##### Table of Contents









UNITED STATES 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,
    2002                                                  
|          
|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                                                                                               |  | 41-1462409                              
|(State or Other Jurisdiction of
    Incorporation or Organization)                                     |  | (I.R.S. Employer
    Identification No.)
|                                                                                                      
|8009 S. 34th Avenue, Suite 1000
    Bloomington, Minnesota(Address of principal executive
    offices) |  | 55425(Zip Code)                         

(952) 229-2300

(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, $0.10 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.     o

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

The
aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $19,033,100 as of
April 30, 2002, the last business day of the
Registrants most recently completed second fiscal quarter,
based on the closing price of the Common Stock as reported on
the Nasdaq Stock Market for that date. There were 3,684,983
shares of the Registrants Common Stock issued and
outstanding on January 23, 2003.

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, 2002, 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 Security Holders                                            
|PART II                                           
|                                                   | Item 5. Market for Registrants 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. Consolidated Financial Statements and Supplementary Data                                       
|                                                   | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures          
|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 and Related Shareholder Matters
|                                                   | Item 13. Certain Relationships and Related Transactions                                                
|                                                   | Item 14. Controls and Procedures                                                                       
|PART IV                                           
|                                                   | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|Ex-4.1 Specimen certificate                       
|Ex-10.7 Form of Stock Option Agreement-Key        
|Ex-10.8 Form of Stock Option Agreement-Others     
|Ex-10.10 Employment Agreement-Klaus P. Besier     
|Ex-10.11 Employment Agreement-Susan W. Ledoux     
|Ex-10.12 Employment Agreement-Christian J. Misvaer
|Ex-10.13 Offer Letter-Sosaburo Shinzo             
|Ex-10.17 Lease of Bloomington, Minnesota facility 
|Ex-10.18 Lease of Mankato, Minnesota facility     
|Ex-10.19 Amendment to lease of Mankato, Minnesota 
|Ex-10.20 Second Amendment to lease of Mankato, MN 
|Ex-21.1 Subsidiaries                              
|Ex-23.1 Consent of PricewaterhouseCoopers LLP     



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TABLE OF CONTENTS

|           |  |                                                                                           |    |      |    | 
|---------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                           |    | Page
|           |  |                                                                                           |    | No. 
|           |  |                                                                                           |    |     
|Part I    
|Item 1.    |  | Business                                                                                  |    |      | 1  | 
|Item 2.    |  | Properties                                                                                |    |      | 17 | 
|Item 3.    |  | Legal Proceedings                                                                         |    |      | 17 | 
|Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 18 | 
|Part II   
|Item 5.    |  | Market for Registrants Common Stock and
    Related Stockholder Matters                  |    |      | 18 | 
|Item 6.    |  | Selected Consolidated Financial Data                                                      |    |      | 20 | 
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 21 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures about
    Market Risk                            |    |      | 34 | 
|Item 8.    |  | Consolidated Financial Statements and
    Supplementary Data                              |    |      | 34 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |    |      | 34 | 
|Part III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                        |    |      | 34 | 
|Item 11.   |  | Executive Compensation                                                                    |    |      | 34 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |      | 34 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                            |    |      | 34 | 
|Item 14.   |  | Controls and Procedures                                                                   |    |      | 34 | 
|Part IV   
|Item 15.   |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |    |      | 35 | 
|Signatures |  |                                                                                           | 36 |     

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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 our expectations, beliefs, intentions or strategies
regarding the future, which speak only as of the date of this
Annual Report on Form 10-K. Firepond undertakes no
obligation to release publicly any updates to the
forward-looking statements included herein after the date of
this document.




Item 1.     Business

Company Overview

In business since 1983, Firepond considers itself
to be a pioneer in software solutions that help companies with
complex products convert more leads into accurate orders.
Companies with complex products may achieve a measurable and
meaningful return on investment in Firepond technology by
reducing their total cost of sales, whether they sell through a
direct sales force, an indirect channel network or via the web.
We consider the sales process for complex goods to be a business
process that has yet to be fully optimized by an enterprise
software solution.

Fireponds SalesPerformer product line
guides sales people, channel partners and customers through the
entire lead-to-order business process. Sold as a
complete system, or as incremental modules that address specific
business needs, SalesPerformer delivers lead management, needs
analysis, product and pricing configuration, quote and proposal
generation and order management. Companies that manufacture
complex goods or maintain complex distribution networks may
realize a high return on investment in Firepond software by
improving order accuracy, shortening their sales cycles and
reducing the expensive engineering resources required to
configure a product that best meets their customers
requirements. For insurers, Fireponds
prospect-to-customer system is designed to
accelerate sales cycles, cut administrative costs, improve
broker loyalty, and simplify the renewals process.

Firepond also offers an online customer
assistance solution. Marketed as Fireponds
eServicePerformer, this product line leverages advanced
intelligence engines and natural language processing technology
to manage a companys online customer interaction channels,
with an emphasis on email response management.

Industry Background

Large companies with complex products typically
require a lengthy, consultative sales process to convert a lead
into an order. For manufacturers, this process often involves
numerous meetings between sales and engineering, manufacturing,
finance, or other departments before a product recommendation
can be made or before a quote can be delivered. This complex,
iterative approach is often both time consuming and error
prone  driving costs into the sales process and
eroding both profit margins and competitiveness.

Removing complexity from the sales process,
however, is no simple task. Complexity can be determined by the
range of different product features or by the number of
different possible option combinations. Complexity can also be
determined by the range of different pricing factors, such as
discounts, rebates, taxes, or other special pricing
calculations. Complexity can also be determined by the range of
channels that make up a companys distribution network,
such as the web, a direct field sales force, resellers,
distributors, or

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dealers. There are a number of software vendors
that have created solutions to address these needs, including
Firepond. This market, which is generally called sales
configuration or interactive selling, is today considered a
high-value segment of the overall enterprise software market.


