |        |   |       |       |        |   |        |       
|                                            |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |        
|                                            | Loss applicable to common stockholders                |                                                                         | $                             | (70,281 | )      |        | $ | (81,884 | )      |        | $ | (28,855 | )      |        | $ | (9,041 | )     |        | $ | (27,035 | )     
|                                            |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |        
|                                            | Net loss per share:                                   |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |         |       
|                                            |                                                       | Basic and diluted net loss per share before
	extraordinary item         |                               | $       | (1.95  | )      |   | $       | (0.52  | )      |   | $       | (2.88  | )      |   | $      | (0.91 | )      |   | $       | (2.62  | )     
|                                            |                                                       | Extraordinary item                                                      |                               |         |       |        |   |         | (0.05  | )      |   |         |       |        |   |        |      |        |   |         |       |       
|                                            |                                                       | Stock dividend paid to preferred stockholders                           |                               |         |       |        |   |         | (2.32  | )      |   |         |       |        |   |        |      |        |   |         |       |       
|                                            |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |        
|                                            |                                                       | Basic and diluted net loss per share applicable
	to common stockholders |                               | $       | (1.95  | )      |   | $       | (2.89  | )      |   | $       | (2.88  | )      |   | $      | (0.91 | )      |   | $       | (2.62  | )     
|                                            |                                                       |                                                                         |                               |         |        |        |   |         |        |        |   |         |        |        |   |        |       |        |   |        

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|                                                   |  |                                       |        |      |  |      |        |      |  |      |        |  |  |  |       |  |  |  |        | 
|-------------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ----- |  |  |  | ------ | 
|                                                   |  |                                      
|                                                   |  | Fiscal Years Ended October 31,       
|                                                   |  |                                      
|                                                   |  | 2001                                  |        | 2000 |  | 1999 |        | 1998 |  | 1997
|                                                   |  |                                       |        |      |  |      |        |      |  |     
|                                                   |  |                                      
|                                                   |  | (In thousands, except per share data)
|Basic weighted average common shares outstanding   |  |                                       | 36,011 |      |  |      | 28,286 |      |  |      | 10,024 |  |  |  | 9,925 |  |  |  | 10,319 | 
|Diluted weighted average common shares Outstanding |  |                                       | 36,011 |      |  |      | 28,286 |      |  |      | 10,024 |  |  |  | 9,925 |  |  |  | 10,319 | 



---



|    |                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes related-party revenue of $350 in fiscal
	1997.                                                                                                                                           
|   
|(2) | Excludes charge for stock-based compensation,
	which is reflected in the aggregate in the caption
	stock-based compensation. See note (1) to
	consolidated statements of operations on page F-4.

|                                                      |                                      |             |        |        |  |      |         |         |  |      |         |        |   |   |        |       |  |   |        |      |  
|----------------------------------------------------- | ------------------------------------ | ----------- | ------ | ------ |  | ---- | ------- | ------- |  | ---- | ------- | ------ | - | - | ------ | ----- |  | - | ------ | ---- | -
|                                                      |                                      |            
|                                                      |                                      | October 31,
|                                                      |                                      |            
|                                                      |                                      | 2001        |        | 2000   |  | 1999 |         | 1998    |  | 1997
|                                                      |                                      |             |        |        |  |      |         |         |  |     
|Consolidated Balance Sheet Data:                      |                                      |             |        |        |  |      |         |         |  |      |         |        |   |   |        |       |  |   |        |     
|Cash and cash equivalents and short-term
	investments |                                      | $           | 44,253 |        |  | $    | 116,233 |         |  | $    | 2,120   |        |   | $ | 2,324  |       |  | $ | 10,147 |     
|Working capital (deficit)                             |                                      |             | 30,752 |        |  |      | 101,907 |         |  |      | (11,380 | )      |   |   | (6,240 | )     |  |   | (7,119 | )   
|Total assets                                          |                                      |             | 75,138 |        |  |      | 144,320 |         |  |      | 21,660  |        |   |   | 18,786 |       |  |   | 27,906 |     
|Long-term debt, net of current portion                |                                      |             |       |        |  |      |        |         |  |      | 702     |        |   |   | 1,727  |       |  |   | 3,991  |     
|                                                      | Total stockholders equity (deficit) |             |        | 47,513 |  |      |         | 110,464 |  |      |         | (5,354 | ) |   |        | 1,031 |  |   |        | (986 | )






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

Overview

We are a leading provider of intelligent guided
selling and online customer assistance solutions that help
companies more profitably acquire and retain customers. Our
product lines leverage advanced intelligence engines and
patented automation technology to drive new revenue streams,
increase profitability, and manage customer interactions across
all channels and throughout the sales and service cycle. From
our inception in 1983 through 1997, we generated revenue
primarily through providing custom development services. These
services consisted of the development of highly customized
applications utilizing core software technology, and related
software maintenance and data maintenance services. In early
fiscal 1997, we undertook a plan to change our strategic focus
from a custom development services company to a software product
company providing more standardized solutions. Our first
packaged software product was introduced in May 1997. We
released the Firepond Application Suite in October 1999 and
renamed and repackaged the FirePond Application Suite as the
SalesPerformer Suite in December 2000. As a result of these
efforts, product-related revenue as a percentage of total
revenue increased from 1.5% in fiscal 1997 to 90.2% in fiscal
2001.

On February 15, 2001, we acquired 100% of
the issued and outstanding shares of capital stock of
Brightware, Inc., located in San Rafael, California. The
acquisition was accounted for as a purchase in accordance with
APB No. 16 and accordingly, the results of operations of
Brightware have been included in the Companys results of
operations since the date of acquisition. In addition, on
September 27, 2000, the Company acquired 100% of the issued
and outstanding shares of capital stock of Signature Software,
Inc. (Signature). This acquisition was also accounted for using
the purchase method in accordance with APB No. 16.
Accordingly, the results of operations of Signature from the
date of acquisition have been included in the results of
operations of the Company.

During fiscal 2001, as a result of a global
slowdown in information technology spending, specifically in the
Customer Relationship Management market, and the Companys
acquisition of Brightware, the Company undertook a plan to
restructure its operations. These actions sought to better align
the Companys cost structure with projected operations in
the future, preserve cash, and in the case of the Brightware
transaction, eliminate redundant operations. The Company reduced
headcount and facilities as well as wrote off excess equipment
and terminated and restructured certain contractual
relationships. Overall, the Company termi-

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nated 31 general and administrative, 111 sales
and marketing, 159 professional services and 62 development
employees, as well as 90 contractors. The restructuring charges
for the year totaled $18.2 million. As a result of these
actions, as we expect expenses in fiscal 2002 to decrease as
compared to fiscal 2001.


We have incurred quarterly and annual losses
intermittently since we were formed, and regularly since we
began transitioning to a software product business in early
fiscal 1997. We incurred net losses of $28.9 million for
fiscal 1999, $16.3 million for fiscal 2000, and
$70.3 million for fiscal 2001. We currently plan to incur
an annual net loss for fiscal 2002. However, we plan to reach
break even, excluding stock based compensation and amortization
of intangible assets, by the end of the fourth quarter of fiscal
2002.

The Company generates revenue from primarily
product-related license and service revenue. Product-related
license revenue is generated from licensing the rights to the
use of the Companys packaged software products.
Product-related service revenue is generated from sales of
maintenance, consulting and training services performed for
customers that license the Companys products.

Revenue is recognized based on the provisions of
Statement of Position, No. 97-2, Software Revenue
Recognition (SOP 97-2), and Statement of Position
No. 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts
(SOP 81-1).

The Company has concluded that generally, for the
SalesPerformer product suite and its components, the
implementation services are essential to the customers use
of the packaged software products in arrangements where the
Company is responsible for implementation services. As such, the
Company recognizes revenue for these arrangements following the
percentage-of-completion method over the implementation period.
Percentage of completion is measured by the percentage of
implementation hours incurred to date compared to estimated
total implementation hours. This method is used because
management has determined that past experience has shown
expended hours to be the best measure of progress on these
engagements. When the current estimates of total contract
revenue and contract cost indicate a loss, a provision for the
entire loss on the contract is recorded.

In situations where the Company is not
responsible for implementation services for the SalesPerformer
Suite of products, the Company recognizes revenue on delivery of
the packaged software if there is persuasive evidence of an
arrangement, collection is probable and the fee is fixed or
determinable.

The Company executes contracts that govern the
terms and conditions of each software license, maintenance
arrangement and other services arrangements. These contracts may
be elements in a multiple element arrangement. Revenue under
multiple element arrangements, which may include several
different software products and services sold together, is
allocated to each element based on the residual method in
accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position 98-9,
Software Revenue Recognition with Respect to Certain
Arrangements.

The Company uses the residual method when
vendor-specific objective evidence of fair value does not exist
for one of the delivered elements in the arrangement. Under the
residual method, the fair value of the undelivered elements is
deferred and subsequently recognized. The Company has
established sufficient vendor specific objective evidence for
professional services, training and maintenance and support
services based on the price charged when these elements are sold
separately. Accordingly, software license revenue is recognized
under the residual method in arrangements in which software is
licensed with professional services, training, and maintenance
and support services.

In situations where the Company is not
responsible for implementation services for the SalesPerformer
Suite of products, but, is obligated to provide unspecified
additional software products in the future, the Company
recognizes revenue as a subscription over the term of the
commitment period.

For separate sales of the eServicePerformer
product line, which was acquired in connection with the
Brightware transaction, the Company recognizes revenue on
delivery of the packaged software if there is persuasive
evidence of an arrangement, collection is probable and the fee
is fixed or determinable. The Company has determined that
implementation services are not essential to the functionality
of the eServicePerformer product.

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In situations where the Company enters into a
license agreement for both its SalesPerformer Suite and its
eServicePerformer product and is responsible for implementation
services, it will recognize revenue for the entire arrangement
under SOP 81-1.

Revenue from maintenance services is recognized
ratably over the term of the contract, typically one year.
Consulting revenue is primarily related to implementation
services performed on a time-and-materials basis under separate
service arrangements. Revenue from consulting and training
services is recognized as services are performed.

The Company generally bills for services on a
monthly basis. The Company generally bills for product license
fees upon commencement of the contract, although the Company may
delay billing based on the terms of the contract. The Company
records deferred revenue on amounts billed or collected by the
Company before satisfying the above revenue recognition criteria.

The Company historically had provided services to
develop highly customized applications utilizing core software
technology. The Company no longer accepts new custom development
service projects but continues to provide ongoing services
related to previously completed custom development projects
including software and data maintenance. Revenue from these
ongoing arrangements is recognized as the services are performed.

We are planning for product-related revenue from
product licenses to grow over the long-term as result of
increased market acceptance of our products, and increases in
the productivity of our sales force. Therefore, we expect that a
higher percentage of total revenue will be attributable to
product-related revenue in the future.

We anticipate custom development services revenue
will continue to decline, as we have strategically de-emphasized
that business and do not plan to accept new custom development
contracts. We will continue to earn custom development services
revenue until existing custom development contracts and related
maintenance agreements are completed. Custom development
services revenue in the future will be primarily from ongoing
software maintenance and data maintenance services that we
provide under custom development services contracts.

We have invested heavily in research and
development. Research and development expenses have been
increasing since early fiscal 1997 when we began the development
of our software products. Since the introduction of our first
software product, we have determined that technological
feasibility of our software products occurs late in the
development cycle and close to general release of the products,
and that the development costs incurred between the time
technological feasibility is established and general release of
the product are not material. Therefore, beginning in June 1997,
we expense these costs as incurred to research and development
expense. To enhance our product offering and market position, we
believe it is essential for us to continue to make significant
investment in research and development.

We have granted stock options to employees and
consultants that require us to record stock-based compensation
expense. We have also granted stock warrants to certain
customers and to strategic business partners. Stock-based
compensation related to grants to employees primarily represents
the amortization, over the vesting period of the option, of the
difference between the exercise price of options granted to
employees and the fair market value of our common stock for
financial reporting purposes. Stock-based compensation related
to grants to non-employees represents the fair market value of
the options and warrants granted as computed using an
established option valuation formula. We recorded stock-based
compensation expense of approximately $2.6 million in fiscal
1999, $6.7 million in fiscal 2000 and $4.5 million in
fiscal 2001. As of October 31, 2001, the deferred
compensation balance was approximately $1.3 million and
will be amortized over the remaining vesting period of the
options and warrants.

On June 26, 2001, we commenced a stock
option exchange program in which our directors and eligible
employees were offered the opportunity to exchange existing
stock options for new stock options with an exercise price equal
to the current market value of our common stock. Participants in
the exchange program received new options to purchase
seventy-five percent (75%) of the number of shares of our common
stock subject to the options that were exchanged and canceled.
The new options were granted on July 31, 2001, with an
exercise price of $.66 per share. We accepted 7,179,285 stock
options for exchange and issued 5,384,384

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stock options in exchange for such tendered
options. As a result of the cancellation of the outstanding
options, unamortized deferred compensation of approximately
$783,000 was amortized and recorded as stock-based compensation
during the third quarter of fiscal 2001. In fiscal 2001, we
recorded $188,000 as stock-based compensation expense and we may
continue to incur compensation expense as a result of the
issuance of the new options because the new options and all
options subject to the tender offer are subject to variable plan
accounting in accordance with APB No. 25. Accordingly, we
are required to record to compensation expense all increases and
decreases in the value of those options, including any
appreciation and depreciation in the market price of the
underlying option shares, which occurs between the grant date of
that option and the date the option is exercised for those
shares or otherwise terminates unexercised. The greater the
increase in the market value of our common stock following the
date of grant, the greater the compensation expense we will be
required to record.


In connection with the Signature acquisition, we
issued 276,266 shares of restricted common stock, valued at
approximately $3.9 million, subject to vesting through
September 27, 2002. Vesting of these shares is based on the
retention of certain Signature employees measured on a quarterly
basis, as defined. The value of these restricted shares is being
recorded as stock-based compensation on a pro rata basis over
the vesting period. Accordingly, we recognized approximately
$162,000 of stock-based compensation for these shares in fiscal
2000 and $2,404,000 in fiscal 2001. We also recognized
approximately $733,000 in stock-based compensation due to the
acceleration of the vesting of certain shares of restricted
common stock related to one employee termination.

Our series A, series C and
series G preferred stock, as well as shares of our common
stock outstanding on May 20, 1997 other than those shares
held by General Atlantic Partners, had rights that allow holders
to receive a priority payment upon the completion of our initial
public offering. These priority payments totaled
$35.8 million for the series A, series C and
series G preferred stockholders, and $10.0 million for
the shares of our common stock outstanding on May 20, 1997
other than those shares held by General Atlantic Partners. These
amounts were payable in cash, or, at our option, a number of
shares of common stock determined by dividing the amount payable
by $12.00. Our board of directors elected to make these payments
in 3,812,532 shares of common stock upon consummation of our
initial public offering. At the initial public offering price of
$22.00 per share, the value of the stock dividend totaled
$65.5 million for the series A, series C and
series G preferred stockholders, and $18.3 million for
the stock dividend on the shares of our common stock outstanding
on May 20, 1997 other than those shares held by General
Atlantic Partners. The stock dividend on the preferred stock
increased the loss attributable to common stockholders by
$65.5 million for fiscal 2000.

As of October 31, 2001, the Company has
available net operating losses of approximately $93 million
to reduce future federal and state income taxes, if any. This
carryforward expires beginning in fiscal 2012 and may be subject
to review and possible adjustment by the Internal Revenue
Service. Utilization of these carryforwards may be subject to
substantial limitations due to the ownership change limitations
provided by the Internal Revenue Service Code of 1986. The
Companys wholly-owned foreign subsidiaries have net
operating loss carryforwards of approximately $31 million.

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Results of Operations

The following table presents selected
consolidated financial data as a percentage of total revenue:

|                                         |                                                       |                          |                               |      |      |       |        |      |      |       |        |      |      |       | 
|---------------------------------------- | ----------------------------------------------------- | ------------------------ | ----------------------------- | ---- | ---- | ----- | ------ | ---- | ---- | ----- | ------ | ---- | ---- | ----- | 
|                                         |                                                       |                         
|                                         |                                                       | Years Ended October 31, 
|                                         |                                                       |                         
|                                         |                                                       | 1999                     |                               | 2000 |      | 2001 
|                                         |                                                       |                          |                               |      |      |      
|Revenue:                                 |                                                       |                          |                               |      |      |       |        |      |      |       |        |     
|                                         | Product-related revenue:                              |                          |                               |      |      |       |        |      |      |       |        |      |     
|                                         |                                                       | License                  |                               |      | 28.5 | %     |        |      | 37.3 | %     |        |      | 32.2 | %    
|                                         |                                                       | Services and maintenance |                               |      | 25.1 |       |        |      | 39.2 |       |        |      | 58.0 |      
|                                         |                                                       |                          |                               |      |      |       |        |      |      |       |        |     
|                                         |                                                       |                          | Total product-related revenue |      |      | 53.6  |        |      |      | 76.5  |        |      |      | 90.2  | 
|                                         | Custom development services                           |                          |                               | 46.4 |      |       |        | 23.5 |      |       |        | 9.8  |     
|                                         |                                                       |                          |                               |      |      |       |        |      |      |       |        |     
|                                         |                                                       |                          | Total revenue                 |      |      | 100.0 |        |      |      | 100.0 |        |      |      | 100.0 | 
|                                         |                                                       |                          |                               |      |      |       |        |      |      |       |        |     
|Cost of revenue:                         |                                                       |                          |                               |      |      |       |        |      |      |       |        |     
|                                         | License                                               |                          |                               | 0.7  |      |       |        | 0.8  |      |       |        | 1.1  |     
|                                         | Product-related services and maintenance              |                          |                               | 16.6 |      |       |        | 26.6 |      |       |        | 63.1 |     
|                                         | Custom development services                           |                          |                               | 31.0 |      |       |        | 9.3  |      |       |        | 2.5  |     
|                                         |                                                       |                          |                               |      |      |       |        |      |      |       |        |     
|                                         |                                                       |                          | Total cost of revenue         |      |      | 48.3  |        |      |      | 36.7  |        |      |      | 66.7  | 
|                                         |                                                       |                          |                               |      |      |       |        |      |      |       |        |     
|Gross profit                             |                                                       |                          | 51.7                          |      |      |       | 63.3   |      |      |       | 33.3   |     
|Operating expenses:                      |                                                       |                          |                               |      |      |       |        |      |      |       |        |     
|                                         | Sales and marketing                                   |                          |                               | 68.9 |      |       |        | 45.0 |      |       |        | 54.5 |     
|                                         | Research and development                              |                          |                               | 28.1 |      |       |        | 24.6 |      |       |        | 40.9 |     
|                                         | General and administrative                            |                          |                               | 20.7 |      |       |        | 15.2 |      |       |        | 23.8 |     
|                                         | Stock-based compensation                              |                          |                               | 7.6  |      |       |        | 10.8 |      |       |        | 9.7  |     
|                                         | Amortization of goodwill and other intangible
	assets |                          |                               |      |      |       |        |      |      |       |        | 7.7  |     
|                                         | Restructuring charge (credit)                         |                          |                               | 8.8  |      |       |        | (0.8 | )    |       |        | 39.6 |     
|                                         | Settlement of claim                                   |                          |                               |     |      |       |        |     |      |       |        | 2.6  |     
|                                         | Acquired in-process research and development          |                          |                               |     |      |       |        |     |      |       |        | 13.5 |     
|                                         |                                                       |                          |                               |      |      |       |        |      |      |       |        |     
|                                         |                                                       |                          | Total operating expenses      |      |      | 134.1 |        |      |      | 94.8  |        |      |      | 192.3 | 
|                                         |                                                       |                          |                               |      |      |       |        |      |      |       |        |     
|Loss from operations                     |                                                       |                          | (82.4                         | )    |      |       | (31.5  | )    |      |       | (159.0 | )   
|Interest income (expense)                |                                                       |                          | (1.6                          | )    |      |       | 6.5    |      |      |       | 8.0    |     
|Other income (expense), net              |                                                       |                          | (0.2                          | )    |      |       | 1.0    |      |      |       | (1.3   | )   
|                                         |                                                       |                          |                               |      |      |       |        |      |      |       |        |     
|Net loss before extraordinary item       |                                                       |                          | (84.2                         | )    |      |       | (24.0  | )    |      |       | (152.3 | )   
|Loss on extinguishment of debt           |                                                       |                          |                              |      |      |       | (2.3   | )    |      |       |       |     
|                                         |                                                       |                          |                               |      |      |       |        |      |      |       |        |     
|Net loss                                 |                                                       |                          | (84.2                         | )    |      |       | (26.3  | )    |      |       | (152.3 | )   
|Stock dividend to preferred stockholders |                                                       |                          |                              |      |      |       | (105.8 | )    |      |       |       |     
|                                         |                                                       |                          |                               |      |      |       |        |      |      |       |        |     
|Loss applicable to common stockholders   |                                                       |                          | (84.2                         | )%   |      |       | (132.1 | )%   |      |       | (152.3 | )%  
|                                         |                                                       |                          |                               |      |      |       |        |      |      |       |        |     

Comparison of Fiscal Years Ended
October 31, 2001 and 2000

Revenue.Total revenue decreased
$15.9 million, or 25.6%, to $46.1 million in fiscal 2001
from $62.0 million in fiscal 2000. This decrease is
primarily attributable to a 68.9% decrease in custom development
revenue and a 12.3% decrease in product-related revenue.



| |                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | License.License
	revenue decreased $8.3 million, or 35.8%, to $14.8 million
	in fiscal 2001 from $23.1 million in fiscal 2000. License
	revenue as a percentage of total revenue decreased to 32.2% in
	fiscal 2001 from 37.3% in fiscal 2000. We believe the decrease
	in absolute dollars and as a percentage of total

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | revenue is primarily attributable to a decline in
	our software license sales due to a global slow down in
	information technology spending by companies in our target
	markets. Over the long-term, we are planning for license revenue
	growth as a result of additional license sales resulting from
	increased market acceptance of our products, a growing customer
	base, the success of our marketing efforts, and improved
	productivity of our sales force.                                                                                                                                                                                                                         
|
| | Product service and maintenance.Product service and maintenance
	revenue increased $2.4 million, or 10.1%, to
	$26.7 million in fiscal 2001 from $24.3 million in
	fiscal 2000. Product services revenue as a percentage of total
	revenue increased to 58.0% in fiscal 2001 from 39.2% in fiscal
	2000. The increase is attributable to an increased amount of
	services provided in connection with the license implementations
	in this period as compared to the prior year period. We expect
	product service revenue to decline in fiscal 2002 as the result
	of fewer post-license implementation consulting engagements and
	an increased use of third-party implementation partners.
|
| | Custom development services.Custom development services revenue
	decreased $10.0 million, or 68.9%, to $4.5 million in
	fiscal 2001 from $14.6 million in fiscal 2000. Custom
	development services revenue as a percentage of total revenue
	decreased to 9.8% in fiscal 2001 from 23.5% in fiscal 2000. The
	decrease in absolute dollars and as a percentage of total
	revenue is due to the change of our strategic focus resulting in
	fewer custom development services engagements. We expect custom
	development services revenue to continue to decline in absolute
	dollars and as a percentage of total revenue.                                                                  

Cost of revenue.Total cost of revenue increased
$8.0 million, or 35.3%, to $30.8 million in fiscal
2001 from $22.8 million in fiscal 2000. Total cost of
revenue as a percentage of total revenue increased to 66.7% in
fiscal 2001 from 36.7% in fiscal 2000.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of license revenue.Cost of license revenue consists
	primarily of costs of royalties, media, product packaging,
	documentation and other production cost. Cost of license revenue
	increased $25,000, or 5.0%, to $524,000 in fiscal 2001 from
	$499,000 in fiscal 2000. Cost of license revenue as a percentage
	of license revenue increased to 3.5% in fiscal 2001 from 2.2% in
	fiscal 2000. The increase in absolute dollars is primarily due
	to incremental royalty charges incurred by the addition of the
	eServices product line.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Cost of product-related services and
	maintenance revenue.Cost of
	product-related services and maintenance revenue consists
	primarily of salaries and related costs for consulting, training
	and customer support personnel, including cost of services
	provided by third-party consultants engaged by us. Cost of
	product-related services and maintenance revenue increased
	$12.6 million, or 76.5%, to $29.1 million in fiscal
	2001 from $16.5 million in fiscal 2000. Cost of product-related
	services and maintenance revenue as a percentage of
	product-related services and maintenance revenue increased to
	108.9% in fiscal 2001 from 67.9% in fiscal 2000. The increase in
	absolute dollars was primarily due to increased staff and
	consulting resources. The increase as a percentage of revenue
	was due to our maintaining consulting staff in excess of the
	current customer demand for services as well as realizing lower
	average revenue per hour on certain fixed price services
	contracts in this period caused by the Company improving
	customer satisfaction and performing services outside of the
	scope of the original engagement for no incremental revenue. In
	addition, we experienced lower utilization of our consulting
	staff in this period. We expect costs of product-related
	services to decline for the next fiscal year as a result of the
	actions we have taken to reduce our employee base and related
	costs.
|
| | Cost of custom development services revenue.Cost of custom development services
	revenue consists primarily of salaries and related costs for
	development, consulting, training and customer support personnel
	as it relates to our custom development projects, including cost
	of services provided by third-party consultants engaged by us.
	Cost of custom development services revenue decreased
	$4.6 million, or 79.7%, to $1.2 million in fiscal 2001
	from $5.8 million in fiscal 2000. Cost of custom
	development services as a percentage of custom development
	services revenue decreased to 25.8% in fiscal 2001 from 39.6% in
	fiscal 2000. The decrease in absolute dollars is primarily due
	to decreased staff supporting fewer custom development services
	engagements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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Sales and marketing expenses.Sales and marketing expenses
consist primarily of salaries, commissions and bonuses for sales
and marketing personnel and promotional expenses. Sales and
marketing expenses decreased $2.8 million, or 9.9%, to
$25.1 million in fiscal 2001 from $27.9 million in
fiscal 2000. Sales and marketing expenses as a percentage of
total revenue increased to 54.5% in fiscal 2001 from 45.0% in
fiscal 2000. Sales and marketing expenses decreased in absolute
dollars primarily due to decreased commissions as a result of
less sales in fiscal 2001, partially offset by incremental sales
and marketing expenses incurred by the addition of the eServices
product line. Sales and marketing expenses increased as a
percentage of total revenue as a result of lower revenue. We
expect sales and marketing expenses will decline for the next
fiscal year due to the actions we have taken to reduce our
workforce which will result in reduced payroll and other
expenses. We plan to continue to invest in marketing programs in
order to achieve planned revenue levels.