We have distinguished ourselves within the broad
category of sales configuration software by focusing primarily
on solving specific problems for customers in our target
markets, such as the sale of complex products. For example,
Fireponds SalesPerformer can reduce a companys total
cost of sales by delivering solutions that improve the
productivity and effectiveness of sales people, and sales
channels (including the web). In fact, Gartner Group, a leading
industry analyst firm, in a recent report, identified four areas
directly addressed by Fireponds SalesPerformer product
line  product configuration, price configuration,
quote generation, and proposal generation  as
software applications that deliver a high return on investment
to manufacturing companies.

Firepond Solutions and Business
Benefits

Fireponds mission is to be the leading
provider of enterprise software systems that helps companies
with complex products convert more leads into accurate orders.
To this end, Fireponds SalesPerformer system focuses on
improving the effectiveness of the sales person or channel
partner throughout the sales cycle. The application can also be
delivered over the web, enabling a more effective and meaningful
self-service online buying experience. In regards to online
customer assistance, Fireponds eServicePerformer enables
an enterprise to enhance its customers online interactions
and more intelligently manage both direct (e.g. email) and
indirect (e.g. web self-service) customer interaction channels.

Today, we offer our product lines through a mix
of direct and indirect sales channels in major markets
worldwide. At a strategic level, Fireponds software
solutions may deliver a concrete return on investment by
reducing a companys total cost of sales and service. Our
software solutions may provide a number of key benefits,
including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lowering Total Cost of
    Sales:Selling complex products
    typically requires the participation of many different parts of
    an organization without distracting from their primary roles
    including sales, engineering, manufacturing, finance, legal, and
    marketing. Fireponds SalesPerformer empowers sales
    representatives with relevant and timely information from each
    department, such as design specifications from engineering,
    production constraints from manufacturing, discount
    authorization from finance, terms and conditions from legal, and
    product collateral from marketing.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Reducing Order
    Errors:Using configuration
    technology, complex product recommendations are more likely to
    result in the right products to handle the right application. By
    reducing the complexity of the sales process and eliminating the
    potential for human error, Fireponds
    SalesPerformer system assists companies in ensuring that
    customers are asked the proper questions to reach a correct
    recommendation/configuration. In addition, the rules within the
    Firepond configuration engine verify that products requested by
    salespeople, channel partners or customers can be manufactured
    and delivered, before an order is placed. In addition, quotation
    errors can be reduced when sales representatives are armed with
    correctly configured pricing information, authorized discounts,
    appropriate currency conversion rates and necessary tax
    considerations.                                                                                                                                    
|
| |  | Accelerating Sales
    Cycles:By applying an intelligent and
    logical process flow from the time a lead is received to the
    moment a valid order is placed, Fireponds solutions are
    designed to optimize the sales process and increase the speed at
    which a sale can be executed. Quick turnaround in product
    recommendations, pricing, proposals and financing allows sales
    representatives to manage more simultaneous opportunities and
    close them faster. Eliminating the time necessary to contact the
    factory or engineering resources significantly reduces the time
    it takes for a customer to reach a buy decision.
    Customer satisfaction, in turn, increases as their questions and
    hesitations are immediately addressed. Further, Fireponds
    SalesPerformer helps manufacturers distribute new product and
    pricing information in real-time. This high degree of
    responsiveness helps foster a strong and lasting
    customer-supplier relationship that is a distinct competitive
    advantage for us.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Unifying the Sales
    Process:Many large companies today
    deliver their products to market through multiple sales
    channels, including a field sales force, channel distribution
    partners, and even via the web. Fireponds SalesPerformer
    system ensures consistency of product and pricing information
    across multiple channels, enhancing a companys channel
    management capabilities and protecting its brand reputation. For
    example, a customer-facing Web interface provides a self-service
    solution for selling to current customers via the Web, or can be
    used to generate desired configurations that can be directed to
    channel partners. This allows repeat customers to obtain the
    products they need without pulling sales attention from
    new relationships. The same experience can be presented to the
    customer directly using Fireponds SalesPerformer system
    deployed in a mobile environment on a laptop, for example,
    during a sales persons visit to a prospect. Or, a customer
    can again receive the same experience when visiting a dealership
    and interacting with a salesperson connected to the Firepond
    system over an intranet.

Market Strategy

Overall, our business strategy 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 targeted vertical market
    segments, primarily discrete manufacturing (including high
    technology, transportation, construction machinery, agricultural
    equipment, and others) and health insurance. Also, we offer our
    eServicePerformer Suite of guided service solutions to a broader
    spectrum of enterprises across a number of vertical industries
    including financial services, telecommunications,
    transportation, travel/hospitality, and high technology.
    Firepond has targeted and will continue to target companies
    within these 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. 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.                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Offer packaging flexibility to strategically
    penetrate our target markets.Firepond
    offers a variety of packaging options for SalesPerformer and
    eServicePerformer, to achieve flexibility in aligning our
    technology with companies in different stages of executing their
    business strategies. For example, customers that have already
    made a significant investment in applications for enterprise
    resource planning, supply chain management, customer
    relationship management, or others, can extend the value of
    their existing infrastructure through an investment in Firepond
    technology. As such, selected components of each product line
    are available as individual packaged solutions tailored to
    specific sales or service channel needs, or specific vertical
    industry segments. Conversely, companies seeking an enterprise
    platform for integrated sales configuration may license
    SalesPerformer or eServicePerformer in their entirety. With each
    of these product lines, additional functional and technology
    components are available as options, such as integration
    capabilities with third party applications. 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 will continue to
    package our product offerings in a fashion designed to remove
    sales barriers and create recurring revenue streams.
|
| |  | 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 from a professional services standpoint.
    Although we will plan to work with systems integrator partners
    more in fiscal 2003, we will continue to maintain our own
    professional services organization and leverage the domain
    expertise of these individuals to help us successfully, and more
    rapidly, implement our software solutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 goal
    is for these alliances to 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.
|
| |  | Maintain our international presence.During fiscal 2002, 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.                                                                                                                                                                                                                                                                             

Firepond Products and Technology

Fireponds SalesPerformer provides a
comprehensive spectrum of interactive selling functionality to
help companies rapidly and cost-effectively acquire customers
across web, direct and indirect sales channels. SalesPerformer
simplifies the traditionally complex sale by streamlining and
accelerating the sales cycle  from customer profiling
and opportunity management to needs analysis and product
recommendations to accurate price configuration and order
management. Critical customer and transaction information is
captured and made available for real-time analysis. Information
in other enterprise systems feeds SalesPerformer applications in
real-time so all channels are selling consistently to every
customer. SalesPerformer is supported by a single configuration
engine to simplify system maintenance and lower the total cost
of system ownership.