Research and development expenses.Research and development expenses
consist primarily of salaries and personnel-related costs and
the costs of contractors associated with the development of new
products, the enhancement of existing products, and the
performance of quality assurance and documentation activities.
Research and development expenses increased $3.6 million,
or 23.4% to $18.8 million in fiscal 2001 from
$15.2 million in fiscal 2000. Research and development
expenses as a percentage of total revenue increased to 40.9% in
fiscal 2001 from 24.6% in fiscal 2000. These expenses increased
in absolute dollars as a result of incremental research and
development expenses associated with the acquisition of the
eServices product line. Research and development expenses
increased as a percentage of total revenue primarily due to
lower revenue. We expect research and development expenses will
decline for the next fiscal year as a result of reduction of
workforce. We plan to continue to make necessary investments to
enhance our existing products and develop new products in order
to achieve planned revenue levels.

General and administrative expenses.General and administrative
expenses consist primarily of salaries, and other
personnel-related cost for executive, financial, human resource,
information services, and other administrative functions, as
well as legal and accounting costs. General and administrative
expenses increased $1.5 million, or 16.2%, to
$11.0 million in fiscal 2001 from $9.5 million in
fiscal 2000. General and administrative expenses as a percentage
of total revenue increased to 23.8% in fiscal 2001 from 15.2% in
fiscal 2000. These expenses increased in absolute dollars
primarily as a result of increased headcount from Brightware
transitional staff that were performing integration tasks. The
increase in general and administrative expenses as a percentage
of total revenue is attributable to lower revenue. We expect
that general and administrative expenses will remain
approximately flat or decline for the next fiscal year.

Stock-based compensation expense.Stock-based compensation expense
decreased $2.2 million, or 33.1%, to $4.5 million in
fiscal 2001 from $6.7 million in fiscal 2000. Stock-based
compensation expense as a percentage of total revenue decreased
to 9.7% in fiscal 2001 from 10.8% in fiscal 2000. If we had
allocated our stock-based compensation to the departments for
which the services were performed, the allocation would have
increased cost of revenue by $568,000 in fiscal 2000 and $84,000
in fiscal 2001, sales and marketing expenses by $4,193,000 in
fiscal 2000 and $181,000 in fiscal 2001, research and
development expenses by $1,261,000 in fiscal 2000 and $300,000
in fiscal 2001, and general and administrative expenses by
$658,000 in fiscal 2000 and $3,905,000 in fiscal 2001. The
decrease in stock-based compensation expense from the prior year
is primarily the result of a $3.0 million decline in
charges for nonemployee stock options and warrants and a
$1.1 million decline in charges for modifications of stock
option terms for employees, partially offset by a
$3.2 million charge from the Signature acquisition stock
grants.

Amortization of goodwill and other
intangible assets.In conjunction
with our acquisition of Brightware, we allocated approximately
$6.3 million to goodwill which was adjusted by
approximately $1.2 million in the quarter ended
July 31, 2001 to $7.5 million, $4.9 million to
developed technology and know-how and $2.2 million to
assembled workforce. Developed technology represents patented
and unpatented technology and know-how related to
Brightwares current eServices product offering founded on
a combination of artificial intelligence, knowledge-manager
technology and Internet enterprise applications. Assembled
workforce is the presence of a skilled workforce that is
knowledgeable about company procedures and possesses expertise
in certain fields that are important to continued profitability
and growth of a company. Intangible assets are being amortized
over three years. For the fiscal 2001, we recognized
$3.6 million in amortization. We adopted SFAS 142,
Goodwill and Other Intangible Assetson November 1,
2001, and going

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forward goodwill, as defined, will be adjusted
periodically for impairments and no goodwill amortization
expense will be recorded.


Restructuring charge (credit).Throughout fiscal 2001, the
Company announced three restructurings of its operations. In the
quarter ended April 30, 2001, we recorded a restructuring charge
of $3.0 million as a result of a global slowdown in
information technology spending and to eliminate redundant
operations that resulted from our acquisition of Brightware. In
the quarter ended July 31, 2001, we recorded a
restructuring charge of $8.1 million as a result of a
continued slowdown of global information technology spending. In
the quarter ended October 31, 2001 as a result of a
continuation in the slowdown of global information technology
spending we recorded a restructuring charge of
$7.1 million. These actions sought to better align the
Companys cost structure with projected operations in the
future, preserve cash, and in the case of the Brightware
transaction, eliminate redundant operations. The Company reduced
headcount and facilities as well as wrote off excess equipment
and terminated and restructured certain contractual
relationships. Overall, the Company terminated 31 general and
administrative, 111 sales and marketing, 159 professional
services and 62 development employees, as well as 90
contractors. The restructuring charges for the year totaled
$18.2 million, which includes $8.5 million of employee
severance costs, $3.0 million of facilities related costs,
$3.9 million of impaired property and equipment costs,
$2.0 million of contract termination fees and $782,000 of
other costs. As a result of these actions, as we expect expenses
in fiscal 2002 to decrease as compared to fiscal 2001.

Settlement of claim.On March 2, 2001, we entered
into an agreement with a customer under which we paid to the
customer $1.6 million to resolve outstanding contractual
matters. The expense for the settlement was partially offset by
$389,000 previously paid by the customer but not yet earned by
the Company. The Company recorded this transaction as a net
charge of $1.2 million to operations in the quarter ended
April 30, 2001.

Acquired in-process research and
development.As part of the
purchase price allocation for Brightware, all intangible assets
that are a part of the acquisition were identified and valued.
It was determined that technology assets and assembled workforce
had value. As a result of this identification and valuation
process, we allocated approximately $6.2 million of the
purchase price to in-process research and development projects.
This allocation represented the estimated fair value based on
risk-adjusted cash flows related to the incomplete research and
development projects. At the date of acquisition, the
development of these projects had not yet reached technological
feasibility, and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed
as of the date of the acquisition.

Interest income (expense), net.Interest income (expense), net
decreased $370,000, or 9.2%, to $3.7 million in fiscal 2001
from $4.0 million in fiscal 2000. The decrease is primarily
due to decreased levels of cash and cash equivalents and short
and long-term investments.

Other income (expense), net.Other income (expense), net
primarily consists of bank fees, certain state and local taxes
and foreign currency transaction gains/losses. Fiscal 2000 also
includes $323,000 in net proceeds from the settlement of a
lawsuit. Other income (expense), net decreased $1.3 million, or
197.5%, to $622,000 in expense in fiscal 2001 from $638,000 in
income in fiscal 2000. The decline is primarily due to foreign
currency transaction losses in fiscal 2001.

Loss on extinguishments of debt.In February 2000, we repaid
$6,000,000 in subordinated notes payable. In conjunction with
the original issuance of the notes in November 1999, we issued
the note holders warrants to purchase an aggregate of 360,000
shares of common stock at an exercise price of $5.25 per share
with an estimated fair value totaling $2,789,000. We had
allocated the proceeds from the subordinated notes payable of
$6,000,000 in proportion to the relative fair values of both the
warrants and the subordinated notes payable. As a result, we had
recorded the warrants as a discount totaling $1,904,000 against
the carrying value of the subordinated notes payable, with the
discount amortized to interest expense over the term of the
subordinated notes payable. As a result of repaying the notes in
fiscal 2000, we recorded a $1,437,000 loss on extinguishment of
debt as an extraordinary item for the amount of unamortized
discount at the time of repayment.

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Comparison of Fiscal Years Ended
October 31, 2000 and 1999

Revenue.Total revenue increased
$27.7 million, or 80.8%, to $62.0 million in fiscal 2000
from $34.3 million in fiscal 1999. This increase is
attributable to a 157.8% increase in product-related revenue,
partially offset by a planned decrease in custom development
services revenue, associated with our change in focus from
providing custom development services to providing more
standardized software products.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | License.License
	revenue increased $13.4 million, or 136.6%, to $23.1
	million in fiscal 2000 from $9.8 million in fiscal 1999.
	License revenue as a percentage of total revenue increased to
	37.3% in fiscal 2000 from 28.5% in fiscal 1999. The increase in
	license revenue in absolute dollars and as a percentage of total
	revenue is primarily attributable to an increase in the number
	of licenses implemented at higher average selling prices.                                                                                
|
| | Product service and maintenance.Product service and maintenance
	revenue increased $15.7 million, or 182.0%, to
	$24.3 million in fiscal 2000 from $8.6 million in
	fiscal 1999. Product services revenue as a percentage of total
	revenue increased to 39.2% in fiscal 2000 from 25.1% in fiscal
	1999. The increase in absolute dollars and as a percentage of
	total revenue is attributable to the increase in the number of
	consulting engagements and maintenance agreements related to the
	increased license sales in fiscal 2000.
|
| | Custom development services.Custom development services revenue
	decreased $1.3 million, or 8.3%, to $14.6 million in
	fiscal 2000 from $15.9 million in fiscal 1999. Custom
	development services revenue as a percentage of total revenue
	decreased to 23.5% in fiscal 2000 from 46.4% in fiscal 1999. The
	decrease in absolute dollars and as a percentage of total
	revenue is due to the change of our strategic focus.                                                                                                              

Cost of revenue.Total cost of revenue increased
$6.2 million, or 37.5%, to $22.8 million in fiscal
2000 from $16.6 million in fiscal 1999. Total cost of
revenue as a percentage of total revenue decreased to 36.7% in
fiscal 2000 from 48.3% in fiscal 1999.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of license revenue.Cost of license revenue increased
	$261,000, or 109.7%, to $499,000 in fiscal 2000 from $238,000 in
	fiscal 1999. Cost of license revenue as a percentage of license
	revenue remained consistent at 2.2% in fiscal 2000 and 2.4% in
	fiscal 1999. The increase in absolute dollars is due primarily
	to an increase in royalty charges associated with the increase
	in license revenue.                                                                                                                      
|
| | Cost of product-related services and
	maintenance revenue.Cost of
	product-related services and maintenance revenue increased
	$10.8 million, or 190.4%, to $16.5 million in fiscal
	2000 from $5.7 million in fiscal 1999. Cost of
	product-related services and maintenance revenue as a percentage
	of product-related services and maintenance revenue increased to
	67.9% in fiscal 2000 from 66.0% in fiscal 1999. The increase was
	primarily due to increased staff to support a higher number of
	product-related engagements.
|
| | Cost of custom development services revenue.Cost of custom development services
	revenue decreased $4.9 million, or 45.7%, to
	$5.8 million in fiscal 2000 from $10.6 million in
	fiscal 1999. Cost of custom development services as a percentage
	of custom development services revenue decreased to 39.6% in
	fiscal 2000 from 66.9% in fiscal 1999. The decrease in absolute
	dollars is primarily due to decreased staff supporting fewer
	custom development services engagements.                                              

Sales and marketing expenses.Sales and marketing expenses
increased $4.3 million, or 18.2%, to $27.9 million in
fiscal 2000 from $23.6 million in fiscal 1999. Sales and
marketing expenses as a percentage of total revenue decreased to
45.0% in fiscal 2000 from 68.9% in fiscal 1999. Sales and
marketing expenses increased in absolute dollars primarily due
to increased headcount in our sales operations, as well as
increase in commissions on product-related sales. Sales and
marketing expenses decreased as a percentage of total revenue
primarily due to our revenue increasing at a greater rate than
our sales and marketing expenses.

Research and development expenses.Research and development expenses
increased $5.6 million, or 58.3% to $15.3 million in
fiscal 2000 from $9.6 million in fiscal 1999. Research and
development expenses as a percentage of total revenue decreased
to 24.6% in fiscal 2000 from 28.1% in fiscal 1999. These
expenses increased in absolute dollars as a result of increased
headcount in our product development operation and increased
utilization of engineering and product development contractors
associated with our investment in the

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SalesPerformer Suite. Research and development
expenses decreased as a percentage of total revenue primarily
due to our revenue increasing at a greater rate than our
research and development expenses.


General and administrative expenses.General and administrative
expenses increased $2.4 million, or 33.4%, to
$9.4 million in fiscal 2000 from $7.1 million in fiscal
1999. General and administrative expenses as a percentage of
total revenue decreased to 15.2% in fiscal 2000 from 20.7% in
fiscal 1999. These expenses increased in absolute dollars
primarily as a result of increased headcount in our general and
administrative functions, increased costs of our infrastructure
necessary to support our growth and costs associated with
becoming a public company in fiscal 2000. The decrease in
general and administrative expenses as a percentage of total
revenue is attributable to our revenue increasing at a greater
rate than our general and administrative expenses.

Stock-based compensation expense.Stock-based compensation expense
increased $4.1 million, or 157.2%, to $6.7 million in
fiscal 2000 from $2.6 million in fiscal 1999. Stock-based
compensation expense as a percentage of total revenue increased
to 10.8% in fiscal 2000 from 7.6% in fiscal 1999. If we had
allocated our stock-based compensation to the departments for
which the services were performed, the allocation would have
increased cost of revenue by $40,000 in fiscal 1999 and $568,000
in fiscal 2000, sales and marketing expenses by $1,327,000 in
fiscal 1999 and $4,193,000 in fiscal 2000, research and
development expenses by $913,000 in fiscal 1999 and $1,261,000
in fiscal 2000, and general and administrative expenses by
$317,000 in fiscal 1999 and $658,000 in fiscal 2000. The
increase in stock based compensation over the prior year is the
result of a higher number of grants in fiscal 2000 to
consultants and in connection with strategic business alliances,
as well as the occurrence of a $1,800,000 charge in fiscal 2000
resulting from the modifications of terms of three employee
stock option agreements.

Restructuring charge (credit).During fiscal 1999, we undertook a
plan to relocate our corporate offices from Minnesota to
Massachusetts. In connection with this plan, we incurred
$3.0 million of restructuring charges, which included
$1.5 million for asset impairments, $1.0 million for
idle lease space and $500,000 for employee severance costs.
During fiscal 2000, we negotiated a new lease for less space,
eliminating the future obligation for the idle space in our
Mankato facility. As a result, we reversed $500,000 of the
restructuring accrual representing the remaining obligation for
the idle lease space.

Interest income (expense), net.Interest income (expense), net
improved to $4.0 million of income in fiscal 2000 from
$565,000 of expense in fiscal 1999. The improvement is primarily
due to interest earned on increased cash and cash equivalents
and short and long-term investments as a result of the proceeds
from our initial public offering partially offset by interest
expense primarily related to the issuance of subordinated notes
payable.

Other income (expense), net.Other income (expense), net
improved to $640,000 of income in fiscal 2000 from $66,000 of
expense in fiscal 1999. This improvement is primarily attributed
to foreign currency transaction net gains and $323,000 in net
proceeds from the lawsuit settlement in fiscal 2000.

Loss on extinguishments of debt.In February 2000, we repaid
$6,000,000 in subordinated notes payable. In conjunction with
the original issuance of the notes in November 1999, we issued
the note holders warrants to purchase an aggregate of 360,000
shares of common stock at an exercise price of $5.25 per share
with an estimated fair value totaling $2,789,000. We had
allocated the proceeds from the subordinated notes payable of
$6,000,000 in proportion to the relative fair values of both the
warrants and the subordinated notes payable. As a result, we had
recorded the warrants as a discount totaling $1,904,000 against
the carrying value of the subordinated notes payable, with the
discount amortized to interest expense over the term of the
subordinated notes payable. As a result of repaying the notes in
fiscal 2000, we recorded a $1,437,000 loss on extinguishment of
debt as an extraordinary item for the amount of unamortized
discount at the time of repayment.

Quarterly Results of Operations

The following table presents our unaudited
consolidated statement of operations data for the eight quarters
in the period ended October 31, 2001, as well as the
percentage of our total revenue represented by

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each item. We have prepared this unaudited
consolidated information on a basis consistent with our audited
consolidated financial statements, and in the opinion of our
management, this information reflects all normal recurring
adjustments necessary for a fair presentation of our operating
results for the quarters presented.


|                                              |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |       |       |        | 
|--------------------------------------------- | ----------------------------------------------------- | --------------------------- | ----------------------------- | --------- | ----- | -------- | ------- | ----------- | ----- | ----------- | ------ | --------- | ----- | -------- | ------ | ----------- | ----- | ------ | ------ | ----- | ----- | ------ | ------- | ----- | ----- | ------ | ------- | ----- | ----- | ------ | ------- | ----- | ----- | ------ | 
|                                              |                                                       |                            
|                                              |                                                       | Quarter Ended              
|                                              |                                                       |                            
|                                              |                                                       | January 31,                 |                               | April 30, |       | July 31, |         | October 31, |       | January 31, |        | April 30, |       | July 31, |        | October 31,
|                                              |                                                       | 2000                        |                               | 2000      |       | 2000     |         | 2000        |       | 2001        |        | 2001      |       | 2001     |        | 2001       
|                                              |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |            
|                                              |                                                       |                            
|                                              |                                                       | (In thousands)             
|Revenue:                                      |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |      
|                                              | Product-related revenue:                              |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |       |      
|                                              |                                                       | License                     |                               | $         | 3,907 |          |         | $           | 4,921 |             |        | $         | 6,794 |          |        | $           | 7,506 |        |        | $     | 4,034 |        |         | $     | 3,631 |        |         | $     | 3,924 |        |         | $     | 3,259 |       
|                                              |                                                       | Services and maintenance    |                               |           | 4,458 |          |         |             | 5,058 |             |        |           | 6,492 |          |        |             | 8,257 |        |        |       | 8,273 |        |         |       | 7,907 |        |         |       | 5,329 |        |         |       | 5,200 |       
|                                              |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |      
|                                              |                                                       |                             | Total product-related revenue |           |       | 8,365    |         |             |       | 9,979       |        |           |       | 13,286   |        |             |       | 15,763 |        |       |       | 12,307 |         |       |       | 11,538 |         |       |       | 9,253  |         |       |       | 8,459  | 
|                                              |                                                       | Custom development services |                               |           | 3,612 |          |         |             | 3,608 |             |        |           | 4,029 |          |        |             | 3,329 |        |        |       | 2,240 |        |         |       | 777   |        |         |       | 861   |        |         |       | 654   |       
|                                              |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |      
|                                              |                                                       |                             | Total revenue                 |           |       | 11,977   |         |             |       | 13,587      |        |           |       | 17,315   |        |             |       | 19,092 |        |       |       | 14,547 |         |       |       | 12,315 |         |       |       | 10,114 |         |       |       | 9,113  | 
|                                              |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |      
|Cost of revenue:                              |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |      
|                                              | Licenses                                              |                             |                               | 129       |       |          |         | 138         |       |             |        | 159       |       |          |        | 72          |       |        |        | 69    |       |        |         | 155   |       |        |         | 145   |       |        |         | 155   |      
|                                              | Product-related services and maintenance              |                             |                               | 2,283     |       |          |         | 2,828       |       |             |        | 4,470     |       |          |        | 6,904       |       |        |        | 8,533 |       |        |         | 9,262 |       |        |         | 6,381 |       |        |         | 4,918 |      
|                                              | Custom development services                           |                             |                               | 1,599     |       |          |         | 1,407       |       |             |        | 1,366     |       |          |        | 1,402       |       |        |        | 677   |       |        |         | 145   |       |        |         | 217   |       |        |         | 132   |      
|                                              |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |      
|                                              |                                                       |                             | Total cost of revenue         |           |       | 4,011    |         |             |       | 4,373       |        |           |       | 5,995    |        |             |       | 8,378  |        |       |       | 9,279  |         |       |       | 9,562  |         |       |       | 6,743  |         |       |       | 5,205  | 
|                                              |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |      
|Gross profit                                  |                                                       |                             | 7,966                         |           |       |          | 9,214   |             |       |             | 11,320 |           |       |          | 10,714 |             |       |        | 5,268  |       |       |        | 2,753   |       |       |        | 3,371   |       |       |        | 3,908   |      
|Operating expenses:                           |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |      
|                                              | Sales and marketing                                   |                             |                               | 6,418     |       |          |         | 6,671       |       |             |        | 7,918     |       |          |        | 6,901       |       |        |        | 6,852 |       |        |         | 8,559 |       |        |         | 6,574 |       |        |         | 3,146 |      
|                                              | Research and development                              |                             |                               | 3,697     |       |          |         | 3,650       |       |             |        | 3,485     |       |          |        | 4,430       |       |        |        | 4,678 |       |        |         | 6,598 |       |        |         | 4,540 |       |        |         | 3,022 |      
|                                              | General and administrative                            |                             |                               | 1,962     |       |          |         | 2,242       |       |             |        | 2,507     |       |          |        | 2,736       |       |        |        | 2,891 |       |        |         | 3,044 |       |        |         | 2,904 |       |        |         | 2,142 |      
|                                              | Stock-based compensation                              |                             |                               | 1,167     |       |          |         | 1,767       |       |             |        | 1,731     |       |          |        | 2,014       |       |        |        | 696   |       |        |         | 672   |       |        |         | 1,472 |       |        |         | 1,630 |      
|                                              | Amortization of goodwill and other intangible
	assets |                             |                               |          |       |          |         |            |       |             |        |          |       |          |        |            |       |        |        |      |       |        |         | 946   |       |        |         | 1,331 |       |        |         | 1,277 |      
|                                              | Restructuring charge (credit)                         |                             |                               |          |       |          |         | (500        | )     |             |        |          |       |          |        |            |       |        |        |      |       |        |         | 3,021 |       |        |         | 8,129 |       |        |         | 7,093 |      
|                                              | Settlement of claim                                   |                             |                               |          |       |          |         |            |       |             |        |          |       |          |        |            |       |        |        |      |       |        |         | 1,211 |       |        |         |      |       |        |         |      |      
|                                              | Acquired in-process research and development          |                             |                               |          |       |          |         |            |       |             |        |          |       |          |        |            |       |        |        |      |       |        |         | 6,200 |       |        |         |      |       |        |         |      |      
|                                              |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |      
|                                              |                                                       |                             | Total operating expenses      |           |       | 13,244   |         |             |       | 13,830      |        |           |       | 15,641   |        |             |       | 16,081 |        |       |       | 15,117 |         |       |       | 30,251 |         |       |       | 24,950 |         |       |       | 18,310 | 
|                                              |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |      
|Loss from operations                          |                                                       |                             | (5,278                        | )         |       |          | (4,616  | )           |       |             | (4,321 | )         |       |          | (5,367 | )           |       |        | (9,849 | )     |       |        | (27,498 | )     |       |        | (21,579 | )     |       |        | (14,402 | )    
|Interest income (expense)                     |                                                       |                             | (807                          | )         |       |          | 1201    |             |       |             | 1,805  |           |       |          | 1,835  |             |       |        | 1,740  |       |       |        | 1,038   |       |       |        | 605     |       |       |        | 290     |      
|Other income (expense), net                   |                                                       |                             | 262                           |           |       |          | 271     |             |       |             | (170   | )         |       |          | 280    |             |       |        | (499   | )     |       |        | (181    | )     |       |        | (381    | )     |       |        | 435     |      
|                                              |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |      
|Net loss before extraordinary item            |                                                       |                             | (5,823                        | )         |       |          | (3,144  | )           |       |             | (2,686 | )         |       |          | (3,252 | )           |       |        | (8,608 | )     |       |        | (26,641 | )     |       |        | (21,355 | )     |       |        | (13,677 | )    
|Loss on extinguishment of debt                |                                                       |                             |                              |           |       |          | (1,437  | )           |       |             |       |           |       |          |       |             |       |        |       |       |       |        |        |       |       |        |        |       |       |        |        |      
|                                              |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |      
|Net loss                                      |                                                       |                             | (5,823                        | )         |       |          | (4,581  | )           |       |             | (2,686 | )         |       |          | (3,252 | )           |       |        | (8,608 | )     |       |        | (26,641 | )     |       |        | (21,355 | )     |       |        | (13,677 | )    
|Stock dividend paid to preferred stockholders |                                                       |                             |                              |           |       |          | (65,542 | )           |       |             |       |           |       |          |       |             |       |        |       |       |       |        |        |       |       |        |        |       |       |        |        |      
|                                              |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |      
|Loss applicable to common stockholders        |                                                       | $                           | (5,823                        | )         |       | $        | (70,123 | )           |       | $           | (2,686 | )         |       | $        | (3,252 | )           |       | $      | (8,608 | )     |       | $      | (26,641 | )     |       | $      | (21,355 | )     |       | $      | (13,677 | )    
|                                              |                                                       |                             |                               |           |       |          |         |             |       |             |        |           |       |          |        |             |       |        |        |       |       |        |         |       |       |        |         |       |       |        |         |      