Fireponds eServicePerformer helps ensure
that Internet activities translate into profitable sales and
exceptional customer satisfaction and retention, without
increasing customer service staff. eServicePerformer is designed
to provide customers with knowledgeable, responsive help,
regardless of the online interaction channel. Driven by
intelligence engines and automation technologies,
Fireponds eServicePerformer assists in preserving the
quality of customer service operations by helping companies
replicate best practices across a variety of interactions, and
replicate knowledge across multiple online interaction channels.

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

|                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Firepond Products            |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|SalesPerformer (Base System) |  | An innovative sales configuration system for
    interactive selling of complex products, leveraging a unified
    intelligence engine, called a configurator, to power each step
    in the lead-to-order process. The base system
    primarily consists of a configuration engine and a set of
    enabling technologies that allow sales people, channel partners,
    or customers to select and validate a product and related
    options. The system reduces the complexity involved in correctly
    architecting a product offering. The system also reduces
    reliance on technical personnel during the sales cycle by
    housing and applying the relevant business rules and engineering
    specifications necessary to ensure accuracy in product selection
    and configuration.
|                             |  | The SalesPerformer configuration engine is based
    on a system architecture and technology platform designed to
    deliver maximum performance, scalability and availability to the
    interactive selling                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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|                             |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---------------------------- | ---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Firepond Products            |                                          | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                             |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                             |                                          | system it powers. A flexible Enterprise Java Bean
    (EJB) API ensures SalesPerformer seamlessly integrates into
    the most current, J2EE compliant Internet environments. Data and
    memory are highly optimized to deliver speed and high
    availability at run-time. The SalesPerformer configuration
    engine uses a model-based approach to allow data to be managed
    graphically, and edited in modes for both novice and expert
    users. The run-time engine controls product and option
    configuration activity by loading a data model, applying
    business rules to the data, and delivering an appropriate,
    customized response to user selections. The run-time engine is
    comprised of deployment APIs; data, state, and memory management
    controls; and advanced inference engines called
    solvers.
|                            
|SalesPerformer User Modules: |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                            
|                             |  Lead Management                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | A flexible sales opportunity and customer
    management application that assigns, forecasts, and prioritizes
    opportunities while tracking sales activities, contacts, notes,
    orders, and a prospects entire transaction history from
    opportunity through post-sale.                                                                                                                                                                                                                                              
|                            
|                             |  Needs Analysis/ Product Recommendation |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Intelligently automates the set of questions
    sales representatives ask to discover the relative importance
    and weighting of a customers intended use, preferences,
    priorities, and sensitivities in product selection. Based on
    this detailed needs analysis, products are recommended with
    features and option combinations that best meet the
    customers need, maximizing cross sell and up-sell
    opportunities. The system ensures that only accurately
    configured products are recommended.
|                            
|                             |  Product Configuration                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Reduces complexity involved in correctly
    architecting a customers product. Reduces reliance on
    technical personnel during the sales cycle by housing and
    applying the engineering specifications necessary to ensure
    accuracy in product selection and configuration.                                                                                                                                                                                                                                         
|                            
|                             |  Pricing/ Quotation                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Leverages the single intelligence engine
    underlying the base system to manage complex pricing scenarios,
    consistently and accurately applying sophisticated rule-based
    pricing strategies including packaging, quantity, effective
    date, margin, and customer influences. Takes into account uplift
    factors, geography, multiple currencies, conversions and tax
    factors to deliver an accurate quote.                                                                                                 
|                            
|                             |  Proposals                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Enables the creation of a summary of the selected
    product, including all standard features, options, and
    associated pricing. Proposals and presentation are
    professionally developed, customized, and branded.                                                                                                                                                                                                                                                                                                     

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|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Firepond Products        |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Insurance SalesPerformer |  | An intelligent, guided selling system built with
    the specific needs of the health insurance industry in mind. The
    system is designed to replicate best sales practices associated
    with each step in the process of converting prospects to
    customers or members, and to enable brokers, agents and field
    sales representatives to efficiently configure health insurance
    plans, generate accurate quotes and create professional, branded
    proposals.             
|                        
|eServicePerformer        |  | An innovative online customer assistance solution
    that leverages a single intelligence engine across multiple
    online interaction channels. The system enables companies to
    respond more efficiently to inbound online inquiries, such as
    email, web contacts and online chat. The system leverages
    advanced natural language processing capabilities to determine
    accurate and contextual responses to such inquiries, generally
    improving customer satisfaction.

Firepond announced major upgrades to
SalesPerformer, Insurance SalesPerformer, and eServicePerformer
in fiscal 2002. Fireponds SalesPerformer was originally
announced in December 2000 while eServicePerformer became
available in February 2001, after Firepond 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.

Although our SalesPerformer and eServicePerformer
products include patented technology, Firepond is committed to
the use of industry standard application development technology,
such as J2EE, and to application server platform independence to
give customers greater deployment flexibility. In addition,
Firepond is a member of Web Services Interoperability
Organization (WS-I) and intends to deliver a web services
interface to its SalesPerformer sales configuration base system.