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|                                   |                                                       |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |      |       |       | 
|---------------------------------- | ----------------------------------------------------- | ---------------------------------- | ----------------------------- | --------- | ----- | -------- | ----- | ----------- | ----- | ----------- | ----- | --------- | ----- | -------- | ----- | ----------- | ----- | ---- | ----- | ---- | ----- | ----- | ------ | ---- | ----- | ----- | ------ | ---- | ----- | ----- | ------ | ---- | ----- | ----- | 
|                                   |                                                       |                                   
|                                   |                                                       | Quarter Ended                     
|                                   |                                                       |                                   
|                                   |                                                       | January 31,                        |                               | April 30, |       | July 31, |       | October 31, |       | January 31, |       | April 30, |       | July 31, |       | October 31,
|                                   |                                                       | 2000                               |                               | 2000      |       | 2000     |       | 2000        |       | 2001        |       | 2001      |       | 2001     |       | 2001       
|                                   |                                                       |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |            
|                                   |                                                       |                                   
|                                   |                                                       | (As a percentage of total revenue)
|Revenue:                           |                                                       |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |     
|                                   | Product-related revenue:                              |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |      |      
|                                   |                                                       | License                            |                               |           | 32.6  | %        |       |             | 36.2  | %           |       |           | 39.2  | %        |       |             | 39.3  | %    |       |      | 27.7  | %     |        |      | 29.5  | %     |        |      | 38.8  | %     |        |      | 35.8  | %    
|                                   |                                                       | Services and maintenance           |                               |           | 37.2  |          |       |             | 37.2  |             |       |           | 37.5  |          |       |             | 43.3  |      |       |      | 56.9  |       |        |      | 64.2  |       |        |      | 52.7  |       |        |      | 57.0  |      
|                                   |                                                       |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |     
|                                   |                                                       |                                    | 69.8                          |           |       |          | 73.4  |             |       |             | 76.7  |           |       |          | 82.6  |             |       |      | 84.6  |      |       |       | 93.7   |      |       |       | 91.5   |      |       |       | 92.8   |     
|                                   |                                                       |                                    | Total product-related revenue |           |       | 30.2     |       |             |       | 26.6        |       |           |       | 23.3     |       |             |       | 17.4 |       |      |       | 15.4  |        |      |       | 6.3   |        |      |       | 8.5   |        |      |       | 7.2   | 
|                                   |                                                       |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |     
|                                   |                                                       | Custom development services        |                               |           | 100.0 |          |       |             | 100.0 |             |       |           | 100.0 |          |       |             | 100.0 |      |       |      | 100.0 |       |        |      | 100.0 |       |        |      | 100.0 |       |        |      | 100.0 |      
|                                   |                                                       |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |     
|                                   |                                                       |                                    | Total revenue                 |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |      |       |       | 
|Cost of revenue:                   |                                                       |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |     
|                                   | Licenses                                              |                                    |                               | 1.1       |       |          |       | 1.0         |       |             |       | 0.9       |       |          |       | 0.4         |       |      |       | 0.5  |       |       |        | 1.3  |       |       |        | 1.4  |       |       |        | 1.7  |      
|                                   | Product-related services and maintenance              |                                    |                               | 19.1      |       |          |       | 20.8        |       |             |       | 25.8      |       |          |       | 36.2        |       |      |       | 58.6 |       |       |        | 75.2 |       |       |        | 63.2 |       |       |        | 54.0 |      
|                                   | Custom development services                           |                                    |                               | 13.3      |       |          |       | 10.4        |       |             |       | 7.9       |       |          |       | 7.3         |       |      |       | 4.7  |       |       |        | 1.2  |       |       |        | 2.1  |       |       |        | 1.4  |      
|                                   |                                                       |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |     
|                                   |                                                       |                                    | Total cost of revenue         |           |       | 33.5     |       |             |       | 32.2        |       |           |       | 34.6     |       |             |       | 43.9 |       |      |       | 63.8  |        |      |       | 77.7  |        |      |       | 66.7  |        |      |       | 57.1  | 
|                                   |                                                       |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |     
|Gross profit                       |                                                       |                                    | 66.5                          |           |       |          | 67.8  |             |       |             | 65.4  |           |       |          | 56.1  |             |       |      | 36.2  |      |       |       | 22.3   |      |       |       | 33.3   |      |       |       | 42.9   |     
|Operating expenses:                |                                                       |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |     
|                                   | Sales and marketing                                   |                                    |                               | 53.6      |       |          |       | 49.1        |       |             |       | 45.7      |       |          |       | 36.1        |       |      |       | 47.0 |       |       |        | 69.5 |       |       |        | 65.0 |       |       |        | 34.5 |      
|                                   | Research and development                              |                                    |                               | 30.9      |       |          |       | 26.9        |       |             |       | 20.1      |       |          |       | 23.2        |       |      |       | 32.2 |       |       |        | 53.6 |       |       |        | 44.9 |       |       |        | 33.2 |      
|                                   | General and administrative                            |                                    |                               | 16.4      |       |          |       | 16.5        |       |             |       | 14.5      |       |          |       | 14.3        |       |      |       | 19.9 |       |       |        | 24.7 |       |       |        | 28.7 |       |       |        | 23.5 |      
|                                   | Stock-based compensation                              |                                    |                               | 9.7       |       |          |       | 13.0        |       |             |       | 10.0      |       |          |       | 10.5        |       |      |       | 4.8  |       |       |        | 5.5  |       |       |        | 14.6 |       |       |        | 17.9 |      
|                                   | Amortization of goodwill and other intangible
	assets |                                    |                               |          |       |          |       |            |       |             |       |          |       |          |       |            |       |      |       |     |       |       |        | 7.7  |       |       |        | 13.2 |       |       |        | 14.0 |      
|                                   | Restructuring charge (credit)                         |                                    |                               |          |       |          |       | (3.7        | )     |             |       |          |       |          |       |            |       |      |       |     |       |       |        | 24.5 |       |       |        | 80.3 |       |       |        | 77.8 |      
|                                   | Settlement of claim                                   |                                    |                               |          |       |          |       |            |       |             |       |          |       |          |       |            |       |      |       |     |       |       |        | 9.8  |       |       |        |     |       |       |        |     |      
|                                   | Acquired in-process research and development          |                                    |                               |          |       |          |       |            |       |             |       |          |       |          |       |            |       |      |       |     |       |       |        | 50.3 |       |       |        |     |       |       |        |     |      
|                                   |                                                       |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |     
|                                   |                                                       |                                    | Total operating expenses      |           |       | 110.6    |       |             |       | 101.8       |       |           |       | 90.3     |       |             |       | 84.1 |       |      |       | 103.9 |        |      |       | 245.6 |        |      |       | 246.7 |        |      |       | 200.9 | 
|                                   |                                                       |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |     
|Loss from operations               |                                                       |                                    | (44.1                         | )         |       |          | (34.0 | )           |       |             | (24.9 | )         |       |          | (28.0 | )           |       |      | (67.7 | )    |       |       | (223.3 | )    |       |       | (213.4 | )    |       |       | (158.0 | )   
|Interest income (expense)          |                                                       |                                    | (6.7                          | )         |       |          | 8.9   |             |       |             | 10.4  |           |       |          | 9.6   |             |       |      | 11.9  |      |       |       | 8.3    |      |       |       | 6.0    |      |       |       | 3.2    |     
|Other income (expense), net        |                                                       |                                    | 2.2                           |           |       |          | 2.0   |             |       |             | (1.0  | )         |       |          | 1.5   |             |       |      | (3.4  | )    |       |       | (1.4   | )    |       |       | (3.8   | )    |       |       | 4.8    |     
|                                   |                                                       |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |     
|Net loss before extraordinary item |                                                       |                                    | (48.6                         | )         |       |          | (23.1 | )           |       |             | (15.5 | )         |       |          | (16.9 | )           |       |      | (59.2 | )    |       |       | (216.4 | )    |       |       | (211.2 | )    |       |       | (150.0 | )   
|Loss on extinguishment of debt     |                                                       |                                    |                              |           |       |          | (10.6 | )           |       |             |      |           |       |          |      |             |       |      |      |      |       |       |       |      |       |       |       |      |       |       |       |     
|                                   |                                                       |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |     
|Net loss                           |                                                       |                                    | (48.6                         | )%        |       |          | (33.7 | )%          |       |             | (15.5 | )%        |       |          | (16.9 | )%          |       |      | (59.2 | )%   |       |       | (216.4 | )%   |       |       | (211.2 | )%   |       |       | (150.0 | )%  
|                                   |                                                       |                                    |                               |           |       |          |       |             |       |             |       |           |       |          |       |             |       |      |       |      |       |       |        |      |       |       |        |      |       |       |        |     

Our operating results have varied significantly
from quarter to quarter in the past and may continue to
fluctuate in the future. The quarterly fluctuations are caused
by a number of factors, including demand for our products and
services, size and timing of specific sales, level of product
and price competition, timing and market acceptance of new
product introductions and product enhancements by us and our
competitors, the length of our sales cycle, personnel changes,
budgeting cycles of our customers, the impact of our revenue
recognition policies, changes in technology and changes caused
by the rapidly evolving e-business market. Many of these factors
are beyond our control. Therefore, we believe that results of
operations for interim periods should not be relied upon as any
indication of the results to be expected in any future period.

Liquidity and Capital Resources

As of October 31, 2001, cash and cash
equivalents were $34.7 million and short-term investments
were $9.6 million as compared with $79.5 million of
cash and cash equivalents and $36.7 million of short-term

33



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##### Table of Contents



investments as of October 31, 2000. Our
working capital at October 31, 2001 was $30.8 million,
compared to a working capital of $101.9 million at
October 31, 2000.


Net cash used in operating activities was
$.53.0 million in the year ended October 31, 2001,
compared with net cash provided by operating activities of
$3.2 million in the year ended October 31, 2000 and
net cash used in operating activities of $119.9 million in
the year ended October 31, 1999. Cash used in operating
activities in the year ended October 31, 2001 was primarily
attributable to our net loss, a decrease in accounts payable,
accrued liabilities and deferred revenue offset by a decrease in
accounts receivable, an increase in restructuring accrual and
non-cash expenses including acquired in-process research and
development, non-cash restructuring charges, stock-based
compensation, depreciation.

Net cash provided by investing activities was
$16.3 million in the year ended October 31, 2001,
compared with net cash used in investing activities of
$40.7 million in the year ended October 31, 2000 and
$2.1 million in the year ended October 31, 1999. Net
cash provided by investing activities in the year ended
October 31, 2001 was primarily attributable to proceeds
from sales and maturities of short-term investments and the
return of restricted cash from escrow offset by the purchase of
short-term investments, the payment for the Brightware
acquisition and purchases of fixed assets.

Net cash used in financing activities was
$8.1 million in the year ended October 31, 2001,
compared with net cash provided by financing activities of
$114.9 million in the year ended October 31, 2000 and
$21.9 million in the year ended October 31, 1999. Net
cash used in financing activities for the year ended
October 31, 2001 were primarily from payments of Brightware
debt and issuance of loans receivable offset by the exercise of
stock options.

We anticipate continued spending on capital
expenditures consistent with anticipated requirements for
operations, infrastructure and personnel. We believe that our
existing cash balances will be sufficient to meet our
anticipated cash need for working capital and capital
expenditures for at least the next 12 months. However, we
may need to raise additional funds in the next 12 months or
in the future to support more rapid expansion of our sales
force, develop new or enhanced products or services, respond to
competitive pressures, acquire complementary businesses or
technologies or respond to unanticipated requirements. If we
seek to raise additional funds, we may not be able to obtain
funds on terms which are favorable or acceptable to us. If we
raise additional funds through the issuance of equity
securities, the percentage ownership of our existing
stockholders would be reduced. Furthermore, these securities may
have rights, preferences or privileges senior to our common
stock.

Recent Accounting Pronouncements

In July 2001, the FASB issued SFAS No, 141,
Business Combinations. SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted
for using the purchase method. This statement is effective for
all business combinations initiated after June 30, 2001.

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. This statement applies to
goodwill and intangible assets acquired after June 30,
2001, as well as goodwill and intangible assets previously
acquired. Under this statement, goodwill will no longer be
amortized, instead goodwill will be reviewed for impairment
annually, at a minimum, by applying a fair-value-based test. We
will adopt this statement, effective the first quarter in the
fiscal year ending October 2002. Accordingly, we will reclassify
the net book value of assembled workforce to goodwill and cease
amortization. We expect this will reduce annual amortization
expense by approximately $3.2 million. Management is currently
evaluating the impact that this statement will have on our
financial statements in reviewing goodwill for impairment when
applying a fair-value-based test.

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This statement supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of Accounting Principles Board
(APB) 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

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##### Table of Contents



Events and Transactions. Under this statement it
is required that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and
used or newly acquired, and it broadens the presentation of
discontinued operations to include more disposal transactions.
The provisions of this statement are effective for financial
statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal
years, with early adoption permitted. We are currently
evaluating the ultimate impact of this statement on its results
of operations or financial position until such time as its
provisions are applied.





Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

We develop products in the United States and sell
them worldwide. As a result, our financial results could be
affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in foreign markets. Since our
sales are currently priced in U.S. dollars and are translated to
local currency amounts, a strengthening of the dollar could make
our products less competitive in foreign markets. Interest
income and expense are sensitive to changes in the general level
of U.S. interest rates, particularly since our investments are
in short-term instruments. Based on the nature and current
levels of our investments, however, we have concluded that there
is no material market risk exposure.




Item 8.     Financial
Statements and Supplementary Data

The financial statements and supplementary data
required by this Item 8 are listed in Item 14(a)(1)
and begin at page F-1 of this report.

The quarterly financial information required by
this Item 8 is included in Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations.






|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|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 response to this item is incorporated by
reference to the information under the captions
Management and Section 16(a) Beneficial
Ownership Reporting Compliance in our Proxy Statement for
the 2002 Annual Meeting of Stockholders.




Item 11.     Executive
Compensation

The response to this item is incorporated by
reference to the information under the caption Executive
Compensation in our Proxy Statement for the 2002 Annual
Meeting of Stockholders.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The response to this item is incorporated by
reference to the information under the caption Security
Ownership of Certain Beneficial Owners and Management in
our Proxy Statement for the 2002 Annual Meeting of Stockholders.




Item 13.     Certain
Relationships and Related Transactions

The response to this item is incorporated by
reference to the information under the caption Certain
Relationships and Related Transactions in our Proxy
Statement for the 2002 Annual Meeting of Stockholders.

35



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##### Table of Contents






PART IV




Item 14.     Exhibits,
Financial Statement Schedules and Reports on
Form 8-K

(a) The following documents are filed as
part of this report:

1.     Financial
Statements

The following are the consolidated financial
statements of the Company appearing elsewhere in this Annual
Report on Form 10-K:

|                                                                                                                       |  |      |     | 
|---------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                       |  | Page
|                                                                                                                       |  |     
|Report of Independent Public Accountants                                                                               |  |      | F-2 | 
|Consolidated Balance Sheets as of
	October 31, 2000 and 2001                                                           |  |      | F-3 | 
|Consolidated Statements of Operations for the
	Fiscal Years Ended October 31, 1999, 2000 and 2001                      |  |      | F-4 | 
|Consolidated Statements of Stockholders
	Equity (Deficit) for the Fiscal Years Ended October 31,
	1999, 2000 and 2001 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
	Fiscal Years Ended October 31, 1999, 2000 and 2001                      |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                                             |  |      | F-8 | 

2.     Financial
Statement Schedules

Financial statement schedules have been omitted
because the information required to be set forth therein is not
applicable or is included in the Financial Statement notes
thereto.

3.     Exhibits

The exhibits listed on the accompanying index to
exhibits, immediately following the financial statement
schedules are filed as part of, or incorporated by reference
into this Form 10-K.

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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Waltham,
Commonwealth of Massachusetts, on January 29, 2002.



| |               
| | --------------
| | FIREPOND, INC.



| |     |                      
| | --- | ---------------------
| | By: | /s/ PAUL K. MCDERMOTT

| |                                              
| | ---------------------------------------------
| |                                              
| | Paul K. McDermott                            
| | Chief Financial Officer and                  
| | Vice President of Finance and
	Administration

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons in the capacities and on the dates indicated.

|                                               |  |                                                                                                                                            |  |                 
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------
|Signature                                      |  | Title                                                                                                                                      |  | Date            
|                                               |  |                                                                                                                                            |  |                 
|/s/ KLAUS P. BESIERKlaus P. Besier             |  | Chairman, Chief Executive Officer
	and Director
	(Principal Executive Officer)                                                             |  | January 29, 2002
|                                              
|/s/ PAUL K. MCDERMOTTPaul K. McDermott         |  | Chief Financial Officer
	and Vice President of Finance
	and Administration
	(Principal Financial Officer and Principal Accounting Officer) |  | January 29, 2002
|                                              
|/s/ JOHN CACHIANESJohn Cachianes               |  | Director                                                                                                                                   |  | January 29, 2002
|                                              
|/s/ J. MICHAEL CLINEJ. Michael Cline           |  | Director                                                                                                                                   |  | January 29, 2002
|                                              
|/s/ WILLIAM O. GRABEWilliam O. Grabe           |  | Director                                                                                                                                   |  | January 29, 2002
|                                              
|Gerhard Schulmeyer                             |  | Director                                                                                                                                   |  | January 29, 2002
|                                              
|/s/ VERNON LAWRENCE WEBERVernon Lawrence Weber |  | Director                                                                                                                                   |  | January 29, 2002

37



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

|                                                                                                                        |  |      |     | 
|----------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                        |  | Page
|                                                                                                                        |  |     
|Report of Independent Public Accountants                                                                                |  |      | F-2 | 
|Consolidated Balance Sheets as of
	October 31, 2000 and 2001.                                                           |  |      | F-3 | 
|Consolidated Statements of Operations for the
	Fiscal Years Ended October 31, 1999, 2000 and 2001                       |  |      | F-4 | 
|Consolidated Statements of Stockholders
	Equity (Deficit) for the Fiscal Years Ended October 31,
	1999, 2000 and 2001. |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
	Fiscal Years Ended October 31, 1999, 2000 and 2001                       |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                                              |  |      | F-8 | 

F-1



---



##### Table of Contents



REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To the Board of Directors and Stockholders of

Firepond, Inc.:


We have audited the accompanying consolidated
balance sheets of Firepond, Inc. (a Delaware corporation) and
subsidiaries as of October 31, 2000 and 2001, and the
related consolidated statements of operations,
stockholders equity (deficit) and cash flows for each
of the three years in the period ended October 31, 2001.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Firepond, Inc.
and subsidiaries as of October 31, 2000 and 2001, and the
results of their operations and their cash flows for each of the
three years in the period ended October 31, 2001, in
conformity with accounting principles generally accepted in the
United States.



| |                        
| | -----------------------
| | /s/ ARTHUR ANDERSEN LLP

Boston, Massachusetts

November 21, 2001 (except with


respect to the matter discussed


in note 18, as to which the date


is January 14, 2002)


F-2



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                            |                                                                                           |                                                                                                                                                                           |                            |         |     |         |        |          |     |        | 
|------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | --- | ------- | ------ | -------- | --- | ------ | 
|                                            |                                                                                           |                                                                                                                                                                          
|                                            |                                                                                           | October 31,                                                                                                                                                              
|                                            |                                                                                           |                                                                                                                                                                          
|                                            |                                                                                           | 2000                                                                                                                                                                      |                            | 2001   
|                                            |                                                                                           |                                                                                                                                                                           |                            |        
|                                            |                                                                                           |                                                                                                                                                                          
|                                            |                                                                                           | (In thousands, except                                                                                                                                                    
|                                            |                                                                                           | per share data)                                                                                                                                                          
|ASSETS                                     
|Current assets:                             |                                                                                           |                                                                                                                                                                           |                            |         |     |         |        |         
|                                            | Cash and cash equivalents                                                                 |                                                                                                                                                                           | $                          | 79,500  |     |         | $      | 34,660   |    
|                                            | Short-term investments                                                                    |                                                                                                                                                                           |                            | 36,733  |     |         |        | 9,593    |    
|                                            | Accounts receivable, net of reserves of $1,115
	and $1,292 in 2000 and 2001, respectively |                                                                                                                                                                           |                            | 15,418  |     |         |        | 10,310   |    
|                                            | Unbilled services                                                                         |                                                                                                                                                                           |                            | 1,676   |     |         |        | 594      |    
|                                            | Prepaid expenses and other current assets                                                 |                                                                                                                                                                           |                            | 2,436   |     |         |        | 2,118    |    
|                                            |                                                                                           |                                                                                                                                                                           |                            |         |     |         |        |         
|                                            |                                                                                           |                                                                                                                                                                           | Total current assets       |         |     | 135,763 |        |          |     | 57,275 | 
|                                            | Property and equipment, net                                                               |                                                                                                                                                                           |                            | 6,887   |     |         |        | 5,356    |    
|                                            | Goodwill and other intangible assets, net (see
	Notes 14 and 15)                          |                                                                                                                                                                           |                            | 389     |     |         |        | 11,114   |    
|                                            | Restricted cash                                                                           |                                                                                                                                                                           |                            | 550     |     |         |        | 550      |    
|                                            | Other assets                                                                              |                                                                                                                                                                           |                            | 731     |     |         |        | 843      |    
|                                            |                                                                                           |                                                                                                                                                                           |                            |         |     |         |        |         
|                                            |                                                                                           | $                                                                                                                                                                         | 144,320                    |         |     | $       | 75,138 |         
|                                            |                                                                                           |                                                                                                                                                                           |                            |         |     |         |        |         
|LIABILITIES AND STOCKHOLDERS
	EQUITY      
|Current liabilities:                        |                                                                                           |                                                                                                                                                                           |                            |         |     |         |        |         
|                                            | Accounts payable                                                                          |                                                                                                                                                                           |                            | 4,851   |     |         |        | 1,790    |    
|                                            | Accrued liabilities                                                                       |                                                                                                                                                                           |                            | 13,656  |     |         |        | 8,874    |    
|                                            | Restructuring accrual                                                                     |                                                                                                                                                                           |                            | 142     |     |         |        | 5,057    |    
|                                            | Deferred revenue                                                                          |                                                                                                                                                                           |                            | 15,207  |     |         |        | 10,802   |    
|                                            |                                                                                           |                                                                                                                                                                           |                            |         |     |         |        |         
|                                            |                                                                                           |                                                                                                                                                                           | Total current liabilities  |         |     | 33,856  |        |          |     | 26,523 | 
|Restructuring accrual, less current portion |                                                                                           |                                                                                                                                                                           |                           |         |     |         | 1,102  |         
|Commitments and contingencies (see Note 8)  |                                                                                           |                                                                                                                                                                           |                            |         |     |         |        |         
|Stockholders equity:                       |                                                                                           |                                                                                                                                                                           |                            |         |     |         |        |         
|                                            | Common stock, $0.01 par value                                                            |                                                                                                                                                                           |                            |         |     |         |        |          |    
|                                            |                                                                                           | Authorized  100,000,000 shares at
	October 31, 2000 and 2001; Issued and
	outstanding  35,596,022 shares at October 31,
	2000 and 37,316,911 shares at October 31, 2001 |                            |         | 356 |         |        |          | 373 |       
|                                            | Additional paid-in capital                                                                |                                                                                                                                                                           |                            | 195,166 |     |         |        | 202,231  |    
|                                            | Accumulated deficit                                                                       |                                                                                                                                                                           |                            | (78,135 | )   |         |        | (148,416 | )  
|                                            | Loans receivable                                                                          |                                                                                                                                                                           |                            |        |     |         |        | (4,407   | )  
|                                            | Deferred compensation                                                                     |                                                                                                                                                                           |                            | (6,077  | )   |         |        | (1,285   | )  
|                                            | Other comprehensive loss                                                                  |                                                                                                                                                                           |                            | (846    | )   |         |        | (983     | )  
|                                            |                                                                                           |                                                                                                                                                                           |                            |         |     |         |        |         
|                                            |                                                                                           |                                                                                                                                                                           | Total stockholders equity |         |     | 110,464 |        |          |     | 47,513 | 
|                                            |                                                                                           |                                                                                                                                                                           |                            |         |     |         |        |         
|                                            |                                                                                           | $                                                                                                                                                                         | 144,320                    |         |     | $       | 75,138 |         
|                                            |                                                                                           |                                                                                                                                                                           |                            |         |     |         |        |         

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

F-3



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |         |        |        | 
|------------------- | ----------------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------- | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | 
|                    |                                                       |                                                                        
|                    |                                                       | Fiscal Years Ended October 31,                                         
|                    |                                                       |                                                                        
|                    |                                                       | 1999                                                                    |                               | 2000    |        | 2001  
|                    |                                                       |                                                                         |                               |         |        |       
|                    |                                                       |                                                                        
|                    |                                                       | (In thousands, except per share data)                                  
|Revenue:            |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    | Product-related revenue:                              |                                                                         |                               |         |        |        |        |         |        |        |        |         |       
|                    |                                                       | License                                                                 |                               | $       | 9,777  |        |        | $       | 23,128 |        |        | $       | 14,848 |       
|                    |                                                       | Services and maintenance                                                |                               |         | 8,604  |        |        |         | 24,265 |        |        |         | 26,709 |       
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    |                                                       |                                                                         | Total product-related revenue |         |        | 18,381 |        |         |        | 47,393 |        |         |        | 41,557 | 
|                    |                                                       | Custom development services                                             |                               |         | 15,904 |        |        |         | 14,579 |        |        |         | 4,532  |       
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    |                                                       |                                                                         | Total revenue                 |         |        | 34,285 |        |         |        | 61,972 |        |         |        | 46,089 | 
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|Cost of revenue:    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    | License                                               |                                                                         |                               | 238     |        |        |        | 499     |        |        |        | 524     |       
|                    | Product-related services and maintenance(1)           |                                                                         |                               | 5,677   |        |        |        | 16,485  |        |        |        | 29,094  |       
|                    | Custom development services                           |                                                                         |                               | 10,636  |        |        |        | 5,773   |        |        |        | 1,171   |       
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    |                                                       |                                                                         | Total cost of revenue         |         |        | 16,551 |        |         |        | 22,757 |        |         |        | 30,789 | 
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|Gross profit        |                                                       |                                                                         | 17,734                        |         |        |        | 39,215 |         |        |        | 15,300 |        
|Operating expenses: |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    | Sales and marketing(1)                                |                                                                         |                               | 23,609  |        |        |        | 27,904  |        |        |        | 25,131  |       
|                    | Research and development(1)                           |                                                                         |                               | 9,641   |        |        |        | 15,264  |        |        |        | 18,838  |       
|                    | General and administrative(1)                         |                                                                         |                               | 7,084   |        |        |        | 9,449   |        |        |        | 10,981  |       
|                    | Stock-based compensation                              |                                                                         |                               | 2,597   |        |        |        | 6,680   |        |        |        | 4,470   |       
|                    | Amortization of goodwill and other intangible
	assets |                                                                         |                               |        |        |        |        |        |        |        |        | 3,554   |       
|                    | Restructuring charge (credit)                         |                                                                         |                               | 3,027   |        |        |        | (500    | )      |        |        | 18,243  |       
|                    | Settlement of claim (see Note 16)                     |                                                                         |                               |        |        |        |        |        |        |        |        | 1,211   |       
|                    | Acquired in-process research and development          |                                                                         |                               |        |        |        |        |        |        |        |        | 6,200   |       
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    |                                                       |                                                                         | Total operating expenses      |         |        | 45,958 |        |         |        | 58,797 |        |         |        | 88,628 | 
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    | Loss from operations                                  |                                                                         |                               | (28,224 | )      |        |        | (19,582 | )      |        |        | (73,328 | )     
|                    | Interest income                                       |                                                                         |                               |        |        |        |        | 5,071   |        |        |        | 3,777   |       
|                    | Interest expense                                      |                                                                         |                               | (850    | )      |        |        | (1,033  | )      |        |        | (104    | )     
|                    | Other income (expense), net                           |                                                                         |                               | 219     |        |        |        | 639     |        |        |        | (626    | )     
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    | Net loss before extraordinary item                    |                                                                         |                               | (28,855 | )      |        |        | (14,905 | )      |        |        | (70,281 | )     
|                    | Loss on extinguishment of debt                        |                                                                         |                               |        |        |        |        | (1,437  | )      |        |        |        |       
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    | Net loss                                              |                                                                         |                               | (28,855 | )      |        |        | (16,342 | )      |        |        | (70,281 | )     
|                    | Stock dividend paid to preferred stockholders         |                                                                         |                               |        |        |        |        | (65,542 | )      |        |        |        |       
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    | Loss applicable to common stockholders                |                                                                         | $                             | (28,855 | )      |        | $      | (81,884 | )      |        | $      | (70,281 | )     
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    | Net loss per share (see Note 3(a)):                   |                                                                         |                               |         |        |        |        |         |        |        |        |         |       
|                    |                                                       | Basic and diluted net loss per share before
	extraordinary item         |                               | $       | (2.88  | )      |        | $       | (0.52  | )      |        | $       | (1.95  | )     
|                    |                                                       | Extraordinary item                                                      |                               |         |       |        |        |         | (0.05  | )      |        |         |       |       
|                    |                                                       | Stock dividend paid to preferred stockholders                           |                               |         |       |        |        |         | (2.32  | )      |        |         |       |       
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    |                                                       | Basic and diluted net loss per share applicable
	to common stockholders |                               | $       | (2.88  | )      |        | $       | (2.89  | )      |        | $       | (1.95  | )     
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    |                                                       | Basic and diluted weighted average common shares
	outstanding           |                               |         | 10,024 |        |        |         | 28,286 |        |        |         | 36,011 |       
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    | Pro forma net loss per share (see Note 3(b)):         |                                                                         |                               |         |        |        |        |         |        |        |        |         |       
|                    |                                                       | Pro forma net loss per share                                            |                               | $       | (1.12  | )      |        | $       | (0.50  | )      |        |         |        |       
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        
|                    |                                                       | Pro forma basic and diluted weighted average
	common shares outstanding |                               |         | 25,799 |        |        |         | 32,867 |        |        |         |        |       
|                    |                                                       |                                                                         |                               |         |        |        |        |         |        |        |        |        



---



|    |                                                                                              
|--- | ---------------------------------------------------------------------------------------------
|(1) | The following summarizes the departmental
	allocation of the stock-based compensation charge:

|                               |                            |                    |       |       |  |      |       |       |  |   |       |       | 
|------------------------------ | -------------------------- | ------------------ | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                               |                            |                   
|                               |                            | Fiscal Years Ended
|                               |                            | October 31,       
|                               |                            |                   
|                               |                            | 1999               |       | 2000  |  | 2001
|                               |                            |                    |       |       |  |     
|Cost of revenue                |                            | $                  | 40    |       |  | $    | 568   |       |  | $ | 84    |      
|Operating expenses:            |                            |                    |       |       |  |      |       |       |  |   |       |      
|                               | Sales and marketing        |                    |       | 1,327 |  |      |       | 4,193 |  |   |       | 181   | 
|                               | Research and development   |                    |       | 913   |  |      |       | 1,261 |  |   |       | 300   | 
|                               | General and administrative |                    |       | 317   |  |      |       | 658   |  |   |       | 3,905 | 
|                               |                            |                    |       |       |  |      |       |       |  |   |       |      
|Total stock-based compensation |                            | $                  | 2,597 |       |  | $    | 6,680 |       |  | $ | 4,470 |      
|                               |                            |                    |       |       |  |      |       |       |  |   |       |      

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

F-4



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

|                                                             |  |                                       |             |              |  |        |      |       |  |            |            |             |  |             |     |              |  |               |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |      |  
|------------------------------------------------------------ |  | ------------------------------------- | ----------- | ------------ |  | ------ | ---- | ----- |  | ---------- | ---------- | ----------- |  | ----------- | --- | ------------ |  | ------------- | ------- | - |  | - | -------- | - |  | - | ------ | - |  | - | ------ | - |  | - | ---- | -
|                                                             |  |                                       |             |              |  |        |      |       |  |            |            |             |  |            
|                                                             |  | Preferred Stock                       |             | Common Stock |  |        |      |       |  |            |            |             |  |            
|                                                             |  |                                       |             |              |  |        |      |       |  |            |            |             |  | Accumulated
|                                                             |  |                                       |             | $0.01        |  |        |      | $0.01 |  | Additional |            |             |  |             |     |              |  | Other        
|                                                             |  |                                       |             | Par          |  |        |      | Par   |  | Paid-in    |            | Accumulated |  | Loans       |     | Deferred     |  | Comprehensive
|                                                             |  | Shares                                |             | Value        |  | Shares |      | Value |  | Capital    |            | Deficit     |  | Receivable  |     | Compensation |  | Income/(Loss)
|                                                             |  |                                       |             |              |  |        |      |       |  |            |            |             |  |             |     |              |  |              
|                                                             |  |                                      
|                                                             |  | (In thousands, except per share data)
|Balance, October 31, 1998                                    |  |                                       | 12,363,785  |              |  | $      | 124  |       |  |            | 10,004,315 |             |  | $           | 100 |              |  | $             | 33,745  |   |  | $ | (32,938  | ) |  | $ |       |   |  | $ |       |   |  | $ |     |  
|Exercise of common stock options                             |  |                                       |            |              |  |        |     |       |  |            | 35,169     |             |  |             |    |              |  |               | 139     |   |  |   |         |   |  |   | (13    | ) |  |   |       |   |  |   |     |  
|Issuance of common stock                                     |  |                                       |            |              |  |        |     |       |  |            | 33,333     |             |  |             | 1   |              |  |               | 278     |   |  |   |         |   |  |   |       |   |  |   | (130   | ) |  |   |     |  
|Issuance of warrants to purchase common stock to
	a customer |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               | 106     |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   |     |  
|Issuance of series F preferred stock                         |  |                                       | 6,734,008   |              |  |        | 67   |       |  |            |           |             |  |             |    |              |  |               | 19,774  |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   |     |  
|Issuance of warrants to purchase series F
	preferred stock   |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               | 1       |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   |     |  
|Cost of exchanging series E for
	series G preferred stock    |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               | (23     | ) |  |   |         |   |  |   |       |   |  |   |       |   |  |   |     |  
|Deferred stock- based compensation                           |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               | 8,360   |   |  |   |         |   |  |   |       |   |  |   | (8,360 | ) |  |   |     |  
|Stock-based compensation expense                             |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               |        |   |  |   |         |   |  |   |       |   |  |   | 2,597  |   |  |   |     |  
|Cumulative translation adjustment                            |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               |        |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   | (327 | )
|Net loss                                                     |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               |        |   |  |   | (28,855  | ) |  |   |       |   |  |   |       |   |  |   |     |  
|Comprehensive loss for the year ended
	October 31, 1999.     |  |                                       |             |              |  |        |      |       |  |            |            |             |  |             |     |              |  |               |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |      |  
|                                                             |  |                                       |             |              |  |        |      |       |  |            |            |             |  |             |     |              |  |               |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |      |  
|Balance, October 31, 1999                                    |  |                                       | 19,097,793  |              |  |        | 191  |       |  |            | 10,072,817 |             |  |             | 101 |              |  |               | 62,380  |   |  |   | (61,793  | ) |  |   | (13    | ) |  |   | (5,893 | ) |  |   | (327 | )
|Exercise of common stock options and warrants                |  |                                       |            |              |  |        |     |       |  |            | 3,035,823  |             |  |             | 30  |              |  |               | 9,845   |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   |      |  
|Payments by stockholders                                     |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               |        |   |  |   |         |   |  |   | 13     |   |  |   |       |   |  |   |     |  
|Issuance of common stock at initial public
	offering         |  |                                       |            |              |  |        |     |       |  |            | 5,666,666  |             |  |             | 57  |              |  |               | 113,743 |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   |     |  
|Issuance of warrants to purchase common stock to
	a customer |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               | 409     |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   |     |  
|Issuance of warrants in connection with note
	payable        |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               | 1,904   |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   |     |  
|Conversion of preferred stock into common stock              |  |                                       | (19,097,793 | )            |  |        | (191 | )     |  |            | 12,731,862 |             |  |             | 127 |              |  |               | 64      |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   |     |  
|Priority payments to stockholders                            |  |                                       |            |              |  |        |     |       |  |            | 3,812,588  |             |  |             | 38  |              |  |               | (38     | ) |  |   |         |   |  |   |       |   |  |   |       |   |  |   |     |  
|Deferred stock- based compensation                           |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               | 2,965   |   |  |   |         |   |  |   |       |   |  |   | (2,965 | ) |  |   |     |  
|Stock-based compensation expense                             |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               |        |   |  |   |         |   |  |   |       |   |  |   | 6,680  |   |  |   |     |  
|Issuance of restricted common shares (see
	Note 14)          |  |                                       |            |              |  |        |     |       |  |            | 276,266    |             |  |             | 3   |              |  |               | 3,896   |   |  |   |         |   |  |   |       |   |  |   | (3,899 | ) |  |   |     |  
|Cumulative translation adjustment                            |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               |        |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   | (515 | )
|Unrealized net loss on investment                            |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               |        |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   | (4   | )
|Net loss                                                     |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               |        |   |  |   | (16,342  | ) |  |   |       |   |  |   |       |   |  |   |     |  
|Comprehensive loss for the year ended
	October 31, 2000.     |  |                                       |             |              |  |        |      |       |  |            |            |             |  |             |     |              |  |               |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |      |  
|                                                             |  |                                       |             |              |  |        |      |       |  |            |            |             |  |             |     |              |  |               |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |      |  
|Balance, October 31, 2000                                    |  |                                       |            |              |  |        |     |       |  |            | 35,596,022 |             |  |             | 356 |              |  |               | 195,166 |   |  |   | (78,135  | ) |  |   |       |   |  |   | (6,077 | ) |  |   | (846 | )
|Exercise of common stock options and warrants                |  |                                       |            |              |  |        |     |       |  |            | 395,575    |             |  |             | 4   |              |  |               | 1,546   |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   |     |  
|Deferred stock- based compensation reversal                  |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               | (322    | ) |  |   |         |   |  |   |       |   |  |   | 322    |   |  |   |     |  
|Stock-based compensation expense                             |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               |        |   |  |   |         |   |  |   |       |   |  |   | 4,470  |   |  |   |     |  
|Issuance of shares for acquisition of Brightware             |  |                                       |            |              |  |        |     |       |  |            | 1,325,314  |             |  |             | 13  |              |  |               | 5,841   |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   |     |  
|Loans receivable                                             |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               |        |   |  |   |         |   |  |   | (4,407 | ) |  |   |       |   |  |   |     |  
|Cumulative translation adjustment                            |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               |        |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   | (150 | )
|Unrealized net gain on investment                            |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               |        |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   | 13   |  
|Net loss                                                     |  |                                       |            |              |  |        |     |       |  |            |           |             |  |             |    |              |  |               |        |   |  |   | (70,281  | ) |  |   |       |   |  |   |       |   |  |   |     |  
|Comprehensive loss for the year ended
	October 31, 2001.     |  |                                       |             |              |  |        |      |       |  |            |            |             |  |             |     |              |  |               |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |      |  
|                                                             |  |                                       |             |              |  |        |      |       |  |            |            |             |  |             |     |              |  |               |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |      |  
|Balance, October 31, 2001.                                   |  |                                       |            |              |  | $      |     |       |  |            | 37,316,911 |             |  | $           | 373 |              |  | $             | 202,231 |   |  | $ | (148,416 | ) |  | $ | (4,407 | ) |  | $ | (1,285 | ) |  | $ | (983 | )
|                                                             |  |                                       |             |              |  |        |      |       |  |            |            |             |  |             |     |              |  |               |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |      |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                             |  |                                       |         |               |  |   |         |  
|------------------------------------------------------------ |  | ------------------------------------- | ------- | ------------- |  | - | ------- | -
|                                                             |  | Stockholders                         |         | Comprehensive
|                                                             |  | Equity                                |         | Income       
|                                                             |  | (Deficit)                             |         | (Loss)       
|                                                             |  |                                       |         |              
|                                                             |  |                                      
|                                                             |  | (In thousands, except per share data)
|Balance, October 31, 1998                                    |  | $                                     | 1,031   |               |  |   |         |  
|Exercise of common stock options                             |  |                                       | 126     |               |  |   |         |  
|Issuance of common stock                                     |  |                                       | 149     |               |  |   |         |  
|Issuance of warrants to purchase common stock to
	a customer |  |                                       | 106     |               |  |   |         |  
|Issuance of series F preferred stock                         |  |                                       | 19,841  |               |  |   |         |  
|Issuance of warrants to purchase series F
	preferred stock   |  |                                       | 1       |               |  |   |         |  
|Cost of exchanging series E for
	series G preferred stock    |  |                                       | (23     | )             |  |   |         |  
|Deferred stock- based compensation                           |  |                                       |        |               |  |   |         |  
|Stock-based compensation expense                             |  |                                       | 2,597   |               |  |   |         |  
|Cumulative translation adjustment                            |  |                                       | (327    | )             |  | $ | (327    | )
|Net loss                                                     |  |                                       | (28,855 | )             |  |   | (28,855 | )
|                                                             |  |                                       |         |               |  |   |         |  
|Comprehensive loss for the year ended
	October 31, 1999.     |  |                                       |         |               |  | $ | (29,182 | )
|                                                             |  |                                       |         |               |  |   |         |  
|Balance, October 31, 1999                                    |  |                                       | (5,354  | )             |  |   |         |  
|Exercise of common stock options and warrants                |  |                                       | 9,875   |               |  |   |         |  
|Payments by stockholders                                     |  |                                       | 13      |               |  |   |         |  
|Issuance of common stock at initial public
	offering         |  |                                       | 113,800 |               |  |   |         |  
|Issuance of warrants to purchase common stock to
	a customer |  |                                       | 409     |               |  |   |         |  
|Issuance of warrants in connection with note
	payable        |  |                                       | 1,904   |               |  |   |         |  
|Conversion of preferred stock into common stock              |  |                                       |        |               |  |   |         |  
|Priority payments to stockholders                            |  |                                       |        |               |  |   |        |  
|Deferred stock- based compensation                           |  |                                       |        |               |  |   |        |  
|Stock-based compensation expense                             |  |                                       | 6,680   |               |  |   |         |  
|Issuance of restricted common shares (see
	Note 14)          |  |                                       |        |               |  |   |        |  
|Cumulative translation adjustment                            |  |                                       | (515    | )             |  |   | (515    | )
|Unrealized net loss on investment                            |  |                                       | (4      | )             |  |   | (4      | )
|Net loss                                                     |  |                                       | (16,342 | )             |  |   | (16,342 | )
|                                                             |  |                                       |         |               |  |   |         |  
|Comprehensive loss for the year ended
	October 31, 2000.     |  |                                       |         |               |  | $ | (16,861 | )
|                                                             |  |                                       |         |               |  |   |         |  
|Balance, October 31, 2000                                    |  |                                       | 110,464 |               |  |   |         |  
|Exercise of common stock options and warrants                |  |                                       | 1,550   |               |  |   |         |  
|Deferred stock- based compensation reversal                  |  |                                       |        |               |  |   |         |  
|Stock-based compensation expense                             |  |                                       | 4,470   |               |  |   |         |  
|Issuance of shares for acquisition of Brightware             |  |                                       | 5,854   |               |  |   |         |  
|Loans receivable                                             |  |                                       | (4,407  | )             |  |   |         |  
|Cumulative translation adjustment                            |  |                                       | (150    | )             |  |   | (150    | )
|Unrealized net gain on investment                            |  |                                       | 13      |               |  |   | 13      |  
|Net loss                                                     |  |                                       | (70,281 | )             |  |   | (70,281 | )
|                                                             |  |                                       |         |               |  |   |         |  
|Comprehensive loss for the year ended
	October 31, 2001.     |  |                                       |         |               |  | $ | (70,418 | )
|                                                             |  |                                       |         |               |  |   |         |  
|Balance, October 31, 2001.                                   |  | $                                     | 47,513  |               |  |   |         |  
|                                                             |  |                                       |         |               |  |   |         |  