Firepond has developed a set of advanced
inference engines called solvers. Solvers, in
effect, are pre-defined rule types that can be selected and
applied to any configuration problem. As an alternative to
companies trying to solve a configuration problem with one or
two rule types (which can result in slow rule evaluation and
difficult maintenance), SalesPerformers configuration
engine provides a wide range of solver types that address the
different types of representations that can be found in a
configuration problem. These solvers act upon the
customer-defined data model, creating attributes in the data
structures that help SalesPerformer interpret the data based on
user selections. SalesPerformer solvers are loaded dynamically
based on the behavior represented in the data model. Solver
examples include the following:

|                 |  |                        |  |                  
|---------------- |  | ---------------------- |  | -----------------
|Constraint Based |  | Relationship Based     |  | Other Solvers    
|                 |  |                        |  |                  
| Boolean logic  |  |  Includes             |  |  Calculations   
| Requirements   |  |  Fuzzy Logic          |  |  Complex Pricing
| Effectivity    |  |  Resources            |  |  Customer values
| Categorical    |  |  Nested Configuration |  |  Simulation     
|                 |  |                        |  |  Aggregate      

Each solver addresses a different type of
configuration problem. These solvers create attributes in the
data model that define how the data will be interpreted when
users make selections at run-time. In effect, this
interpretation of the data relationships and constraints is the
application of the rules that configure orders, make
product recommendations, and generate price quotes.

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Professional Services and Support

Firepond offers a range of professional services
in major markets worldwide. These services help companies use
the packaged software functionality of the SalesPerformer and
eServicePerformer product lines to create deployments that are
highly specific to their businesses. Our professional services
personnel typically have extensive experience in the deployment
of enterprise-scale selling systems. When we assist companies in
the implementation of our products, or their 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 implementation
templates help our customers achieve a rapid and successful
deployment of our applications. Our expert professional services
team helps customers and third party integrators implement our
products. In addition, we have made it a priority to work with
partners in order to provide our customers with greater
flexibility in their implementation choices. The maturity and
stability of our product has enabled us to experience strong
success in working with implementation partners.

Quality training offers the most effective way
for customers to derive maximum benefit from their investment.
We train users in major markets worldwide and we tailor training
materials to the unique requirements of individual customers. We
also have training programs for our implementation partners.

We offer comprehensive support for our
SalesPerformer and eServicePerformer product lines to our
customers and partners in major markets 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
and frequently-asked-questions, support by e-mail or telephone
to report problems or request technical assistance, and
notification of service pack and upgrade availability. Phone
support is available on a 24x7 basis for critical issues. Our
technical support team also provides data maintenance,
enhancement, and end-user support services on a time and
materials basis when not covered by our maintenance agreement.

Our technical support analysts are highly trained
and have extensive experience with Firepond. Firepond has
support resources in the United States, Europe and Japan.

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 for its SalesPerformer product
line are discrete manufacturing (including high technology,
transportation, construction machinery, agricultural equipment,
and others) and health insurance. Selected Firepond
SalesPerformer customers include ABB, Amada, Cummins Power
Generation, Deere & Company, Freightliner, Hitachi
Construction, Honda, Horizon Blue Cross Blue Shield, Renault
Trucks, Scania, Siemens Building Technologies, Steelcase
International, and Toshiba Machine.

For our eServicePerformer product line, Firepond
targets financial services, telecommunications, transportation,
travel/hospitality, and high technology. Selected Firepond
eServicePerformer customers include Abbey National, AT&T
Wireless, Best Buy, Cendant Mortgage, Royal Sun Alliance,
Ticketmaster, and Virgin Mobile, among many others.

In fiscal 2002, ABB accounted for more than 10%
of our total revenue. 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.

Sales and Marketing

Firepond markets and sells its products through a
mix of direct and indirect channels in major markets worldwide.
We offer our SalesPerformer product line through a direct sales
force, which is located in the United States, Europe, and Japan.
Additionally, in Japan, we have successfully cultivated a set of
partners to

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resell and implement our products. Our partners
in Japan include Fujitsu, Hitachi Kenki Business Frontier, and
Kozo Keikaku Engineering, one of the countrys largest
engineering firms.


Fireponds sales team is organized
geographically, with a focus for its SalesPerformer product line
on discrete manufacturing (including high technology,
transportation, construction machinery, agricultural equipment,
and others). In North America, we also target health insurance
with a vertical solution marketed as Insurance SalesPerformer.
Our model is to deliver our eServicePerformer product line to
market primarily through third party channel partners worldwide.

Firepond is continually driving market awareness
and developing leads in its target markets through a series of
integrated sales and marketing campaigns. Fireponds
marketing organization utilizes a variety of programs to support
our sales efforts, including market and product research and
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.

Research and Development

Our research and development team is responsible
for product planning, design and development of functionality
within the SalesPerformer and eServicePerformer product lines,
general release and quality assurance functions, third party
integration and developing templates for target vertical
industries. During the fourth quarter of fiscal year 2002, we
transitioned the research and development activities for our
eServicePerformer product line from our now closed San Rafael,
California office to our Minnesota facilities.

At the beginning of fiscal 2002, we had
contracted with two third party offshore companies to provide
software development and implementation services on an
outsourced basis: EPAM Systems and Elbrus. As of
November 1, 2001 EPAM Systems, based in Minsk, Belarus had
provided 25 software developers dedicated to our SalesPerformer
related projects. Similarly, Elbrus, based in Moscow, Russia,
provided 5 software developers dedicated to our
eServicePerformer related projects. However, during fiscal 2002,
we reduced our use of contract engineers and at the end of
fiscal 2002 were using only three EPAM Systems contractors
and four other part-time contractors.

Firepond research and development expenses were
$9.3 million for fiscal 2002, $18.8 million for fiscal
2001, and $15.3 million for fiscal 2000. We expect to
continue to invest in research and development in the future.

Competition

The markets for sales configuration and email
response management systems are intensely competitive,
constantly evolving, and subject to rapid technological change.
We encounter competition against our SalesPerformer product line
from a number of different sources, including in-house technical
staffs, traditional customer relationship management vendors,
enterprise resource planning vendors, and other vendors of sales
configuration point solutions. Of these vendors, our principle
competitors include SAP, Oracle, Trilogy, Siebel Systems, and
Selectica. 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. However, we believe that the market for
sales configuration solutions is still in its formative stage,
and that no currently identified competitor represents a
dominant presence in this market.