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

F-5



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                      |                                                                                            |                                                         |                                           |                                                      |       |        |         |         |       |        |         |         |       |        |         |  
|------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------------------- | ----------------------------------------- | ---------------------------------------------------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | -
|                                      |                                                                                            |                                                        
|                                      |                                                                                            | Fiscal Years Ended October 31,                         
|                                      |                                                                                            |                                                        
|                                      |                                                                                            | 1999                                                    |                                           | 2000                                                 |       | 2001  
|                                      |                                                                                            |                                                         |                                           |                                                      |       |       
|                                      |                                                                                            |                                                        
|                                      |                                                                                            | (In thousands)                                         
|Cash flows from operating activities: |                                                                                            |                                                         |                                           |                                                      |       |        |         |         |       |        |         |        
|                                      | Net loss                                                                                   |                                                         | $                                         | (28,855                                              | )     |        | $       | (16,342 | )     |        | $       | (70,281 | )    
|                                      | Adjustments to reconcile net loss to net cash
	provided by (used in) operating activities: |                                                         |                                           |                                                      |       |        |         |         |       |        |         |         |      
|                                      |                                                                                            | Acquired in-process research and development            |                                           |                                                      |      |        |         |         |      |        |         |         | 6,200 |       
|                                      |                                                                                            | Non-cash restructuring charges (reversals)              |                                           |                                                      | 1,532 |        |         |         | (500  | )      |         |         | 4,256 |       
|                                      |                                                                                            | Issuance of warrants to a customer                      |                                           |                                                      | 106   |        |         |         | 409   |        |         |         |      |       
|                                      |                                                                                            | Stock-based compensation expense                        |                                           |                                                      | 2,597 |        |         |         | 6,680 |        |         |         | 4,470 |       
|                                      |                                                                                            | Loss on disposal of property and equipment              |                                           |                                                      | 49    |        |         |         | 44    |        |         |         |      |       
|                                      |                                                                                            | Depreciation and amortization                           |                                           |                                                      | 2,851 |        |         |         | 3,062 |        |         |         | 8,190 |       
|                                      |                                                                                            | Non-cash interest expense                               |                                           |                                                      |      |        |         |         | 467   |        |         |         |      |       
|                                      |                                                                                            | Loss on early extinguishment of debt                    |                                           |                                                      |      |        |         |         | 1,437 |        |         |         |      |       
|                                      |                                                                                            | Changes in assets and liabilities, net of
	acquisition: |                                           |                                                      |       |        |         |         |       |        |         |         |       |       
|                                      |                                                                                            |                                                         | Accounts receivable                       |                                                      |       | (4,024 | )       |         |       | (5,247 | )       |         |       | 5,474  |        
|                                      |                                                                                            |                                                         | Unbilled services                         |                                                      |       | (346   | )       |         |       | (485   | )       |         |       | 1,082  |        
|                                      |                                                                                            |                                                         | Prepaid expenses and other current assets |                                                      |       | (860   | )       |         |       | (1,171 | )       |         |       | 594    |        
|                                      |                                                                                            |                                                         | Accounts payable                          |                                                      |       | 2,001  |         |         |       | 858    |         |         |       | (5,603 | )      
|                                      |                                                                                            |                                                         | Accrued liabilities                       |                                                      |       | 1,334  |         |         |       | 7,210  |         |         |       | (6,039 | )      
|                                      |                                                                                            |                                                         | Deferred revenue                          |                                                      |       | 3,666  |         |         |       | 6,702  |         |         |       | (5,881 | )      
|                                      |                                                                                            |                                                         | Restructuring accrual                     |                                                      |       |       |         |         |       | 108    |         |         |       | 4,515  |        
|                                      |                                                                                            |                                                         |                                           |                                                      |       |        |         |         |       |        |         |        
|                                      |                                                                                            |                                                         |                                           | Net cash (used in) provided by operating
	activities |       |        | (19,949 | )       |       |        | 3,232   |         |       |        | (53,023 | )
|                                      |                                                                                            |                                                         |                                           |                                                      |       |        |         |         |       |        |         |        
|Cash flows from investing activities: |                                                                                            |                                                         |                                           |                                                      |       |        |         |         |       |        |         |        
|                                      | Purchases of short-term investments                                                        |                                                         |                                           |                                                     |       |        |         | (49,628 | )     |        |         | (13,303 | )    
|                                      | Purchases of long-term investments                                                         |                                                         |                                           |                                                     |       |        |         | (2,558  | )     |        |         |        |      
|                                      | Proceeds from the sale and maturities of short
	and long-term investments                  |                                                         |                                           |                                                     |       |        |         | 15,449  |       |        |         | 40,470  |      
|                                      | Purchases of property and equipment                                                        |                                                         |                                           | (3,916                                               | )     |        |         | (3,856  | )     |        |         | (4,115  | )    
|                                      | Proceeds from sale of property and equipment                                               |                                                         |                                           | 2,557                                                |       |        |         |        |       |        |         |        |      
|                                      | Increase in restricted cash                                                                |                                                         |                                           | (550                                                 | )     |        |         |        |       |        |         |        |      
|                                      | Payment for acquisition, net of cash acquired and
	acquisition costs paid                  |                                                         |                                           |                                                     |       |        |         | 29      |       |        |         | (6,855  | )    
|                                      | (Increase) decrease in other assets                                                        |                                                         |                                           | (236                                                 | )     |        |         | (179    | )     |        |         | 88      |      
|                                      |                                                                                            |                                                         |                                           |                                                      |       |        |         |         |       |        |         |        
|                                      |                                                                                            |                                                         |                                           | Net cash provided by (used in) investing
	activities |       |        | (2,145  | )       |       |        | (40,743 | )       |       |        | 16,285  |  
|                                      |                                                                                            |                                                         |                                           |                                                      |       |        |         |         |       |        |         |        
|Cash flows from financing activities: |                                                                                            |                                                         |                                           |                                                      |       |        |         |         |       |        |         |        
|                                      | Net proceeds (payments) on line of credit                                                  |                                                         |                                           | 6,740                                                |       |        |         | (6,740  | )     |        |         |        |      
|                                      | Payments on long-term debt                                                                 |                                                         |                                           | (4,959                                               | )     |        |         | (2,003  | )     |        |         | (395    | )    
|                                      | Payments on Brightware debt                                                                |                                                         |                                           |                                                     |       |        |         |        |       |        |         | (4,860  | )    
|                                      | Issuance of loans receivable                                                               |                                                         |                                           |                                                     |       |        |         |        |       |        |         | (4,407  | )    
|                                      | Proceeds from preferred stock issuance                                                     |                                                         |                                           | 19,842                                               |       |        |         |        |       |        |         |        |      

F-6



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)

|                                                              |                                                                  |                                                      |                                                      |        |   |        |         |       |   |         |         |   |         |        |  
|------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------------- | ------ | - | ------ | ------- | ----- | - | ------- | ------- | - | ------- | ------ | -
|                                                              |                                                                  |                                                     
|                                                              |                                                                  | Fiscal Years Ended October 31,                      
|                                                              |                                                                  |                                                     
|                                                              |                                                                  | 1999                                                 |                                                      | 2000   |   | 2001  
|                                                              |                                                                  |                                                      |                                                      |        |   |       
|                                                              |                                                                  |                                                     
|                                                              |                                                                  | (In thousands)                                      
|Proceeds from common stock issuance, net of
	offering costs   |                                                                  |                                                      | 288                                                  |        |   |        | 113,800 |       |   |         |        |  
|Costs associated with exchange of preferred stock             |                                                                  |                                                      | (23                                                  | )      |   |        |        |       |   |         |        |  
|Proceeds from stock options and warrants exercised            |                                                                  |                                                      |                                                     |        |   |        | 9,845   |       |   |         | 1,550   |  
|Increase (decrease) in subscription
	receivables              |                                                                  |                                                      | (13                                                  | )      |   |        | 13      |       |   |         |        |  
|                                                              |                                                                  |                                                      |                                                      |        |   |        |         |       |   |         |         |  
|                                                              |                                                                  |                                                      | Net cash provided by (used in) financing
	activities |        |   | 21,875 |         |       |   | 114,915 |         |   |         | (8,112 | )
|Effect of exchange rate changes on cash and cash
	equivalents |                                                                  |                                                      | 15                                                   |        |   |        | (24     | )     |   |         | 10      |  
|                                                              |                                                                  |                                                      |                                                      |        |   |        |         |       |   |         |         |  
|Net increase (decrease) in cash and cash
	equivalents         |                                                                  |                                                      | (204                                                 | )      |   |        | 77,380  |       |   |         | (44,840 | )
|Cash and cash equivalents, beginning of period                |                                                                  |                                                      | 2,324                                                |        |   |        | 2,120   |       |   |         | 79,500  |  
|                                                              |                                                                  |                                                      |                                                      |        |   |        |         |       |   |         |         |  
|Cash and cash equivalents, end of period                      |                                                                  | $                                                    | 2,120                                                |        |   | $      | 79,500  |       |   | $       | 34,660  |  
|                                                              |                                                                  |                                                      |                                                      |        |   |        |         |       |   |         |         |  
|Supplemental cash flow information:                           |                                                                  |                                                      |                                                      |        |   |        |         |       |   |         |         |  
|Interest paid                                                 |                                                                  | $                                                    | 695                                                  |        |   | $      | 665     |       |   | $       | 104     |  
|                                                              |                                                                  |                                                      |                                                      |        |   |        |         |       |   |         |         |  
|Noncash investing and financing activities:                   |                                                                  |                                                      |                                                      |        |   |        |         |       |   |         |         |  
|                                                              | Series D preferred stock exchanged for
	series E preferred stock |                                                      | $                                                    |       |   |        | $       |      |   |         | $       |  |        
|                                                              |                                                                  |                                                      |                                                      |        |   |        |         |       |   |         |         |  
|                                                              | Series E preferred stock exchanged for
	series G preferred stock |                                                      | $                                                    | 19,974 |   |        | $       |      |   |         | $       |  |        
|                                                              |                                                                  |                                                      |                                                      |        |   |        |         |       |   |         |         |  
|                                                              | Equipment acquired under capital lease obligations               |                                                      | $                                                    | 477    |   |        | $       |      |   |         | $       |  |        
|                                                              |                                                                  |                                                      |                                                      |        |   |        |         |       |   |         |         |  
|                                                              | Warrants issued in conjunction with subordinated
	notes payable  |                                                      | $                                                    |       |   |        | $       | 1,904 |   |         | $       |  |        
|                                                              |                                                                  |                                                      |                                                      |        |   |        |         |       |   |         |         |  
|                                                              | Conversion of preferred stock into common stock                  |                                                      | $                                                    |       |   |        | $       | 191   |   |         | $       |  |        
|                                                              |                                                                  |                                                      |                                                      |        |   |        |         |       |   |         |         |  
|                                                              | Purchase of Brightware, net of cash acquired:                    |                                                      |                                                      |        |   |        |         |       |   |         |         |   |        
|                                                              |                                                                  | Fair value of assets acquired                        |                                                      | $      |  |        |         | $     |  |         |         | $ | 3,954   |       
|                                                              |                                                                  | Liabilities assumed                                  |                                                      |        |  |        |         |       |  |         |         |   | (11,034 | )     
|                                                              |                                                                  | Goodwill                                             |                                                      |        |  |        |         |       |  |         |         |   | 7,449   |       
|                                                              |                                                                  | In-process research and development                  |                                                      |        |  |        |         |       |  |         |         |   | 6,200   |       
|                                                              |                                                                  | Developed technology and know-how                    |                                                      |        |  |        |         |       |  |         |         |   | 4,900   |       
|                                                              |                                                                  | Assembled workforce                                  |                                                      |        |  |        |         |       |  |         |         |   | 2,200   |       
|                                                              |                                                                  | Cash paid including cash paid for acquisition
	costs |                                                      |        |  |        |         |       |  |         |         |   | (6,855  | )     
|                                                              |                                                                  | Acquisition costs accrued                            |                                                      |        |  |        |         |       |  |         |         |   | (949    | )     
|                                                              |                                                                  |                                                      |                                                      |        |   |        |         |       |   |         |         |  
|                                                              |                                                                  |                                                      | Fair value of stock issued                           |        | $ |       |         |       | $ |        |         |   | $       | 5,865  |  
|                                                              |                                                                  |                                                      |                                                      |        |   |        |         |       |   |         |         |  

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

F-7



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Nature of
Business and Basis of Presentation

Firepond, Inc., together with its wholly owned
subsidiaries (the Company) is a leading provider of
intelligent guided selling and online customer assistance
solutions that help companies more profitably acquire and retain
customers. The Companys product lines leverage advanced
intelligence engines and patented automation technology to drive
new revenue streams, increase profitability, and manage customer
interactions across all channels and throughout the sales and
service cycle.

On February 15, 2001, the Company acquired
100% of the issued and outstanding shares of capital stock of
Brightware, Inc. (Brightware). The acquisition was accounted for
as a purchase in accordance with APB No. 16.
Accordingly, the results of operations of Brightware have been
included in the Companys results of operations since the
date of acquisition.

The Company is subject to a number of risks
similar to those of other companies of similar size in its
industry, including recurring losses, rapid technological
changes, competition, customer concentration, integration of
acquisitions, management of international activities and
dependence on key individuals.

The accompanying consolidated financial
statements include the accounts of Firepond, Inc. and its wholly
owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in the accompanying financial
statements.

2.     Significant
Accounting Policies

(a) Use
of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results
could differ from those estimates.

(b) Revenue
Recognition

The Company recognizes revenue based on the
provisions of Statement of Position, No. 97-2, Software
Revenue Recognition (SOP 97-2), as amended, and
Statement of Position No. 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type
Contracts (SOP 81-1).

The Company generates revenue from two primary
sources: (1) product-related license and service revenue
and (2) custom development service revenue.

Product-Related
Revenue

Product-related license revenue is generated from
licensing the rights to the use of the Companys packaged
software products. Product-related service revenue is generated
from sales of maintenance and, consulting and training services
performed for customers that license the Companys products.

The Company has concluded that generally, for the
SalesPerformer product suite and its components, the
implementation services are essential to the customers use
of the packaged software products in arrangements where the
Company is responsible for implementation services. As such, the
Company recognizes revenue for these arrangements following the
percentage-of-completion method over the implementation period.
Percentage of completion is measured by the percentage of
implementation hours incurred to date compared to estimated
total implementation hours. This method is used because
management has determined that past experience has shown
expended hours to be the best measure of progress on these
engagements. When the current estimates of total contract
revenue and contract cost indicate a loss, a provision for the
entire loss on the contract is recorded.

F-8



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In situations where the Company is not
responsible for implementation services for the SalesPerformer
Suite of products, the Company recognizes revenue on delivery of
the packaged software if there is persuasive evidence of an
arrangement, collection is probable and the fee is fixed or
determinable.

In situations where the Company is not
responsible for implementation services for the SalesPerformer
Suite of products, however, is obligated to provide unspecified
additional software products in the future, the Company
recognizes revenue as a subscription over the term of the
commitment period.

For separate sales of the eServicePerformer
product line, which was acquired in connection with the
Brightware transaction, the Company recognizes revenue on
delivery of the packaged software if there is persuasive
evidence of an arrangement, collection is probable, and the fee
is fixed or determinable. The Company has determined that
implementation services are not essential to the functionality
of the eServicePerformer product.

For product sales that are recognized on
delivery, the Company will execute contracts that govern the
terms and conditions of each software license, as well as
maintenance arrangements and other services arrangements. These
contracts may be elements in a multiple element arrangement.
Revenue under multiple element arrangements, which may include
several different software products and services sold together,
is allocated to each element based on the residual method in
accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position 98-9,
Software Revenue Recognition with Respect to Certain
Arrangements.

The Company uses the residual method when
vendor-specific objective evidence of fair value does not exist
for one of the delivered elements in the arrangement. Under the
residual method, the fair value of the undelivered elements is
deferred and subsequently recognized. The Company has
established sufficient vendor specific objective evidence for
professional services, training and maintenance and support
services based on the price charged when these elements are sold
separately. Accordingly, software license revenue is recognized
under the residual method in arrangements in which software is
licensed with professional services, training, and maintenance
and support services.

In situations where the Company enters into a
license agreement for both its SalesPerformer Suite and its
eServicePerformer product and is responsible for implementation
services; it will recognize revenue for the entire arrangement
under SOP 81-1.

Revenue from maintenance services is recognized
ratably over the term of the contract, typically one year.
Consulting revenue is primarily related to implementation
services performed on a time-and-materials basis under separate
service arrangements. Revenue from consulting and training
services is recognized as services are performed.

The Company generally bills for services on a
monthly basis. The Company generally bills for product license
fees upon commencement of the contract, however, the Company may
delay billing based on the terms of the contract. The Company
has recorded deferred revenue on amounts billed or collected by
the Company before satisfying the above revenue recognition
criteria. Deferred revenue consists of the following:

|                            |  |                |        |      |  |   |        | 
|--------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                            |  |               
|                            |  | October 31,   
|                            |  |               
|                            |  | 2000           |        | 2001
|                            |  |                |        |     
|                            |  |               
|                            |  | (In thousands)
|Product license             |  | $              | 8,740  |      |  | $ | 5,073  | 
|Product-related services    |  |                | 1,344  |      |  |   | 1,957  | 
|Product-related maintenance |  |                | 2,865  |      |  |   | 3,379  | 
|Custom development services |  |                | 2,258  |      |  |   | 393    | 
|                            |  |                |        |      |  |   |        | 
|                            |  | $              | 15,207 |      |  | $ | 10,802 | 
|                            |  |                |        |      |  |   |        | 

F-9



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Unbilled revenue of $1,676,000 at
October 31, 2000 and $594,000 at October 31, 2001
represents amounts due to the Company under license, service and
maintenance agreements for work performed that had not been
billed but for which revenue was recognized as of the period
end. Product license fees for which the Company has not billed
based on contract terms nor has the Company recognized or
deferred revenue totaled $5,923,000 at October 31, 2000 and
$343,000 at October 31, 2001.

Custom
Development Services Revenue

The Company historically had provided services to
develop highly customized applications utilizing core software
technology. The Company no longer accepts new custom development
service projects but continues to provide ongoing services
related to previously completed custom development projects
including software and data maintenance. Revenue from these
ongoing arrangements is recognized as the services are performed.

(c) Cost
of Revenue

Cost of licenses includes royalties, media,
product packaging, documentation, other production costs and the
amortization of capitalized software development costs. See
note 2(m).

Cost of product-related services and maintenance
and cost of custom development services revenue consist
primarily of salaries, related costs for development,
consulting, training and customer support personnel, including
cost of services provided by third-party consultants engaged by
the Company.

(d) Cash
and Cash Equivalents

The Company accounts for cash equivalents based
on the guidance in Statement of Financial Accounting Standards,
SFAS, No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Cash equivalents are short-term,
highly liquid investments with original maturity dates of three
months or less. Cash equivalents are carried at cost, which
approximates fair market value and consisted of the following:

|                           |                                |                                 |   |        |        |  |   |        |        | 
|-------------------------- | ------------------------------ | ------------------------------- | - | ------ | ------ |  | - | ------ | ------ | 
|                           |                                |                                
|                           |                                | October 31,                    
|                           |                                |                                
|                           |                                | 2000                            |   | 2001  
|                           |                                |                                 |   |       
|                           |                                |                                
|                           |                                | (In thousands)                 
|Cash and cash equivalents: |                                |                                 |   |        |        |  |   |       
|                           | Interest bearing bank deposits |                                 | $ | 7,186  |        |  | $ | 2,776  |       
|                           | Money market accounts          |                                 |   | 4,095  |        |  |   | 10,765 |       
|                           | Commercial paper               |                                 |   | 68,219 |        |  |   | 19,748 |       
|                           | Discount notes                 |                                 |   |       |        |  |   | 1,371  |       
|                           |                                |                                 |   |        |        |  |   |       
|                           |                                | Total cash and cash equivalents |   | $      | 79,500 |  |   | $      | 34,660 | 
|                           |                                |                                 |   |        |        |  |   |       

(e) Short-term
Investments

In accordance with SFAS No. 115 and based on
the Companys intentions regarding these instruments, the
Company has classified all short-term investments as
available-for-sale. These investments consist of commercial
paper, corporate notes and bonds and discount notes with an
original maturity of less than a year. Other comprehensive loss
in stockholders equity included an unrealized holding loss
of $4,000 for October 31, 2000 and an unrealized holding
gain of $9,000 for October 31, 2001 related to these
investments.

F-10



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                   |                              |                |        |        |  |   |       |       | 
|------------------------------------------------------------------ | ---------------------------- | -------------- | ------ | ------ |  | - | ----- | ----- | 
|                                                                   |                              |               
|                                                                   |                              | October 31,   
|                                                                   |                              |               
|                                                                   |                              | 2000           |        | 2001  
|                                                                   |                              |                |        |       
|                                                                   |                              |               
|                                                                   |                              | (In thousands)
|Short-term investments, at fair value:                             |                              |                |        |        |  |   |       |      
|Commercial paper (average 57 remaining days
	to maturity)          |                              | $              | 15,329 |        |  | $ | 3,089 |      
|Corporate notes and bonds (average
	21 remaining days to maturity) |                              |                | 21,404 |        |  |   | 4,512 |      
|Discount notes (average 71 remaining days to
	maturity)            |                              |                |       |        |  |   | 1,992 |      
|                                                                   |                              |                |        |        |  |   |       |      
|                                                                   | Total short-term investments |                | $      | 36,733 |  |   | $     | 9,593 | 
|                                                                   |                              |                |        |        |  |   |       |      

(f) Property
and Equipment

Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, generally two to seven
years. The cost of equipment acquired under a capital lease is
amortized over the shorter of the life of the lease or the
estimated useful life of the assets. Maintenance and repairs are
charged to operations as incurred and major improvements are
capitalized. The cost of assets retired or disposed of and the
accumulated depreciation thereon are removed from the accounts
with any gain or loss realized upon sale or disposal credited or
charged to operations, respectively.

|                        |                                                 |                             |        |        |       |  |       |        |       | 
|----------------------- | ----------------------------------------------- | --------------------------- | ------ | ------ | ----- |  | ----- | ------ | ----- | 
|                        |                                                 |                            
|                        |                                                 | October 31,                
|                        |                                                 |                            
|                        |                                                 | 2000                        |        | 2001  
|                        |                                                 |                             |        |       
|                        |                                                 |                            
|                        |                                                 | (In thousands)             
|Property and equipment: |                                                 |                             |        |        |       |  |       |       
|                        | Computer equipment                              |                             | $      | 10,584 |       |  | $     | 7,978  |      
|                        | Furniture and fixtures                          |                             |        | 2,039  |       |  |       | 1,418  |      
|                        | Leasehold improvements                          |                             |        | 746    |       |  |       | 561    |      
|                        |                                                 |                             |        |        |       |  |       |       
|                        |                                                 |                             | 13,369 |        |       |  | 9,957 |       
|                        | Less: accumulated depreciation and amortization |                             |        | (6,482 | )     |  |       | (4,601 | )    
|                        |                                                 |                             |        |        |       |  |       |       
|                        |                                                 | Property and equipment, net |        | $      | 6,887 |  |       | $      | 5,356 | 
|                        |                                                 |                             |        |        |       |  |       |       

Depreciation expense was approximately $2,590,000
for fiscal 1999, $3,021,000 for fiscal 2000, and $4,151,000 for
fiscal 2001.

(g) Impairment
of Long-Lived Assets

The Company evaluates the carrying value of
long-lived assets, including intangible assets, based on the
guidance in SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. The Companys evaluation considers nonfinancial
data such as changes in the operating environment and business
strategy, competitive information, market trends and operating
performance. Based on this evaluation, the Company recorded an
asset impairment charge of $1,532,000 during fiscal 1999 in
connection with the relocation of the Companys corporate
headquarters from Minnesota to Massachusetts and $3,891,000
during fiscal 2001 in connection with a restructuring of the
Companys operations, (see note 5).

(h) Concentration
of Credit Risk

SFAS No. 105, Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk,
requires disclosure of any significant off-balance-sheet risks
and credit risk concentrations. The Company has no significant
off-balance-sheet risks. Financial instruments that potentially
subject the Company to concentrations of credit risk are
principally cash and cash

F-11



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

equivalents, short-term investments, accounts
receivable and unbilled services. The Company maintains its cash
and cash equivalents with established financial institutions.
The Companys credit risk is managed by investing its cash
in high quality money market instruments and high quality
corporate issuers. Concentration of credit risk related to
accounts receivable and unbilled services is limited to several
customers to whom the Company makes substantial sales. The
Company performs periodic credit evaluations of its customers
and has recorded allowances for estimated losses. The Company
has not experienced any material losses related to receivables
or unbilled services from individual customers, geographic
regions or groups of customers. Due to these factors, no
additional credit risk beyond amounts that have been provided
for, is believed by management to be inherent in the
Companys accounts receivable or unbilled services.

The following table summarizes the number of
customers that individually comprise greater than 10% of total
revenue or total accounts receivable and their aggregate
percentage of the Companys total revenue and accounts
receivable:

|                   |                  |           |  |                     |  |            |  |            |   |  |  |   |  |  |  |    |  
|------------------ | ---------------- | --------- |  | ------------------- |  | ---------- |  | ---------- | - |  |  | - |  |  |  | -- | -
|                   |                  |           |  |                     |  |           
|                   |                  |           |  | Accounts Receivable
|                   |                  | Revenue   |  |                    
|                   |                  |           |  |                     |  | Percent of
|                   |                  |           |  | Percent of          |  |            |  | Total     
|                   |                  | Number of |  | Total               |  | Number of  |  | Accounts  
|                   |                  | Customers |  | Revenue             |  | Customers  |  | Receivable
|                   |                  |           |  |                     |  |            |  |           
|Fiscal year ended: |                  |           |  |                     |  |            |  |            |   |  |  |   |  |  |  |   
|                   | October 31, 1999 |           |  | 2                   |  |            |  | 38         | % |  |  | 3 |  |  |  | 42 | %
|                   | October 31, 2000 |           |  | 2                   |  |            |  | 32         | % |  |  | 2 |  |  |  | 27 | %
|                   | October 31, 2001 |           |  | 1                   |  |            |  | 17         | % |  |  | 1 |  |  |  | 16 | %

(i) Financial
Instruments

The estimated fair values of the Companys
financial instruments, which include cash equivalents,
short-term investments, accounts receivable, unbilled services,
restricted cash and accounts payable, approximate their carrying
value due to the short-term nature of these instruments.

(j) Stock-Based
Compensation

SFAS No. 123, Accounting for Stock-Based
Compensation, requires the measurement of the fair value of
employee and director stock options or warrants to be included
in the statement of operations or disclosed in the notes to the
financial statements. The Company accounts for stock-based
compensation for employees and directors under the Accounting
Principles Board, or APB, Opinion No. 25, Accounting for
Stock Issued to Employees,and follows the disclosure-only
alternative under SFAS No. 123, see note 9(d). The Company
accounts for options and warrants granted to non-employees using
the fair-value method prescribed by SFAS No. 123 and
Emerging Issues Task Force, or EITF, No. 96-18,
Accounting for Equity Instruments that are Issued to other
than Employees for Acquiring, or in Conjunction with Selling,
Goods, or Services.

(k) Recent
Accounting Pronouncements

In July 2001, the FASB issued SFAS No, 141,
Business Combinations. SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. This statement is
effective for all business combinations initiated after
June 30, 2001.

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. This statement
applies to goodwill and intangible assets acquired after
June 30, 2001, as well as goodwill and intangible assets
previously acquired. Under this statement, goodwill will no
longer be amortized, instead goodwill will be reviewed for
impairment annually, at a minimum, by applying a fair-
value-based test. The Company will adopt this statement,
effective the first quarter in the fiscal year ending
October 31, 2002. Accordingly, the Company will reclassify
the net book value of assembled workforce to goodwill and cease
amortization of goodwill. The Company expects this will reduce
annual amortization expense by approximately $3.2 million.

F-12



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company is currently evaluating the impact
that this statement will have on its financial statements in
reviewing goodwill for impairment when applying a
fair-value-based test.

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This statement supercedes SFAS
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of Accounting Principles
Board (APB) 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. Under this
statement it is required that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously
held and used or newly acquired, and it broadens the
presentation of discontinued operations to include more disposal
transactions. The provisions of this statement are effective for
financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal
years, with early adoption permitted. The Company is currently
evaluating the ultimate impact of this statement on its results
of operations or financial position until such time as its
provisions are applied.

(l) Foreign
Currency Translation

Assets and liabilities of the foreign
subsidiaries are translated based on the guidance in SFAS
No. 52, Foreign Currency Translation. Under SFAS
No. 52, assets and liabilities of the Companys
foreign operations are translated into U.S. dollars at
current exchange rates, and income and expense items are
translated at average rates of exchange prevailing during the
year. Gains and losses arising from translation are accumulated
as a separate component of stockholders equity. Gains and
losses arising from transactions denominated in foreign
currencies are included in other income and were not material
for the periods presented.

(m) Computer
Software Development Costs and Research and Development
Expenses

The Company incurs software development costs
associated with its licensed products as well as new products.
Since June 1997, the Company determined that technological
feasibility occurs upon the successful development of a working
model, which happens late in the development cycle and close to
general release of the products. Because the development costs
incurred between the time technological feasibility is
established and general release of the product are not material,
the Company expenses these costs as incurred. Through
May 1997, the Company capitalized $532,000 of costs related
to the development of its first software product based on the
guidance of SFAS No. 86 Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed.
These costs were amortized over three years through
October 31, 1999. Amortization of these costs was charged
to costs of product licenses and was $177,000 in fiscal 1999.

3.     Net Loss Per
Share

(a) Net
Loss Per Share

Net loss per share is computed based on the
guidance of SFAS No. 128, Earnings per Share. SFAS
No. 128 requires companies to report both basic loss per
share, which is computed by dividing the net loss applicable to
common stockholders by the weighted average number of common
shares outstanding, and diluted loss per share, which is
computed by dividing the net loss applicable to common
stockholders by the weighted average number of common shares
outstanding plus the weighted average dilutive potential common
shares outstanding using the treasury stock method. As a result
of the losses incurred by the Company for all fiscal periods
presented, all potential common shares were antidilutive and
were excluded from the diluted net loss per share calculations.

F-13



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes securities
outstanding as of each period-end which were not included in the
calculation of diluted net loss per share since their inclusion
would be antidilutive.

|                                     |  |                |        |      |  |      |        |  |  |  |       | 
|------------------------------------ |  | -------------- | ------ | ---- |  | ---- | ------ |  |  |  | ----- | 
|                                     |  |               
|                                     |  | October 31,   
|                                     |  |               
|                                     |  | 1999           |        | 2000 |  | 2001
|                                     |  |                |        |      |  |     
|                                     |  |               
|                                     |  | (In thousands)
|Common stock options and warrants    |  |                | 7,952  |      |  |      | 10,762 |  |  |  | 8,421 | 
|                                     |  |                |        |      |  |      |        |  |  |  |       | 
|Convertible preferred stock          |  |                | 19,098 |      |  |      |       |  |  |  |      | 
|                                     |  |                |        |      |  |      |        |  |  |  |       | 
|Preferred stock warrants (note 9(c)) |  |                | 864    |      |  |      |       |  |  |  |      | 
|                                     |  |                |        |      |  |      |        |  |  |  |       | 

(b) Pro
Forma Net Loss Per Share

Pro forma net loss per share has been computed as
described above and also gives effect to the conversion of
preferred stock that converted upon the completion of the
Companys initial public offering, using the if-converted
method, from the original date of issuance.

The following table reflects the reconciliation
of the shares used in the computation of pro forma loss per
share.

|                             |                                                                                                              |                |  |        |  |  |  |        | 
|---------------------------- | ------------------------------------------------------------------------------------------------------------ | -------------- |  | ------ |  |  |  | ------ | 
|                             |                                                                                                              |               
|                             |                                                                                                              | October 31,   
|                             |                                                                                                              |               
|                             |                                                                                                              | 1999           |  | 2000  
|                             |                                                                                                              |                |  |       
|                             |                                                                                                              |               
|                             |                                                                                                              | (In thousands)
|Pro forma basic and diluted: |                                                                                                              |                |  |        |  |  |  |       
|                             | Weighted average common shares outstanding used
	in computing basic and diluted net loss per share           |                |  | 10,024 |  |  |  | 28,286 | 
|                             | Weighted average common shares issuable upon the
	conversion of preferred stock                              |                |  | 11,792 |  |  |  | 3,516  | 
|                             | Weighted average common shares issuable upon
	settlement of the priority payments                            |                |  | 3,812  |  |  |  | 1,000  | 
|                             | Weighted average common shares issuable upon
	exercise of series F preferred stock warrants                  |                |  | 171    |  |  |  | 65     | 
|                             |                                                                                                              |                |  |        |  |  |  |       
|                             | Weighted average common shares outstanding used
	in computing pro forma basic and diluted net loss per share |                |  | 25,799 |  |  |  | 32,867 | 
|                             |                                                                                                              |                |  |        |  |  |  |       

4.     Accrued
Liabilities

Accrued liabilities consist of the following:

|                          |                           |                |       |        |  |   |       |       | 
|------------------------- | ------------------------- | -------------- | ----- | ------ |  | - | ----- | ----- | 
|                          |                           |               
|                          |                           | October 31,   
|                          |                           |               
|                          |                           | 2000           |       | 2001  
|                          |                           |                |       |       
|                          |                           |               
|                          |                           | (In thousands)
|Payroll and related costs |                           | $              | 4,142 |        |  | $ | 844   |      
|Other                     |                           |                | 9,514 |        |  |   | 8,030 |      
|                          |                           |                |       |        |  |   |       |      
|                          | Total accrued liabilities |                | $     | 13,656 |  |   | $     | 8,874 | 
|                          |                           |                |       |        |  |   |       |      

F-14



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     Restructuring
Charge

(a) Fiscal
1999 and 2000

During fiscal 1999, the Company undertook a plan
to relocate its corporate offices from Mankato, Minnesota to
Waltham, Massachusetts. In connection with this plan, the
Company incurred charges associated with asset impairments, idle
lease space and employee severance costs.

The significant components of the restructuring
charge in fiscal 1999 were as follows:

|                                     |  |                |       | 
|------------------------------------ |  | -------------- | ----- | 
|                                     |  | Amount        
|                                     |  |               
|                                     |  | (In thousands)
|Impairment of property and equipment |  | $              | 1,532 | 
|Idle lease space                     |  |                | 993   | 
|Employee severance costs             |  |                | 502   | 
|                                     |  |                |       | 
|                                     |  | $              | 3,027 | 
|                                     |  |                |       | 

The Company was subject to a ten-year lease
arrangement on its Mankato, Minnesota facility that permitted
(1) a 50% reduction in the monthly lease obligation by
providing notice one year in advance, and (2) early
termination of the lease agreement at the end of the fifth year
by giving notice before the fourth anniversary of the lease
agreement. The Company had determined that approximately 72% of
the office space in Mankato was rendered idle as part of the
relocation plan. The idle lease space cost was determined in
anticipation of the Company exercising its option to reduce the
lease obligation within one year and terminating the remaining
lease obligation at the end of the fifth year. Therefore, the
present value of the portion of future lease payments for which
the Company did not anticipate any future benefit was accrued
for as of October 31, 1999. In March 2000, the Company
negotiated a new lease for less space, eliminating the future
obligation for the idle space in its Mankato facility. As a
result, during fiscal 2000, the Company reversed $500,000 of the
restructuring accrual representing the remaining obligation for
the idle lease space.

The impairment of property and equipment
component consisted primarily of excess and obsolete office
furniture and computer equipment located in the Mankato
facility. The Company determined that this equipment would have
no future benefit and has disposed of this equipment.

The employee severance cost component of the
restructuring charge was related to reductions in headcount.
Under the plan, the Company terminated 12 general and
administrative personnel. In October 1999, the
Companys chairman, who was located in the Mankato office,
resigned. As part of his resignation, the Company agreed to pay
severance costs of $402,000. These costs were included as part
of the severance component of the restructuring reserve.

(b) Fiscal
2001

The Company undertook three plans to restructure
its operations during fiscal 2001. During the quarter ended
April 30, 2001, as a result of the global information
technology spending slowdown, specifically in the Customer
Relationship Management market, and the Companys
acquisition of Brightware on February 15, 2001, the Company
undertook a plan to restructure its operations. During the
quarters ended July 31, 2001 and October 31, 2001, as
a result of a continued global slowdown in information
technology spending, the Company took actions to extend the
first restructuring. These actions sought to better align the
Companys cost structure with its projected operations in
the future, preserve cash, and in the case of the Brightware
transaction, eliminate redundant operations.

F-15



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The significant components of the restructuring
charges were as follows:

|                                                     |  |                |       |          |  |             |       |             |  |   |       |  |  |   |        | 
|---------------------------------------------------- |  | -------------- | ----- | -------- |  | ----------- | ----- | ----------- |  | - | ----- |  |  | - | ------ | 
|                                                     |  |                |       |         
|                                                     |  | Quarter Ended  |       | Year    
|                                                     |  |                |       | Ended   
|                                                     |  | April 30,      |       | July 31, |  | October 31, |       | October 31,
|                                                     |  | 2001           |       | 2001     |  | 2001        |       | 2001       
|                                                     |  |                |       |          |  |             |       |            
|                                                     |  |               
|                                                     |  | (In thousands)
|Employee severance costs                             |  | $              | 2,286 |          |  | $           | 3,296 |             |  | $ | 2,931 |  |  | $ | 8,513  | 
|Facilities related costs                             |  |                | 270   |          |  |             | 1,884 |             |  |   | 862   |  |  |   | 3,016  | 
|Impairment of property and equipment                 |  |                | 114   |          |  |             | 1,530 |             |  |   | 2,247 |  |  |   | 3,891  | 
|Excess contractual commitments and termination
	fees |  |                |      |          |  |             | 1,050 |             |  |   | 991   |  |  |   | 2,041  | 
|Other                                                |  |                | 351   |          |  |             | 369   |             |  |   | 62    |  |  |   | 782    | 
|                                                     |  |                |       |          |  |             |       |             |  |   |       |  |  |   |        | 
|                                                     |  | $              | 3,021 |          |  | $           | 8,129 |             |  | $ | 7,093 |  |  | $ | 18,243 | 
|                                                     |  |                |       |          |  |             |       |             |  |   |       |  |  |   |        | 

The employee severance cost was related to
reductions in headcount. The Company terminated 31 general
and administrative, 111 sales and marketing,
159 professional services, and 62 development
employees, as well as, 90 contractors.

The facilities related cost component consisted
of idle lease space, lease termination fees, and the closing of
our Australia and Malaysia facilities. The Companys
assumptions consider current market value of similar properties
and the ability, if any, to sublease the idle space or any other
future use.

The impairment of property and equipment charges
consisted of excess computer equipment and furniture and
fixtures resulting from the reductions-in-force and leasehold
write-offs related to office closings or downsizings.

The excess contractual commitment and termination
fees are primarily amounts resulting from the Company entering
into a settlement agreement with EPAM Systems, an offshore
organization which provides software development services to us,
to resolve a contract dispute. Among other items, the Company
agreed to pay EPAM Systems $1,000,000 in cash and granted
options to purchase 100,000 shares of the Companys
common stock in return for restructuring the relationship and a
release of claims including those claims previously filed
against the Company by EPAM Systems. As part of this agreement,
the relationship has been restructured to reduce the
Companys monthly commitment for the retention of EPAM
Systems consultants in furtherance of the Companys cost
reduction measures.

There were no other material contractual
commitments terminated as a result of these restructurings.

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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(c) Restructuring
Reserve

A summary of the short and long-term
restructuring accrual is as follows:

|                       |                              |                                   |   |       |        |      |   |       |      |   |   |       |        |  
|---------------------- | ---------------------------- | --------------------------------- | - | ----- | ------ | ---- | - | ----- | ---- | - | - | ----- | ------ | -
|                       |                              |                                  
|                       |                              | Fiscal Years Ended October 31,   
|                       |                              |                                  
|                       |                              | 1999                              |   | 2000  |        | 2001
|                       |                              |                                   |   |       |        |     
|                       |                              |                                  
|                       |                              | (In thousands)                   
|Restructuring reserve: |                              |                                   |   |       |        |      |   |       |      |   |   |      
|                       | Balance, beginning of period |                                   | $ | 304   |        |      | $ | 1,247 |      |   | $ | 142   |       
|                       |                              | Provision                         |   |       | 3,027  |      |   |       |     |   |   |       | 18,243 |  
|                       |                              | Adjustment to reserve             |   |       |       |      |   |       | (500 | ) |   |       |       |  
|                       |                              | Severance payments                |   |       | (552   | )    |   |       | (605 | ) |   |       | (6,026 | )
|                       |                              | Facilities related payments       |   |       |       |      |   |       |     |   |   |       | (820   | )
|                       |                              | Contract termination fees         |   |       |       |      |   |       |     |   |   |       | (1,050 | )
|                       |                              | Other payments                    |   |       |       |      |   |       |     |   |   |       | (592   | )
|                       |                              | Property and equipment write-offs |   |       | (1,532 | )    |   |       |     |   |   |       | (3,738 | )
|                       |                              |                                   |   |       |        |      |   |       |      |   |   |      
|                       | Balance, end of period       |                                   | $ | 1,247 |        |      | $ | 142   |      |   | $ | 6,159 |       
|                       |                              |                                   |   |       |        |      |   |       |      |   |   |      

The short-term portion of the restructuring
reserve is $5,057,000 and the long-term portion is $1,102,000.
The long-term portion of the restructuring accrual will be paid
out through fiscal 2010.

6.     Financings

During fiscal 1999 and 2000, the Company
maintained a line of credit agreement with a financial
institution for amounts up to $7,000,000. Borrowings under the
agreement were limited to the lesser of $5,000,000 or 80% of
qualifying accounts receivable, as defined and a $2,000,000 term
loan. The line of credit and term loan bore interest at the
prime rate, which was 8.25% at October 31, 1999, plus 2.0%
limited to a minimum of 8.0% per year, and was payable monthly.
The Company also paid a fee of 0.5% per year on any unused line
of credit. Substantially all of the Companys tangible and
intangible assets were pledged as collateral. The entire
arrangement was scheduled to mature on October 31, 2000,
However, all amounts outstanding were paid in full during fiscal
2000 and the line of credit agreement was terminated.

On November 12, 1999, the Company issued
subordinated notes payable totaling $6,000,000 to an outside
investor and two existing stockholders of the Company. The
subordinated notes bore interest at 12.0% per year and were due
upon the earlier of the closing of the Companys initial
public offering or November 11, 2000. The subordinated note
payable was subject to conversion into preferred shares, as
defined. The Company also issued to the holders of the
subordinated notes payable warrants to purchase an aggregate of
360,000 shares of common stock at an exercise price of $5.25 per
share. The estimated fair value of these warrants totaling
$2,789,000 was determined using the Black-Scholes valuation
model with the following variables: risk-free interest rate of
6.0%, dividend yield rate of 0%, term of twelve years, and
volatility of 80%. The Company allocated the proceeds from the
subordinated notes payable of $6,000,000 in proportion to the
relative fair values of both the warrants and the subordinated
notes payable. As a result, the Company recorded the warrants as
a discount totaling $1,904,000 against the carrying value of the
subordinated notes payable, with the discount amortized to
interest expense over the term of the subordinated notes
payable. In conjunction with the Companys initial public
offering in February 2000, the Company repaid the $6,000,000 of
subordinated notes plus accrued interest of $180,000. As a
result, in the year ended October 31, 2000, the Company
recorded a $1,437,000 loss on extinguishment of debt as an
extraordinary item for the amount of unamortized discount at the
time of repayment.

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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

7.     Income
Taxes

Income taxes are accounted for based on guidance
in SFAS No. 109, Accounting for Income Taxes. Under
SFAS No. 109, deferred income tax liabilities and assets
are determined based on the difference between the financial
reporting and tax bases of assets and liabilities using
currently enacted tax rates.

The income tax provision (benefit) for the
entirety of each period is as follows:

|                                     |  |                                |        |      |  |      |        |   |  |   |         |  
|------------------------------------ |  | ------------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                     |  |                               
|                                     |  | Fiscal Years Ended October 31,
|                                     |  |                               
|                                     |  | 1999                           |        | 2000 |  | 2001
|                                     |  |                                |        |      |  |     
|                                     |  |                               
|                                     |  | (In thousands)                
|Federal                              |  | $                              | (5,882 | )    |  | $    | (4,588 | ) |  | $ | (18,749 | )
|State taxes, net of federal benefits |  |                                | (1,053 | )    |  |      | (821   | ) |  |   | (2,156  | )
|Foreign                              |  |                                | (3,982 | )    |  |      | (996   | ) |  |   | (5,298  | )
|Other                                |  |                                | 1,099  |      |  |      | 89     |   |  |   | 5,079   |  
|Net operating loss not benefited     |  |                                | 9,818  |      |  |      | 6,316  |   |  |   | 21,124  |  
|                                     |  |                                |        |      |  |      |        |   |  |   |         |  
|                                     |  | $                              |       |      |  | $    |       |   |  | $ |        |  
|                                     |  |                                |        |      |  |      |        |   |  |   |         |  

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Companys net deferred
tax assets (net of deferred tax liabilities) are comprised
primarily of the following:

|                                              |  |             |         |      |  |   |         |  
|--------------------------------------------- |  | ----------- | ------- | ---- |  | - | ------- | -
|                                              |  |            
|                                              |  | October 31,
|                                              |  |            
|                                              |  | 2000        |         | 2001
|                                              |  |             |         |     
|Net operating losses and credit carryforwards |  | $           | 23,888  |      |  | $ | 45,012  |  
|Nondeductible reserves and accruals           |  |             | 3,545   |      |  |   | 3,720   |  
|Depreciation and amortization                 |  |             | 23      |      |  |   | (28     | )
|Other                                         |  |             | 139     |      |  |   | 52      |  
|Valuation allowance                           |  |             | (27,595 | )    |  |   | (48,756 | )
|                                              |  |             |         |      |  |   |         |  
|                                              |  | $           |        |      |  | $ |        |  
|                                              |  |             |         |      |  |   |         |  

As of October 31, 2001, the Company has
available net operating losses of approximately $93 million
to reduce future federal and state income taxes, if any. These
carryforwards expire beginning in fiscal 2012 and may be subject
to review and possible adjustment by the Internal Revenue
Service. Utilization of these carryforwards may be subject to
substantial limitations due to the ownership change limitations
provided by the Internal Revenue Code of 1986. The
Companys wholly owned foreign subsidiaries have net
operating loss carryforwards of approximately $31 million.