Regarding our eServicePerformer product line, we
consider our primary competition to be other vendors of email
management systems, including KANA, eGain, and RightNow
Technologies.

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.

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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.

We believe that the principal competitive factors
in our target markets 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.                                            

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. We
currently hold 14 United States patents and have applied for
other patents on our technology in the United States. We also
hold various trademarks in the United States and internationally
and intend to continue to apply for others. Our end user license
agreements are designed to prohibit unauthorized use, copying,
disclosure and the creation of derivative works of our software.

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, on occasion, 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 previously had 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. Periodically, we may
desire or be required to renew or 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.

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,

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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, 2002, we had a total of 128
employees, of which 34 were in research and development, 21 were
in sales and marketing, 21 were in finance and administration,
and 52 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.

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 delayed recovery in information technology
spending could reduce the sale of our products

Average license fees for our SalesPerformer Suite
typically range from approximately a few hundred thousand
dollars to several million dollars. Often this represents a
significant information technology 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. Consequently, if the current global slowdown
in information technology 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. In addition, we depend on our customers
to pay recurring maintenance fees to us for technical support
and product upgrades. Often, this represents a significant and
recurring information technology capital expenditure for our
customers. As a result, if the global slowdown in information
technology should continue, whether resulting from a weakened
economy or other factors, we may be unable to maintain our
maintenance revenues at their current levels and achieve our
targeted revenues.

If the markets for sales configuration and
customer service solutions do not expand, we may not be
successful

Our products address a new and emerging market
for solutions that optimize the lead-to-order
process and solutions which address guided customer service. The
failure of these markets to expand, or a delay in the expansion
of these markets, would seriously harm our business. Our
business depends on the successful customer acceptance of our
products and we expect that we will continue to depend on
revenue from new and enhanced versions of our products. Our
business would be harmed if our target customers do not adopt
and expand their use of our 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, sales, engineers, and
professional services personnel, who perform important functions
and would be difficult to replace. Also, we believe that our
future success is highly dependent on Klaus P. Besier, our
chairman and chief executive officer. The loss of the services
of any key personnel, particularly senior management, sales,
engineers, or professional services personnel could seriously
harm our business.

We depend on our direct sales force for a
significant portion 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

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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
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, 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. In connection with
the restructurings, during fiscal 2001 we terminated 363
employees and 90 consultants and during fiscal 2002 we
terminated 93 employees. We have incurred aggregate costs of
$8.5 million in fiscal 2001 and $1.9 million in fiscal 2002
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 has caused and may
continue to cause us to incur substantial costs as well as to
divert managements 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, has been and may continue to 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.

Negative results from the discovery of
fraudulent acts by our former acting vice president of sales
could adversely affect our company

As a result of senior managements discovery
of three fraudulent transactions involving license amounts
totaling approximately $5 million by our former acting vice
president of sales, in fiscal 2002 we lowered our previously
reported results and reduced our forecasted revenues. This
situation may harm our reputation and, as a result, could
adversely affect our relationship with our current customers as
well as harm our ability to sell our product in the future. In
addition, we could be subject to investor criticism. Also, the
Securities and

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Exchange Commissions investigation into
this matter as well as any further action brought by government
agencies or shareholder litigation has and may continue to
result in substantial legal fees and expenses and divert
managements attention and resources.


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 $23.7 million in
fiscal 2002, $70.3 million for fiscal 2001, and
$16.3 million for fiscal 2000. We may continue to incur
losses on a quarterly and annual basis and not become
profitable. Additionally, we may not grow or generate sufficient
revenue to attain profitability.

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

As a result of our failure to meet the Nasdaq
National Market minimum $1.00 per share bid price requirements,
we effected a 1-for-10 reverse stock split effective
August 16, 2002.

While we now meet the minimum price requirement,
we are currently trading at levels that may result in our
failure to maintain the minimum $5 million market value of
publicly held share requirement. If the market value of our
publicly held shares falls below $5 million for a period of
thirty consecutive business days, Nasdaq has the right to delist
the stock if within ninety days thereafter the market value of
our publicly held shares is not $5 million for a minimum of
ten consecutive business days. In the event the market value of
our publicly held shares does not rise above $5 million for
the 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 we 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. However, if our
common stock loses its Nasdaq National Market status, we may
apply for inclusion in the Nasdaq SmallCap Market. If our common
stock loses its Nasdaq National Market status and we are unable
to trade on the Nasdaq SmallCap Market, 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.

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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.

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.

Difficulties and financial burdens associated
with mergers and 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 or be the target of a potential
merger or acquisition. The Brightware acquisition, or any future
merger or acquisition of or by us, 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 a merger or acquisition, however,
it is difficult to determine if such benefits can actually be
realized. The process of integrating companies into our business
or integrating our company into another 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
merger or acquisition, our management could spend a significant
amount of time and effort identifying and completing the merger
or 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.

Failure to expand our relationships with third
party channels may adversely impact our support and maintenance
of existing customers, delay the implementation 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.

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Difficulties associated with the protection of
our intellectual property and potential claims alleging
infringement of third partys intellectual property could
harm our ability to compete and result in significant expense to
us and loss of significant rights

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.

Further, the software 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 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.

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 sales configuration 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.

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.

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We depend upon technology licensed to us by
third parties, the loss of which could adversely affect out
competitive position

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 results of operations may be harmed by
charges associated with stock-based compensation

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 717,929 options for exchange
and, on July 31, 2001 issued 538,438 new stock options with
an exercise price equal to $6.60 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 is the greater the compensation expense and effect
on our reported earnings.

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 realize planned 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 51% in fiscal 2002,
36% for fiscal 2001, and 28% in fiscal 2000. Our failure to
realize our planned international sales levels 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
the United States, 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.

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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, Euro and
Japanese Yen.


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
operating income 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.

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 sophisticated products fail to
perform properly, our revenue would be adversely
affected

Software products as sophisticated 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.

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.