8.     Commitments
and Contingencies

(a) Litigation

On October 19, 2001, General Motors
Corporation filed a complaint against the Company in the
Superior Court of Massachusetts, Middlesex County. The complaint
alleges, among other things, a breach of contract under
agreements entered into in 1994, as amended; anticipatory
repudiation in the spring of 2000 of agreements entered into in
1994, as amended; unjust enrichment; establishment of a
constructive trust; rescission and restitution based upon
failure of consideration as well as extortion and coercion
relating to agreements entered into in 1994, as amended; breach
of the covenant of good faith and fair dealing; fraud; as well
as violation of Chapter 93A of the General Laws of the
Commonwealth of Massachusetts relating to unfair and deceptive
trade practices. General Motors claims further relate to
license agreements, services agreements and a general release
entered into with the Company in May, 2000. The claims generally
allege,

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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

among other things, that Firepond coerced,
extorted or otherwise caused General Motors to enter into such
agreements under duress. On the Civil Cover Sheet for the
Superior Court of Massachusetts, Middlesex County, General
Motors claims damages in the amount of $9,000,000 exclusive of
fees, costs and multiple damages. The complaint does not demand
damages in specific dollar amounts. While management believes
the claims against the Company are without merit and intend to
defend the action vigorously, the litigation is in the
preliminary stage.

Beginning in August, 2001, a number of securities
class action complaints were filed in the Southern District of
New York seeking an unspecified amount of damages on behalf of
an alleged class of persons who purchased shares of the
Companys common stock between the date of its initial
public offering and December 6, 2000. The complaints name
as defendants Firepond and certain of its directors and
officers, and FleetBoston Robertson Stephens an underwriter of
the Companys initial public offering. The plaintiffs
allege, among other things, that the Companys prospectus,
incorporated in the Registration Statement on Form S-1
filed with the Securities and Exchange Commission was materially
false and misleading because it failed to disclose that the
investment banks which underwrote Fireponds initial public
offering of securities received undisclosed and excessive
brokerage commissions, and required investors to agree to buy
shares of the Companys securities after the initial public
offering was completed at predetermined prices as a precondition
to obtaining initial public offering allocations. The plaintiffs
further allege that these actions artificially inflated the
price of the Companys common stock after the initial
public offering. While management believes the claims against
the Company are without merit and intend to defend the actions
vigorously, the litigation is in the preliminary stage.

The Company is also subject to various other
claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with
legal counsel, the ultimate disposition of these matters is not
expected to have a material effect on our business, financial
condition or results of operations.

(b) Leases

The Company leases its office space under
operating leases expiring at various dates through August 2010.
Rent expense under these agreements totaled approximately
$2,349,000 in fiscal 1999, $2,882,000 in fiscal 2000 and
$2,999,000 in fiscal 2001. The rent expense for fiscal 2001
includes $413,000 of sublease income. There was no sublease
income in either fiscal 1999 or fiscal 2000.

At October 31, 2001, the minimum future
obligations under operating leases, exclusive of sublease income
are as follows:

|                                      |            |                |        |       | 
|------------------------------------- | ---------- | -------------- | ------ | ----- | 
|                                      |            | Amount        
|                                      |            |               
|                                      |            | (In thousands)
|For the Fiscal Year Ended October 31, |            |                |        |      
|                                      | 2002       |                | $      | 2,896 | 
|                                      | 2003       |                |        | 2,026 | 
|                                      | 2004       |                |        | 1,504 | 
|                                      | 2005       |                |        | 1,009 | 
|                                      | 2006       |                |        | 872   | 
|                                      | Thereafter |                |        | 3,324 | 
|                                      |            |                |        |      
|                                      |            | $              | 11,631 |      
|                                      |            |                |        |      

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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(c) Letter
of Credit

The Company is obligated to maintain an
irrevocable standby letter of credit of approximately $550,000,
which would be payable upon default of the Companys
noncancelable facility lease that was entered into in May 1999.
The letter of credit has been collateralized by cash, which has
been classified as restricted cash in the accompanying
consolidated balance sheet.

9.     Stockholders
Equity

(a) Capitalization

The Companys certificate of incorporation
as amended and restated authorizes capital stock consisting of
100,000,000 shares of $0.01 par value common stock and 5,000,000
shares of $0.01 par value preferred stock.

On February 4, 2000, the Company completed
its initial public offering of 5,000,000 shares of common stock.
Additionally, on February 25, 2000, the underwriters of the
initial public offering exercised their over-allotment option to
purchase an additional 666,666 shares. At the offering price of
$22.00 per share, the Company received $113.8 million from
these transactions, net of underwriting discounts and
commissions and offering expenses.

(b) Preferred
Stock

In February 1999, the Company sold 6,734,008
shares of series F preferred stock at $2.97 per share. In
addition, the Company issued warrants to purchase 673,401 shares
of series F preferred stock at an exercise price of $3.56
per share. In connection with the series F preferred stock
financing, the Company exchanged 7,604,563 outstanding shares of
series E preferred stock for 7,604,563 shares of series G
preferred stock.

Prior to the Companys initial public
offering, the Company had outstanding 4,188,880 shares of
series A preferred stock and 570,342 shares of
series C preferred stock.

Each outstanding share of series A,
series C, series F and series G preferred stock
automatically converted into 0.67 shares of common stock, for a
total of 12,731,862 shares, upon the closing of the initial
public offering of the Companys common stock on
February 4, 2000. Based on the offering price per share of
the initial price range for the initial public offering, the
conversion rate for the outstanding shares of series F
preferred stock was adjusted to include the issuance of 404,039
additional shares of common stock.

The Companys series A, series C
and series G preferred stock, as well as shares of the
Companys common stock held by some common stockholders,
had rights that allowed holders to receive a priority payment
upon the completion of the Companys initial public
offering. These priority payments totaled $35,750,000 for the
series A, series C and series G preferred
stockholders, and $10,000,000 to some of the holders of the
Companys common stock. These amounts were payable in cash,
or, at the Companys option, a number of shares of common
stock determined by dividing the amount payable by $12.00. The
Companys board of directors elected to make these payments
as a stock dividend of 3,812,588 shares of common stock upon
consummation of the Companys initial public offering. At
the initial public offering price of $22.00 per share, the value
of the stock dividend to preferred shareholders totaled
$65,542,000 and the value of the stock dividend to some of the
holders of the Companys common stock totaled $18,334,000.
As a result, during the year ended October 31, 2000, the
Company recorded a stock dividend on the preferred stock of
$65,542,000 increasing the loss attributable to common
stockholders.

(c) Stock
Options and Warrants

Stock Option
Plans

In May 1997, the Company adopted the 1997 Stock
Option Plan for the grant of stock options to key employees,
nonemployee directors and consultants. On November 8, 1999,
the Board of Directors adopted and

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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

on January 4, 2000 the stockholders approved
an increase in the number of shares of common stock reserved for
issuance under this plan from 7,896,815 shares to 9,396,815
shares. The exercise price and vesting are determined by the
board of directors at the date of grant. Options generally vest
over three years and expire five years after the date of grant.
As of October 31, 2001, 2,614,149 shares were available for
future issuance under the 1997 plan.

In September 1999, the Company adopted the 1999
Director Stock Option Plan for the grant of stock options to
non-employee directors. The Company has reserved 500,000 shares
of common stock for issuance under this plan. As of
October 31, 2001, 263,125 shares were available for future
issuance under this plan.

On November 8, 1999, the Board of Directors
adopted and on January 4, 2000 the stockholders approved
the 1999 Stock Option and Grant Plan under which 3,000,000
shares of the Companys common stock were reserved for
future issuance. On February 27, 2001, the Board of
Directors adopted and on March 22, 2001 the stockholders
approved an increase in the number of shares of common stock
reserved for issuance under this plan from 3,000,000 to
8,000,000 shares. The exercise price and vesting are determined
by the Board of Directors at the date of grant. Options
generally vest over three years and expire five years after the
date of grant. As of October 31, 2001, 5,829,360 shares
were available for future issuance under the 1999 plan.

On January 29, 2001, the Board of Directors
adopted and on March 22, 2001 the stockholders approved the
Brightware Acquisition Stock Option Plan for the grant of stock
options to employees of Brightware who continued to be employed
by the Company after the completion of the acquisition. The
Company reserved 1,000,000 shares of common stock for issuance
under this plan. As of October 31, 2001, 575,944 shares
were available for future issuance under this plan.

Option activity for fiscal 1999, fiscal 2000 and
fiscal 2001 was as follows:

|                              |           |           |           |                 |   |          |               |               |  |   |      |       | 
|----------------------------- | --------- | --------- | --------- | --------------- | - | -------- | ------------- | ------------- |  | - | ---- | ----- | 
|                              |           |           |           |                 |   | Weighted
|                              |           |           |           |                 |   | Average 
|                              |           | Number of |           |                 |   | Exercise
|                              |           | Shares    |           | Price Per Share |   | Price   
|                              |           |           |           |                 |   |         
|Outstanding, October 31, 1998 |           |           | 4,888,577 |                 |   | $        | 3.95          |               |  | $ | 3.95 |      
|                              | Granted   |           |           | 3,717,189       |   |          |               | 3.95    7.22 |  |   |      | 4.41  | 
|                              | Exercised |           |           | (35,169         | ) |          |               | 3.95          |  |   |      | 3.95  | 
|                              | Canceled  |           |           | (915,476        | ) |          |               | 3.95    4.46 |  |   |      | 3.98  | 
|                              |           |           |           |                 |   |          |               |               |  |   |      |      
|Outstanding, October 31, 1999 |           |           | 7,655,121 |                 |   |          | 3.95    7.22 |               |  |   | 4.17 |      
|                              | Granted   |           |           | 5,216,092       |   |          |               | 0.01   96.00 |  |   |      | 12.60 | 
|                              | Exercised |           |           | (1,642,502      | ) |          |               | 3.95   11.00 |  |   |      | 4.09  | 
|                              | Canceled  |           |           | (1,360,746      | ) |          |               | 3.95   96.00 |  |   |      | 8.09  | 
|                              |           |           |           |                 |   |          |               |               |  |   |      |      
|Outstanding, October 31, 2000 |           |           | 9,867,965 |                 |   | $        | 0.01  $63.88 |               |  | $ | 8.09 |      
|                              | Granted   |           |           | 10,965,453      |   |          |               | 0.01   10.56 |  |   |      | 1.90  | 
|                              | Exercised |           |           | (395,575        | ) |          |               | 0.01    7.22 |  |   |      | 3.91  | 
|                              | Canceled  |           |           | (12,916,511     | ) |          |               | 0.53   63.88 |  |   |      | 6.85  | 
|                              |           |           |           |                 |   |          |               |               |  |   |      |      
|Outstanding, October 31, 2001 |           |           | 7,521,332 |                 |   | $        | 0.01  $31.75 |               |  | $ | 1.42 |      
|                              |           |           |           |                 |   |          |               |               |  |   |      |      
|Exercisable, October 31, 2001 |           |           | 2,267,608 |                 |   | $        | 0.01  $31.75 |               |  | $ | 2.10 |      
|                              |           |           |           |                 |   |          |               |               |  |   |      |      
|Exercisable, October 31, 2000 |           |           | 3,142,928 |                 |   | $        | 0.01  $29.75 |               |  | $ | 5.48 |      
|                              |           |           |           |                 |   |          |               |               |  |   |      |      
|Exercisable, October 31, 1999 |           |           | 2,547,069 |                 |   | $        | 3.95  $ 7.22 |               |  | $ | 4.02 |      
|                              |           |           |           |                 |   |          |               |               |  |   |      |      

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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information
relating to currently outstanding and exercisable options as of
October 31, 2001.

|                |  |             |           |                  |  |          |     |           |  |          |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ----------- | --------- | ---------------- |  | -------- | --- | --------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |             |           |                 
|                |  | Outstanding |           | Exercisable     
|                |  |             |           |                 
|                |  |             |           | Weighted Average |  | Weighted |     |           |  | Weighted
|                |  |             |           | Remaining        |  | Average  |     |           |  | Average 
|Range of        |  | Number      |           | Contractual      |  | Exercise |     | Number    |  | Exercise
|Exercise Prices |  | of Shares   |           | Life (Years)     |  | Price    |     | of Shares |  | Price   
|                |  |             |           |                  |  |          |     |           |  |         
|$  0.01   0.64 |  |             | 157,520   |                  |  |          | 4.8 |           |  | $        | 0.25  |  |  |  | 41,827    |  |  | $ | 0.04  | 
|0.66            |  |             | 5,238,164 |                  |  |          | 4.7 |           |  |          | 0.66  |  |  |  | 1,461,411 |  |  |   | 0.66  | 
|0.67   1.26    |  |             | 1,019,946 |                  |  |          | 7.3 |           |  |          | 1.09  |  |  |  | 122,084   |  |  |   | 1.11  | 
|1.50   9.90    |  |             | 976,540   |                  |  |          | 7.8 |           |  |          | 4.03  |  |  |  | 571,478   |  |  |   | 4.32  | 
|10.995  31.75  |  |             | 129,162   |                  |  |          | 8.6 |           |  |          | 16.66 |  |  |  | 70,808    |  |  |   | 16.70 | 
|                |  |             |           |                  |  |          |     |           |  |          |       |  |  |  |           |  |  |   |       | 
|$  0.01  31.75 |  |             | 7,521,332 |                  |  |          | 5.6 |           |  | $        | 1.42  |  |  |  | 2,267,608 |  |  | $ | 2.10  | 
|                |  |             |           |                  |  |          |     |           |  |          |       |  |  |  |           |  |  |   |       | 

The weighted average grant date fair value and
weighted average exercise price for options granted in fiscal
2001 whose exercise price was equal to the fair market value on
the date of grant was $1.17 and $1.92 per share, respectively.
The weighted average grant date fair value and weighted average
exercise price for options granted in fiscal 2001 whose exercise
price was less than fair value on the date of grant was $1.08
and $0.01 per share, respectively.

Employee and
Director Stock Options

The Company has granted stock options to its
employees and directors that require the recognition of
stock-based compensation expense. Stock-based compensation
related to grants to employees resulting from the amortization,
over the vesting period of the option, of the difference between
the exercise price of options and the fair market value of the
underlying common stock on the date of grant primarily from
stock options granted prior the Companys initial public
offering was $1,210,000, $1,489,000 and $411,000 in fiscal 1999,
2000 and 2001, respectively. In addition, unamortized deferred
compensation of $783,000 for these employee and director awards
was expensed during fiscal 2001 in connection with the
Companys stock option exchange program discussed below.

On June 26, 2001, the Company commenced a
stock option exchange program in which its directors and
eligible employees were offered the opportunity to exchange
existing stock options for new stock options with an exercise
price equal to the current market value of the Companys
common stock. Participants in the exchange program received new
options to purchase seventy-five percent (75%) of the number of
shares of the Companys common stock subject to the options
that were exchanged and canceled. The new options were granted
on July 31, 2001, with an exercise price of $.66 per share.
The Company accepted 7,179,285 stock options for exchange and
issued 5,384,384 stock options in exchange for such tendered
options. As a result of the cancellation of the outstanding
options, existing unamortized deferred compensation of
approximately $783,000 was amortized and recorded as stock-based
compensation during fiscal 2001. All option grants subject to
the stock option exchange program will be subject to variable
plan accounting in accordance with APB No. 25, whereby the
Company will be required to record, as compensation expense,
increases and decreases in the value of these options between
the grant date of the option and the date the option is
exercised. The greater the increase in the market value of the
Companys common stock following the date of grant, the
greater the compensation expense the Company will be required to
record. In the fiscal year ended October 31, 2001, the
Company recorded $188,000 of stock based compensation expense
related to these options.

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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During fiscal 2000, the Company modified the
terms of three employee stock option agreements, including an
extended period to exercise in connection with termination and
net exercise with immature shares. These modifications resulted
in a stock-based compensation charge of $1,804,000.

Nonemployee
Stock Options

The Company has granted stock options to
non-employees that require the recognition of stock-based
compensation expense based on the fair market value of the
options granted as computed using an established option
valuation formula. The Company recorded stock based compensation
expense of $1,388,000 and $1,825,000 in fiscal 1999 and 2000,
respectively, and a reversal of $49,000 in stock based
compensation expense in fiscal 2001, related to these options.
As of October 31, 2001, the deferred compensation balance
of $1,285,000, primarily related to non-employee awards, will be
recognized as an expense as earned for non-employees in
accordance with EITF 96-18.

Warrants

In connection with the series A preferred stock
financing in May 1997, the Company issued a warrant to the
investment funds affiliated with GAP to purchase 190,438 shares
of series B preferred stock at an exercise price of
$19.69 per share, exercisable in full, through May 2002.
The price paid for this warrant was $1,000. Upon the
Companys initial public offering in February 2000, this
warrant was automatically converted into a warrant to purchase
634,794 shares of common stock at an exercise price of $5.91 per
share. As of October 31, 2001, this warrant remained
outstanding.

In July 1997, the Company issued a warrant to
purchase 200,000 shares of common stock to a vendor at
$3.95 per share, exercisable in full, through 2007. The
warrant was issued in consideration for services to be received
from the vendor. The estimated value of the warrant totaled
$450,000 and was recorded in stock-based compensation expense in
fiscal 1997. The warrant was exercised in full in February 2000.
In addition, in July 1997, that vendor purchased 190,114 shares
of series C preferred stock for $500,000.

In connection with the series F preferred
stock financing in February 1999, the Company sold warrants to
purchase 673,401 shares of series F preferred stock at an
exercise price of $3.56 per share. The price paid for this
warrant was $1,000. Following the Companys initial public
offering, these warrants were exercised in February 2000 through
the voluntary payment of the exercise price by the warrant
holder.

In October 1999, the Company approved the future
issuance of warrants to purchase 500,000 shares of common stock
to customers and strategic partners. Warrants to purchase a
total of 384,567 shares have been issued from this pool of which
warrants to purchase 259,481 shares remain outstanding as of
October 31, 2001. In October 1999, the Company issued a
warrant to a strategic partner to purchase 83,334 shares of
common stock at an exercise price of $7.22 per share, vesting
over three years. The estimated value of this warrant was
$463,000 at the time of grant. Under EITF 96-18, the fair value
of this warrant is marked to market over the vesting period. The
Company recorded stock-based compensation expense of
approximately $79,000 in fiscal 2000 and a $2,000 reversal of
expense in fiscal 2001 related to this grant. In November 1999,
in connection with a consulting arrangement the Company issued a
warrant to purchase an aggregate of 207,900 shares of common
stock at an exercise price of $7.22 per share, exercisable
within one year of the Companys initial public offering.
The value of the consulting arrangement was $1.0 million
and was recorded as stock based compensation expense in fiscal
2000. In addition, during February 2000 in connection with a
strategic business alliance, the Company issued a warrant to
purchase 33,333 shares of common stock at an exercise price of
$14.00 per share. In accordance with EITF 96-18, the Company
adjusts the value of this grant to market over its vesting
period. Warrants to purchase 19,403 shares vested in fiscal 2000
and, accordingly, the Company recorded a stock-based
compensation charge of $320,000 in fiscal 2000. In October 2000,
the company issued fully vested warrants in connection with a
license arrangement to a customer to purchase 13,333 shares of
common stock at an exercise price of $7.22 per share. In January
2000, the Company issued fully vested

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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

warrants in connection with license arrangements
to two customers to purchase a total of 36,667 shares of common
stock at an exercise price of $11.00 per share. In July 2000,
the Company issued a fully vested warrant to a customer to
purchase 10,000 shares of common stock at an exercise price of
$35.94 per share. The estimated values of these warrants totaled
$523,000 at the time of grant and were recorded as reductions in
the amount of deferred revenue to be recognized associated with
these customers.

(d) Pro
Forma Stock-Based Compensation

Under SFAS No. 123, Accounting for
Stock-Based Compensation, the Company is required to
disclose the pro forma effects on net income (loss) and net
income (loss) per share as if the Company had elected to
use the fair value approach to account for all of its employee
stock-based compensation plans beginning in fiscal 1997.

The Company has computed the pro forma
disclosures required under SFAS No. 123 for options granted
during fiscal 1999, fiscal 2000 and fiscal 2001 using the
Black-Scholes option pricing model prescribed by SFAS
No. 123. The weighted average assumptions used were as
follows:

|                                                                    |  |                                |            |      |  |      |            |   |  |  |            |  
|------------------------------------------------------------------- |  | ------------------------------ | ---------- | ---- |  | ---- | ---------- | - |  |  | ---------- | -
|                                                                    |  |                               
|                                                                    |  | Fiscal Years Ended October 31,
|                                                                    |  |                               
|                                                                    |  | 1999                           |            | 2000 |  | 2001
|                                                                    |  |                                |            |      |  |     
|Risk-free interest rate                                             |  |                                | 4.5%  5.8 | %    |  |      | 5.7%  6.7 | % |  |  | 3.1%  5.8 | %
|Expected dividend yield                                             |  |                                |           |      |  |      |           |   |  |  |           |  
|Expected lives                                                      |  |                                | 5 years    |      |  |      | 5 years    |   |  |  | 2.7 years  |  
|Expected volatility                                                 |  |                                | 80         | %    |  |      | 100        | % |  |  | 130        | %
|Weighted average grant date fair value                              |  |                                | $4.75      |      |  |      | $11.36     |   |  |  | $1.17      |  
|Weighted average remaining contractual life of
	options outstanding |  |                                | 8.6 years  |      |  |      | 8.7 years  |   |  |  | 5.6 years  |  

Had compensation cost for the Companys plan
been determined consistent with the fair value approach
enumerated in SFAS No. 123, the Companys pro forma
net loss and net loss per share would have been as
follows:

|                                                  |  |                                       |         |      |  |      |          |   |  |   |         |  
|------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                  |  |                                      
|                                                  |  | Fiscal Years Ended October 31,       
|                                                  |  |                                      
|                                                  |  | 1999                                  |         | 2000 |  | 2001
|                                                  |  |                                       |         |      |  |     
|                                                  |  |                                      
|                                                  |  | (In thousands, except per share data)
|Net loss applicable to shareholders, as reported  |  | $                                     | (28,855 | )    |  | $    | (81,884  | ) |  | $ | (70,281 | )
|Net loss applicable to shareholders, pro forma    |  |                                       | (37,359 | )    |  |      | (102,027 | ) |  |   | (96,704 | )
|Basic and diluted net loss per share, as reported |  | $                                     | (2.88   | )    |  | $    | (2.89    | ) |  | $ | (1.95   | )
|Basic and diluted net loss per share, pro forma   |  |                                       | (3.73   | )    |  |      | (3.61    | ) |  |   | (2.69   | )

The Black-Scholes option pricing model was
developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable.
In addition, option pricing models require the input of highly
subjective assumptions including expected stock price
volatility. Because the Companys employee stock options
have characteristics significantly different from those of
traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its employee stock options.

(e) Loans
Receivable

On November 28, 2000, the Companys
Board of Directors approved a loan facility to Klaus Besier, the
Companys Chairman and Chief Executive Officer, allowing
borrowings up to $3,000,000 bearing interest at the applicable
federal rate in effect during the term of the note. On
January 9, 2001, the Companys Board of

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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Directors approved an increase in the loan
facility to $4,000,000. Originally the outstanding principal
together with unpaid interest was due and payable on the earlier
of October 31, 2001, an event of default, or an event of
maturity, as defined. On December 11, 2001, the Board of
Directors amended the facility to extend the maturity to
May 1, 2006. Due to the modification of the facility, all
amounts outstanding have been reclassified as a component of
stockholders equity. The promissory note is secured by a
pledge of 500,000 shares of common stock of Firepond, Inc. and
is generally not a recourse obligation of the borrower, with
specified exceptions. Amounts totaling $4,000,000 plus accrued
interest have been advanced to Mr. Besier under this
facility as of October 31, 2001.

The Company has also issued notes to two officers
of the Company in the amount of $270,000 and an employee of the
Company in the amount of $125,000.

10.     Profit-Sharing
Plan

The Company sponsors a defined contribution
profit-sharing plan for US employees which conforms to Internal
Revenue Service provisions for 401(k) plans. Employees must be
at least 21 years of age to be eligible to participate in
the plan. Participants may contribute up to 15% of their
earnings. The Company matches 50% of the first 2% and 25% of the
next 4% of employee contributions and may make additional
contributions as determined by the board of directors.
Operations have been charged for cash contributions to the plan
of approximately $551,000 for fiscal 1999, $463,000 for fiscal
2000 and $662,000 for fiscal 2001.

11.     Related-Party
Transactions

The Company contracts with a third party, EPAM
Systems, to provide software development and implementation
services on an outsourced basis. Under this arrangement, EPAM
Systems provides software developers dedicated to the
Companys projects to develop products and application
functionality based on specifications provided by the Company
and to provide implementation services to the Companys
customers. The agreement with EPAM Systems expires in May 2002.
As of October 31, 2001, approximately 25 employees and
contractors of EPAM Systems were performing services for the
Company. The majority owner of EPAM Systems was an employee of
the Company until May 31, 2001.

Software development and cost of product-related
services costs under this contract which have been expensed in
the accompanying consolidated statements of operations were
$1,920,000, $4,530,000 and $5,599,000 for fiscal years ended
October 31, 1999, 2000 and 2001, respectively. The Company
believes that the terms of this agreement were negotiated on an
arms-length basis. The Company made a payment in connection with
restructuring this contract during the year ended
October 31, 2001. See note 5(b).

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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12.     Valuation and
Qualifying Accounts

A summary of the allowance for doubtful accounts
and reserve for loss contracts is as follows:

|                                 |                              |                                                   |   |       |      |      |   |       |     |  |   |       |     |  
|-------------------------------- | ---------------------------- | ------------------------------------------------- | - | ----- | ---- | ---- | - | ----- | --- |  | - | ----- | --- | -
|                                 |                              |                                                  
|                                 |                              | Fiscal Years Ended October 31,                   
|                                 |                              |                                                  
|                                 |                              | 1999                                              |   | 2000  |      | 2001
|                                 |                              |                                                   |   |       |      |     
|                                 |                              |                                                  
|                                 |                              | (In thousands)                                   
|Allowance for doubtful accounts: |                              |                                                   |   |       |      |      |   |       |     |  |   |      
|                                 | Balance, beginning of period |                                                   | $ | 290   |      |      | $ | 410   |     |  | $ | 1,115 |    
|                                 |                              | Provision for doubtful accounts                   |   |       | 120  |      |   |       | 705 |  |   |       | 271 |  
|                                 |                              | Write-offs                                        |   |       |     |      |   |       |    |  |   |       | (94 | )
|                                 |                              |                                                   |   |       |      |      |   |       |     |  |   |      
|                                 | Balance, end of period       |                                                   | $ | 410   |      |      | $ | 1,115 |     |  | $ | 1,292 |    
|                                 |                              |                                                   |   |       |      |      |   |       |     |  |   |      
|Reserve for loss contracts:      |                              |                                                   |   |       |      |      |   |       |     |  |   |      
|                                 | Balance, beginning of period |                                                   | $ | 1,000 |      |      | $ | 500   |     |  | $ | 600   |    
|                                 |                              | Provision (reduction) for loss contracts
	reserve |   |       |     |      |   |       | 100 |  |   |       |    |  
|                                 |                              | Payments and/or costs incurred                    |   |       | (500 | )    |   |       |    |  |   |       |    |  
|                                 |                              |                                                   |   |       |      |      |   |       |     |  |   |      
|                                 | Balance, end of period       |                                                   | $ | 500   |      |      | $ | 600   |     |  | $ | 600   |    
|                                 |                              |                                                   |   |       |      |      |   |       |     |  |   |      

For a rollforward of the restructuring reserve
see note 5(c).

13.     Segment
Reporting

The Company has adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information, which establishes standards for reporting
information related to operating segments in annual financial
statements and requires selected information for those segments
to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for
related disclosures about products and services and geographic
areas. Operating segments are defined as components of an
enterprise about which separate, discrete financial information
is available for evaluation by the chief operating decision
maker, or decision-making group, in making decisions how to
allocate resources and assess performance. The Companys
chief operating decision maker, as defined under SFAS
No. 131, is its chief executive officer.

The Company views its operations and manages its
business as two segments, product-related licenses and services
and custom development services. The Companys reportable
segments are strategic business units that provide distinct
services to the end customer. They are managed separately
because each business segment requires different marketing and
management strategies. The Companys approach is based on
the way that management organizes the segments within the
Company for making operating decisions and assessing performance.

The accounting policies of the segments are the
same as those described in the summary of significant accounting
policies. The Company does not allocate operating expenses
between its two reportable segments. Therefore, the
Companys measure of performance for each reportable
segment is based on total net revenue and direct costs of
services, which are reported separately in the accompanying
condensed consolidated statements of operations and no
additional disclosure is required. The Company does not identify
assets and liabilities by segment and therefore, identifiable
assets, capital expenditures and depreciation and amortization
are not reported by segment.

The majority of the Companys revenue is
derived from the United States with approximately 11%, 28% and
36% coming from foreign countries for the years ended
October 31, 1999, 2000 and 2001. Revenue from Switzerland
contributed approximately 10% of our revenue for the year ended
October 31, 2001. Revenue from no single foreign country
exceeded 10% of total revenue in 2000 and 1999.

F-26



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

14.     Signature
Acquisition

On September 27, 2000, pursuant to an
Agreement and Plan of Merger between the Company and Signature
Software, Inc. (Signature) (the Purchase agreement), the Company
acquired 100% of the issued and outstanding shares of capital
stock of Signature, an information technology consulting firm.
The Company acquired the capital shares of Signature in exchange
for $30,000 in cash and the issuance of 276,266 shares of
restricted common stock to two shareholders of Signature. The
Company also incurred approximately $224,000 in acquisition
related fees and expenses. The acquisition was accounted for as
a purchase in accordance with APB No. 16. Accordingly,
the results of operations of Signature have been included in the
Companys results of operations since the date of
acquisition. The prior results of Signatures operations
are not material to the accompanying consolidated financial
statements.

The 276,266 shares of restricted common stock,
valued at approximately $3.9 million, are subject to
vesting through September 27, 2002 based on the retention
of certain Signature employees measured on a quarterly basis, as
defined. The value of these restricted shares is being recorded
as stock based compensation on a pro rata basis over the vesting
period. Accordingly, the Company recognized approximately
$162,000 of stock-based compensation for these shares in fiscal
2000 and $2,404,000 in fiscal 2001. We also recognized
approximately $733,000 in stock-based compensation due to the
acceleration of the vesting of certain shares of restricted
common stock related to one employee termination.

The following table summarizes the transaction:

|                                   |                                        |                |   |      |  
|---------------------------------- | -------------------------------------- | -------------- | - | ---- | -
|                                   |                                        | Amount        
|                                   |                                        |               
|                                   |                                        | (In thousands)
|Acquisition of Signature Software: |                                        |                |   |     
|                                   | Fair value of assets acquired          |                | $ | 415  |  
|                                   | Fair value of liabilities assumed      |                |   | (567 | )
|                                   | Cash paid                              |                |   | (30  | )
|                                   | Acquisition costs incurred             |                |   | 224  |  
|                                   |                                        |                |   |     
|                                   | Costs in excess of net assets acquired |                | $ | 406  |  
|                                   |                                        |                |   |     

The difference between actual operating results
and pro forma operating results assuming the acquisition of
Signature Software occurred at the beginning of fiscal 2000 are
immaterial.

15.     Brightware
Acquisition

On February 15, 2001, pursuant to an
Agreement and Plan of Merger between the Company and Brightware,
Inc. the Company acquired 100% of the issued and outstanding
capital stock of Brightware, a supplier of eCustomer assistance
software. The purchase price of the acquisition was $13,669,000,
which was composed of $5,228,000 in cash, 1.3 million
shares of Firepond common stock valued at $5,865,000, and
$2,576,000 in acquisition related costs. The value of
approximately 1.5 million shares of Firepond common stock
and cash payments totaling $3,250,000 were excluded from the
purchase price as this consideration was contingent on achieving
financial performance objectives as measured on April 30,
2001 which subsequently were not achieved. In addition, the
consideration was subject to a final accounting of
Brightwares net assets as of February 15, 2001. The
acquisition was accounted for using the purchase method in
accordance with APB No. 16 and accordingly, the results of
operations of Brightware from the date of acquisition have been
included in the results of operations of the Company.

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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the transaction:

|                           |                                     |                |   |         |  
|-------------------------- | ----------------------------------- | -------------- | - | ------- | -
|                           |                                     | Amount        
|                           |                                     |               
|                           |                                     | (In thousands)
|Acquisition of Brightware: |                                     |                |   |        
|                           | Fair value of assets acquired       |                | $ | 3,954   |  
|                           | Fair value of liabilities assumed   |                |   | (11,034 | )
|                           | In-process research and development |                |   | 6,200   |  
|                           | Developed technology and know-how   |                |   | 4,900   |  
|                           | Assembled workforce                 |                |   | 2,200   |  
|                           | Goodwill                            |                |   | 7,449   |  
|                           |                                     |                |   |        
|                           | Total purchase price                |                | $ | 13,669  |  
|                           |                                     |                |   |        

As part of the purchase price allocation, all
intangible assets that are a part of the acquisition were
identified and valued. As a result of this identification and
valuation process, the Company allocated approximately
$6,200,000 million of the purchase price to in-process
research and development projects. This allocation represented
the estimated fair value based on risk-adjusted cash flows
related to the incomplete research and development projects. At
the date of acquisition, the development of these projects had
not yet reached technological feasibility, and the research and
development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the date of the
acquisition.

In making its purchase price allocation,
management considered the present value calculation of income,
an analysis of project accomplishments and remaining outstanding
items, an assessment of overall contributions, as well as
project risks. The value assigned to purchased in-process
research and development was determined by estimating the costs
to develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the
projects, and discounting the net cash flows to their present
value. The revenue projection used to value the in-process
research and development was based on estimates of relevant
market sizes and growth factors, expected trends in technology,
and the nature and expected timing of new product introductions
by the Company and its competitors. The resulting net cash flows
from such projects are based on managements estimates of
cost of sales, operating expenses, and income taxes from such
projects.

As a result of the identification and valuation
of intangibles acquired, the Company also allocated
approximately $4,900,000 and $2,200,000 to developed technology
and know-how and assembled workforce, respectively. Developed
technology represents patented and unpatented technology and
know-how related to Brightwares current eService product
offering founded on a combination of artificial intelligence,
knowledge manager-technology and internet enterprise
applications. Assembled workforce is the presence of a skilled
workforce that is knowledgeable about company procedures and
possesses expertise in certain fields that are important to
continued profitability and growth of a company. The excess of
the purchase price over the fair value of identified intangible
net assets of approximately $ 4,481,000 was allocated to
goodwill.

Both developed technology and assembled workforce
are amortized over a period of three years.

Through October 31, 2001, the Company
amortized goodwill over a period of three years; however, on
June 30 2001, the FASB issued SFAS No. 142
Accounting for Goodwill and Other intangible Assets.
SFAS 142 requires that goodwill, including amounts related
to assembled workforce, no longer be amortized, rather, goodwill
will be subject to an assessment of impairment by applying a
fair-value based test at least annually. The Company will adopt
SFAS 142 effective November 1, 2001.

Accumulated amortization of developed technology,
assembled workforce and goodwill was $1,157,000, $519,000 and
$1,759,000 as of October 31, 2001, respectively.

F-28



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Unaudited pro forma operating results for the
Company, assuming the acquisition of Brightware occurred at the
beginning of the following periods are as follows:

|                                       |  |                   |         |      |  |   |         |  
|-------------------------------------- |  | ----------------- | ------- | ---- |  | - | ------- | -
|                                       |  |                  
|                                       |  | Fiscal Years     
|                                       |  | Ended October 31,
|                                       |  |                  
|                                       |  | 2000              |         | 2001
|                                       |  |                   |         |     
|                                       |  |                  
|                                       |  | (In thousands)   
|Net sales                              |  | $                 | 78,443  |      |  | $ | 48,412  |  
|Net loss before extraordinary item     |  |                   | (37,725 | )    |  |   | (74,710 | )
|Net loss                               |  |                   | (39,162 | )    |  |   | (74,710 | )
|Net loss per share  basic and diluted |  | $                 | (1.05   | )    |  | $ | (2.04   | )

16.     Settlement of
Claim

On March 2, 2001, the Company entered into
an agreement under which the Company paid a customer $1,600,000
to resolve outstanding contractual matters. The expense for the
settlement was partially offset by $389,000 previously paid by
the customer but not yet earned by the Company. The Company
recorded this transaction as a net charge of $1,211,000 to
operations in the quarter ended April 30, 2001.

17.     Quarterly
Statement of Operations Information (unaudited)

The following table presents a summary of
quarterly results of operations for 2000 and 2001:

|                                                                        |  |                |        |           |  |          |         |             |  |             |        |           |  |          |        |             |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | -------------- | ------ | --------- |  | -------- | ------- | ----------- |  | ----------- | ------ | --------- |  | -------- | ------ | ----------- |  | - | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                        |  |               
|                                                                        |  | Quarter Ended 
|                                                                        |  |               
|                                                                        |  | January 31,    |        | April 30, |  | July 31, |         | October 31, |  | January 31, |        | April 30, |  | July 31, |        | October 31,
|                                                                        |  | 2000           |        | 2000      |  | 2000     |         | 2000        |  | 2001        |        | 2001      |  | 2001     |        | 2001       
|                                                                        |  |                |        |           |  |          |         |             |  |             |        |           |  |          |        |            
|                                                                        |  |               
|                                                                        |  | (In thousands)
|Total revenue                                                           |  | $              | 11,977 |           |  | $        | 13,587  |             |  | $           | 17,315 |           |  | $        | 19,092 |             |  | $ | 14,547 |   |  | $ | 12,315  |   |  | $ | 10,114  |   |  | $ | 9,113   |  
|Gross profit                                                            |  | $              | 7,966  |           |  | $        | 9,214   |             |  | $           | 11,320 |           |  | $        | 10,714 |             |  | $ | 5,268  |   |  | $ | 2,753   |   |  | $ | 3,371   |   |  | $ | 3,908   |  
|Net income(loss)                                                        |  | $              | (5,823 | )         |  | $        | (70,123 | )           |  | $           | (2,686 | )         |  | $        | (3,252 | )           |  | $ | (8,608 | ) |  | $ | (26,641 | ) |  | $ | (21,355 | ) |  | $ | (13,677 | )
|Basic and diluted net loss per share applicable
	to common stockholders |  | $              | (0.58  | )         |  | $        | (2.06   | )           |  | $           | (0.08  | )         |  | $        | (0.11  | )           |  | $ | (0.24  | ) |  | $ | (0.74   | ) |  | $ | (0.59   | ) |  | $ | (0.38   | )

18.     Subsequent
Event

In connection with the Companys acquisition
of Brightware, Inc., the consideration payable was subject to a
final accounting of Brightwares net assets as of
February 15, 2001. In connection therewith, on
January 14, 2002, the Company received $520,000 of cash and
553,000 shares of Firepond common stock previously escrowed in
resolution of this provision of the transaction. This release
from escrow has the effect of reducing the purchase price
recorded by the Company by approximately $2,968,000 to
$10,790,000. The Company will account for this reduction in
purchase price in the quarter ending January 31, 2002, by
reducing goodwill and recording the value of cash and stock
returned. The Companys total stockholders equity
will be reduced by the value of the shares returned.

F-29



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##### Table of Contents



EXHIBIT INDEX

|        |          |  |  |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | -------- |  |  | ------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |  |  |                    
|Number  |          |  |  | Exhibit Description
|        |          |  |  |                    
|        | 3.1(1)   |  |  |                    |  | Third Amended and Restated Certificate of
	Incorporation (filed as Exhibit 3.3 to the
	Registrants Registration Statement on Form S-1, File
	No. 333-90911, originally filed with the Commission on
	November 12, 1999, as subsequently amended, and
	incorporated herein by reference).                                                                                                        
|        | 3.2(1)   |  |  |                    |  | First Amended and Restated By-laws (filed as
	Exhibit 3.5 to the Registrants Registration Statement
	on Form S-1, File No. 333-90911, originally filed with
	the Commission on November 12, 1999, as subsequently
	amended, and incorporated herein by reference).                                                                                                                              
|        | 4.1(1)   |  |  |                    |  | Specimen certificate for shares of common stock,
	$.01 par value, of the Registrant (filed as Exhibit 4.1 to
	the Registrants Registration Statement on Form S-1,
	File No. 333-90911, originally filed with the Commission on
	November 12, 1999, as subsequently amended, and
	incorporated herein by reference).                                                                             
|        | 10.1(1)  |  |  |                    |  | Amended and Restated Registration Rights
	Agreement, dated February 23, 1999, between the Registrant
	and the stockholders named therein (filed as Exhibit 10.1
	to the Registrants Registration Statement on
	Form S-1, File No. 333-90911, originally filed with
	the Commission on November 12, 1999, as subsequently
	amended, and incorporated herein by reference).                       
|        | 10.2(2)  |  |  |                    |  | Registration Rights Agreement, dated
	January 30, 2001, between the Registrant and the
	stockholders named therein (filed as Exhibit 10.1 to the
	Registrants Current Report on Form 8-K, dated
	March 2, 2001, as subsequently amended, and incorporated
	herein by reference).                                                                                                                
|        | 10.3     |  |  |                    |  | Amended and Restated 1997 Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                     
|        | 10.4     |  |  |                    |  | Amended and Restated 1999 Stock Option and Grant
	Plan.                                                                                                                                                                                                                                                                                                                                          
|        | 10.5     |  |  |                    |  | Amended and Restated 1999 Director Plan.                                                                                                                                                                                                                                                                                                                                                         
|        | 10.6(3)  |  |  |                    |  | Brightware Acquisition Stock Option Plan (filed
	as Exhibit 4.4 to the Registrants Registration
	Statement on Form S-8, File No. 333-55926, originally
	filed with the Commission on February 20, 2001, and
	incorporated herein by reference).                                                                                                                                                 
|        | 10.7     |  |  |                    |  | Form of Stock Option Agreement for directors,
	executive officers and key employees.                                                                                                                                                                                                                                                                                                             
|        | 10.8     |  |  |                    |  | Form of Stock Option Agreement for all other
	employees.                                                                                                                                                                                                                                                                                                                                         
|        | 10.9(1)  |  |  |                    |  | Employment Agreement dated April 2, 1998
	between Registrant and Klaus P. Besier (filed as Exhibit
	10.10 to the Registrants Registration Statement on
	Form S-1, File No. 333-90911, originally filed with
	the Commission on November 12, 1999, as subsequently
	amended, and incorporated herein by reference).                                                                              
|        | 10.10(1) |  |  |                    |  | Offer Letter dated December 11, 1998 between
	the Registrant and Paul K. McDermott (filed as Exhibit
	10.14 to the Registrants Registration Statement on
	Form S-1, File No. 333-90911, originally filed with
	the Commission on November 12, 1999, as subsequently
	amended, and incorporated herein by reference).                                                                            
|        | 10.11    |  |  |                    |  | Relocation Agreement, dated April 17, 2000
	between the Registrant and Joel D. Radford.                                                                                                                                                                                                                                                                                                          
|        | 10.12    |  |  |                    |  | Offer Letter, dated November 21, 2000
	between the Registrant and Joel D. Radford.                                                                                                                                                                                                                                                                                                               
|        | 10.13    |  |  |                    |  | Offer Letter, dated February 19, 1999
	between Registrant and John Keighley                                                                                                                                                                                                                                                                                                                      
|        | 10.14    |  |  |                    |  | Amendment to Offer Letter dated May 4, 2001
	between Registrant and John Keighley                                                                                                                                                                                                                                                                                                                
|        | 10.15    |  |  |                    |  | Offer Letter, dated January 23, 2001 between
	the Registrant and Cem Tanyel                                                                                                                                                                                                                                                                                                                      
|        | 10.16(1) |  |  |                    |  | Lease of 890 Winter Street, Waltham,
	Massachusetts between the Registrant., as Tenant, and 890 Winter
	Street, L.L.C., as Landlord dated as of March 25, 1999
	(filed as Exhibit 10.6 to the Registrants
	Registration Statement on Form S-1, File
	No. 333-90911, originally filed with the Commission on
	November 12, 1999, as subsequently amended, and
	incorporated herein by reference).
|        | 10.17    |  |  |                    |  | Amendment to lease of 890 Winter Street,
	Waltham, Massachusetts between the Registrant., as Tenant, and
	890 Winter Street LLC., as Landlord dated as of
	October 18, 2001.                                                                                                                                                                                                                     
|        | 10.18    |  |  |                    |  | Lease of 1401 Los Gamos, San Rafael, California
	between the Registrant., as Tenant, and Richard and Denise
	Bergmann., as Landlord dated as of January 6, 2000.                                                                                                                                                                                                                                 



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##### Table of Contents



|        |          |   |  |                     |  |                                                                                                                                                                                                                                                                                                                                               
|------- | -------- | - |  | ------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |   |  |                    
|Number  |          |   |  | Exhibit Description
|        |          |   |  |                    
|        | 10.19(1) |  |  |                    |  | Software License Agreement between the Registrant
	and SilverStream Software Inc. dated as of March 18, 1999
	(filed as Exhibit 10.8 to the Registrants
	Registration Statement on Form S-1, File No. 333-90911,
	originally filed with the Commission on November 12, 1999,
	as subsequently amended, and incorporated herein by reference).
|        | 21.1     |   |  |                    |  | Subsidiaries                                                                                                                                                                                                                                                                                                                                  
|        | 23.1     |   |  |                    |  | Consent of Arthur Andersen LLP.                                                                                                                                                                                                                                                                                                               



---



| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Confidential treatment has been obtained for
	certain portions of this exhibit. The confidential redacted
	information has been filed separately with the Securities and
	Exchange Commission.



|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Originally filed as an Exhibit to the
	Registrants Registration Statement on Form S-1 as
	filed with the SEC on November 12, 1999, as subsequently
	amended.
|   
|(2) | Originally filed as an Exhibit to the
	Registrants Current Report on Form 8-K as filed with
	the SEC on March 2, 2001, as subsequently amended.             
|   
|(3) | Originally filed as an Exhibit to the
	Registrants Registration Statement on Form S-8 as
	filed with the SEC on February 20, 2001.