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, 2002, 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.

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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.




Item 2.     Properties

Our corporate headquarters are located in
Bloomington, Minnesota and occupy approximately 12,100 square
feet. Our lease for this facility expires on January 31,
2005. We reduced our leased space in Mankato, Minnesota to
approximately 13,500 square feet with a lease that expires on
November 30, 2003. In addition, we renegotiated our lease
in Waltham, Massachusetts down from approximately 29,500 square
feet to 7,000 square feet with a lease termination date of
December 31, 2004. Our remaining occupied international
offices include Paris, France and Tokyo, Japan. The lease in
Paris, France is for 2,700 square feet and expires in December
2003. The lease in Tokyo, Japan is for 3,500 square feet and
expires in June 2003.




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, and other parties as
underwriters 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

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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 allocations.
The plaintiffs further allege that these actions artificially
inflated the price of our common stock after the initial public
offering. The action against Firepond is being coordinated with
over three hundred other nearly identical actions filed against
other companies. A motion to dismiss addressing issues common to
the companies and individuals who have been sued in these
actions was filed in July 2002. An opposition to the motion was
filed on behalf of the plaintiffs and a reply brief was filed on
behalf of the companies. The fully briefed issues are now
pending before the court. In October 2002, the court dismissed
the individual defendants from the case without prejudice based
upon stipulations of dismissal filed by the plaintiffs and the
individual defendants. 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 Security Holders

Not applicable




PART II






Item 5.     Market
for Registrants 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. 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:



| |                                       
| | --------------------------------------
| | Fiscal Year Ended October 31,
    2002

|                     |  |      |       |     |  |   |      | 
|-------------------- |  | ---- | ----- | --- |  | - | ---- | 
|Fiscal Quarter Ended |  | High |       | Low
|                     |  |      |       |    
|October 31, 2002     |  | $    | 3.66  |     |  | $ | 2.15 | 
|July 31, 2002        |  | $    | 9.70  |     |  | $ | 2.40 | 
|April 30, 2002       |  | $    | 13.30 |     |  | $ | 9.20 | 
|January 31, 2002     |  | $    | 15.70 |     |  | $ | 6.70 | 

Fiscal Year
Ended October 31, 2001

|                     |  |      |        |     |  |   |       | 
|-------------------- |  | ---- | ------ | --- |  | - | ----- | 
|Fiscal Quarter Ended |  | High |        | Low
|                     |  |      |        |    
|October 31, 2001     |  | $    | 9.00   |     |  | $ | 4.10  | 
|July 31, 2001        |  | $    | 25.40  |     |  | $ | 6.60  | 
|April 30, 2001       |  | $    | 41.88  |     |  | $ | 15.00 | 
|January 31, 2001     |  | $    | 120.00 |     |  | $ | 44.69 | 

(b) Holders

As of December 31, 2002, there were
approximately 174 holders of record of our common stock. This
number does not include stockholders whose shares are held in
trust by other entities.

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(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.

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Item 6.     Selected
Consolidated Financial Data

The following selected financial data are derived
from our consolidated 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.

Selected Financial Data

|                                                                                              |                                                          |                                          |                               |        |        |        |         |        |        |        |         |        |        |        |         |        |        |        |        |        |        |        | 
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------- | ----------------------------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | 
|                                                                                              |                                                          |                                         
|                                                                                              |                                                          | Fiscal Years Ended October 31,          
|                                                                                              |                                                          |                                         
|                                                                                              |                                                          | 2002                                     |                               | 2001   |        | 2000   |         | 1999   |        | 1998  
|                                                                                              |                                                          |                                          |                               |        |        |        |         |        |        |       
|                                                                                              |                                                          |                                         
|                                                                                              |                                                          | (In thousands, except per share data)   
|Statement of Consolidated Operations
    Data:                                                |                                                          |                                          |                               |        |        |        |         |        |        |        |         |        |        |        |         |        |        |        |        |       
|Revenue:                                                                                      |                                                          |                                          |                               |        |        |        |         |        |        |        |         |        |        |        |         |        |        |        |        |       
|                                                                                              | Product-related revenue:                                 |                                          |                               |        |        |        |         |        |        |        |         |        |        |        |         |        |        |        |        |        |       
|                                                                                              |                                                          | License                                  |                               | $      | 5,584  |        |         | $      | 14,848 |        |         | $      | 23,128 |        |         | $      | 9,777  |        |        | $      | 1,888  |       
|                                                                                              |                                                          | Services and maintenance                 |                               |        | 14,505 |        |         |        | 26,709 |        |         |        | 24,265 |        |         |        | 8,604  |        |        |        | 4,972  |       
|                                                                                              |                                                          |                                          |                               |        |        |        |         |        |        |        |         |        |        |        |         |        |        |        |        |       
|                                                                                              |                                                          |                                          | Total product-related revenue |        |        | 20,089 |         |        |        | 41,557 |         |        |        | 47,393 |         |        |        | 18,381 |        |        |        | 6,860  | 
|                                                                                              |                                                          | Custom development services              |                               |        | 1,549  |        |         |        | 4,532  |        |         |        | 14,579 |        |         |        | 15,904 |        |        |        | 22,142 |       
|                                                                                              |                                                          |                                          |                               |        |        |        |         |        |        |        |         |        |        |        |         |        |        |        |        |       
|                                                                                              |                                                          |                                          | Total revenue                 |        |        | 21,638 |         |        |        | 46,089 |         |        |        | 61,972 |         |        |        | 34,285 |        |        |        | 29,002 | 
|                                                                                              | Cost of revenue:                                         |                                          |                               |        |        |        |         |        |        |        |         |        |        |        |         |        |        |        |        |        |       
|                                                                                              |                                                          | License                                  |                               |        | 104    |        |         |        | 524    |        |         |        | 499    |        |         |        | 238    |        |        |        | 192    |       
|                                                                                              |                                                          | Product-related services and maintenance |                               |        | 9,168  |        |         |        | 29,094 |        |         |        | 16,485 |        |         |        | 5,677  |        |        |        | 3,061  |       
|                                                                                              |                                                          | Custom development services              |                               |        | 737    |        |         |        | 1,171  |        |         |        | 5,773  |        |         |        | 10,636 |        |        |        | 8,397  |       
|                                                                                              |                                                          |                                          |                               |        |        |        |         |        |        |        |         |        |        |        |         |        |        |        |        |       
|                                                                                              |                                                          |                                          | Total cost of revenue(1)      |        |        | 10,009 |         |        |        | 30,789 |         |        |        | 22,757 |         |        |        | 16,551 |        |        |        | 11,650 | 
|                                                                                              |                                                          |                                          |                               |        |        |        |         |        |        |        |         |        |        |        |         |        |        |        |        |       
|                                                                                              | Gross profit (loss)                                      |                                          |                               | 11,629 |        |        |         | 15,300 |        |        |         | 39,215 |        |        |         | 17,734 |        |        |        | 17,352 |       
|Operating expenses:                                                                           |                                                          |                                          |                               |        |        |        |         |        |        |        |         |        |        |        |         |        |        |        |        |       
|                                                                                              | Sales and marketing(1)                                   |                                          |                               | 7,826  |        |        |         | 25,131 |        |        |         | 27,904 |        |        |         | 23,609 |        |        |        | 13,680 |       
|                                                                                              | Research and development(1)                              |                                          |                               | 9,349  |        |        |         | 18,838 |        |        |         | 15,264 |        |        |         | 9,641  |        |        |        | 8,199  |       
|                                                                                              | General and administrative(1)                            |                                          |                               | 7,164  |        |        |         | 10,981 |        |        |         | 9,449  |        |        |         | 7,084  |        |        |        | 3,516  |       
|                                                                                              | Stock-based compensation                                 |                                          |                               | 795    |        |        |         | 4,470  |        |        |         | 6,680  |        |        |         | 2,597  |        |        |        | 672    |       
|                                                                                              | Amortization of goodwill and other intangible
    assets |                                          |                               | 486    |        |        |         | 3,554  |        |        |         |       |        |        |         |       |        |        |        |       |       
|                                                                                              | Restructuring charge (credit)                            |                                          |                               | 3,420  |        |        |         | 18,243 |        |        |         | (500   | )      |        |         | 3,027  |        |        |        |       |       
|                                                                                              | Settlement of claim                                      |                                          |                               |       |        |        |         | 1,211  |        |        |         |       |        |        |         |       |        |        |        |       |       
|                                                                                              | Acquired in-process research and development             |                                          |                               |       |        |        |         | 6,200  |        |        |         |       |        |        |         |       |        |        |        |       |       
|                                                                                              | Impairment of developed technology and know-how          |                                          |                               | 3,120  |        |        |         |       |        |        |         |       |        |        |         |       |        |        |        |       |       
|                                                                                              |                                                          |                                          |                               |        |        |        |         |        |        |        |         |        |        |        |         |        |        |        |        |       
|                                                                                              |                                                          |                                          | Total operating expenses      |        |        | 32,160 |         |        |        | 88,628 |         |        |        | 58,797 |         |        |        | 45,958 |        |        |        | 26,067 | 
|                                                                                              |                                                          |                                          |                               |        |        |        |         |        |        |        |         |        |        |        |         |        |        |        |        |       
|Loss from operations                                                                          |                                                          |                                          | (20,531                       | )      |        |        | (73,328 | )      |        |        | (19,582 | )      |        |        | (28,224 | )      |        |        | (8,715 | )     
|Other income (expense), net                                                                   |                                                          |                                          | 826                           |        |        |        | 3,047   |        |        |        | 4,677   |        |        |        | (631    | )      |        |        | (326   | )     
|                                                                                              |                                                          |                                          |                               |        |        |        |         |        |        |        |         |        |        |        |         |        |        |        |        |       
|Loss before extraordinary items and cumulative
    effect of a change in accounting principle |                                                          |                                          | (19,705                       | )      |        |        | (70,281 | )      |        |        | (14,905 | )      |        |        | (28,855 | )      |        |        | (9,041 | )     

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|                                                          |                                                                                                                              |                                       |         |       |   |      |         |        |   |      |         |        |   |   |         |        |   |   |        |       |  
|--------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ----- | - | ---- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | - | - | ------ | ----- | -
|                                                          |                                                                                                                              |                                      
|                                                          |                                                                                                                              | Fiscal Years Ended October 31,       
|                                                          |                                                                                                                              |                                      
|                                                          |                                                                                                                              | 2002                                  |         | 2001  |   | 2000 |         | 1999   |   | 1998
|                                                          |                                                                                                                              |                                       |         |       |   |      |         |        |   |     
|                                                          |                                                                                                                              |                                      
|                                                          |                                                                                                                              | (In thousands, except per share data)
|Loss on extinguishment of debt                            |                                                                                                                              |                                       |         |       |   |      |         |        |   |      | (1,437  | )      |   |   |         |        |   |   |        |      
|Cumulative effect of a change in accounting
    principle |                                                                                                                              |                                       | (3,973  | )     |   |      |        |        |   |      |        |        |   |   |        |        |   |   |       |      
|                                                          |                                                                                                                              |                                       |         |       |   |      |         |        |   |      |         |        |   |   |         |        |   |   |        |      
|Net loss                                                  |                                                                                                                              |                                       | (23,678 | )     |   |      | (70,281 | )      |   |      | (16,342 | )      |   |   | (28,855 | )      |   |   | (9,041 | )    
|Stock dividend to preferred stockholders                  |                                                                                                                              |                                       |        |       |   |      |        |        |   |      | (65,542 | )      |   |   |        |        |   |   |       |      
|                                                          |                                                                                                                              |                                       |         |       |   |      |         |        |   |      |         |        |   |   |         |        |   |   |        |      
|Loss applicable to common stockholders                    |                                                                                                                              | $                                     | (23,678 | )     |   | $    | (70,281 | )      |   | $    | (81,884 | )      |   | $ | (28,855 | )      |   | $ | (9,041 | )    
|                                                          |                                                                                                                              |                                       |         |       |   |      |         |        |   |      |         |        |   |   |         |        |   |   |        |      
|Net loss per share:                                       |                                                                                                                              |                                       |         |       |   |      |         |        |   |      |         |        |   |   |         |        |   |   |        |      
|                                                          | Basic and diluted loss per share before
    extraordinary item and cumulative effect of a change in
    accounting principle |                                       | $       | (5.37 | ) |      | $       | (19.52 | ) |      | $       | (5.27  | ) |   | $       | (28.80 | ) |   | $      | (9.11 | )
|                                                          | Extraordinary item                                                                                                           |                                       |         |       |   |      |         |       |   |      |         | (0.51  | ) |   |         |       |   |   |        |      |  
|                                                          | Cumulative effect of a change in accounting
    principle                                                                    |                                       |         | (1.09 | ) |      |         |        |   |      |         |        |   |   |         |        |   |   |        |       |  
|                                                          | Stock dividend paid to preferred stockholders                                                                                |                                       |         |      |   |      |         |       |   |      |         | (23.17 | ) |   |         |       |   |   |        |      |  
|                                                          |                                                                                                                              |                                       |         |       |   |      |         |        |   |      |         |        |   |   |         |        |   |   |        |      
|                                                          | Basic and diluted net loss per share applicable
    to common stockholders                                                   |                                       | $       | (6.46 | ) |      | $       | (19.52 | ) |      | $       | (28.95 | ) |   | $       | (28.80 | ) |   | $      | (9.11 | )
|                                                          |                                                                                                                              |                                       |         |       |   |      |         |        |   |      |         |        |   |   |         |        |   |   |        |      
|                                                          | Basic and diluted weighted average common shares
    outstanding                                                             |                                       |         | 3,668 |   |      |         | 3,601  |   |      |         | 2,828  |   |   |         | 1,002  |   |   |        | 992   |  



---



|    |                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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-5.

|                                                         |  |             |        |      |  |      |        |      |  |      |         |  |  |   |         |   |  |   |        |  
|-------------------------------------------------------- |  | ----------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------- |  |  | - | ------- | - |  | - | ------ | -
|                                                         |  |            
|                                                         |  | October 31,
|                                                         |  |            
|                                                         |  | 2002        |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                                         |  |             |        |      |  |      |        |      |  |     
|Consolidated Balance Sheet Data:                         |  |             |        |      |  |      |        |      |  |      |         |  |  |   |         |   |  |   |        |  
|Cash and cash equivalents and short-term
    investments |  | $           | 29,169 |      |  | $    | 44,253 |      |  | $    | 116,233 |  |  | $ | 2,120   |   |  | $ | 2,324  |  
|Working capital (deficit)                                |  |             | 18,590 |      |  |      | 30,752 |      |  |      | 101,907 |  |  |   | (11,380 | ) |  |   | (6,240 | )
|Total assets                                             |  |             | 36,359 |      |  |      | 75,138 |      |  |      | 144,320 |  |  |   | 21,660  |   |  |   | 18,786 |  
|Long-term debt, net of current portion                   |  |             |       |      |  |      |       |      |  |      |        |  |  |   | 702     |   |  |   | 1,727  |  
|Total stockholders equity (deficit)                     |  |             | 21,373 |      |  |      | 47,513 |      |  |      | 110,464 |  |  |   | (5,354  | ) |  |   | 1,031  |  






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

Certain statements in the Managements
Discussion and Analysis of Financial Condition and Results of
Operations are forward-looking statements that involve
risks and uncertainties. Words such as anticipates, expects,
intends, plans, believes, seeks, estimates, and similar
expressions identify such forward-looking statements. The
forward-looking statements contained herein are based on current
expectations and entail various risks and uncertainties that
could cause actual results to differ materially from these
expressed in such forward-looking statements. Factors that might
cause such a difference include, among other things, those set
forth under Overview, Liquidity and Capital
Resources and Factors that May Affect Future Results
and Market Price of our Common Stock included in these
sections and those appearing elsewhere in this Form 10-K.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect managements
analysis only as of the date hereof. We assume no obligation to
update these forward-looking statements to reflect actual
results or changes in factors or assumptions affecting
forward-looking statements.

21



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##### Table of Contents



Overview

We are a leading provider of enterprise software
that optimizes the process of converting leads into accurate
orders. Our SalesPerformer sales configuration system guides
sales people, channel partners and customers through the entire
lead-to-order business process 
delivering lead management, needs analysis, product and pricing
configuration, quote and proposal generation, and order
management. We also offer an online customer assistance
solution, called eServicePerformer, that leverages advanced
intelligence engines and natural language processing technology
to manage the full range of a companys online customer
interaction channels, with an emphasis on email response
management.

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 92.8% in fiscal
2002.

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 and accordingly, the
results of operations of Brightware have been included in our
results of operations since the date of acquisition. In
addition, on September 27, 2000, we acquired 100% of the
issued and outstanding shares of capital stock of Signature
Software, Inc. This acquisition was also accounted for using the
purchase method. Accordingly, the results of operations of
Signature Software from the date of acquisition have been
included in our results of operations.

During fiscal 2001, as a result of a global
slowdown in information technology spending, specifically in the
Customer Relationship Management market, and the acquisition of
Brightware, we undertook plans to restructure our operations.
These actions sought to better align our cost structure with
projected operations in the future, preserve cash, and in the
case of the Brightware transaction, eliminate redundant
operations. We reduced headcount and facilities as well as wrote
off excess equipment and terminated and restructured certain
contractual relationships. Overall, we terminated 31 general and
administrative, 111 sales and marketing, 159 professional
services and 62 development employees, as well as 90
contractors. The restructuring and other special charges for
fiscal 2001 totaled $18.2 million. These actions
contributed to a significant decrease in our expenses in fiscal
2002 as compared to fiscal 2001.

During the quarter ended July 31, 2002, we
announced a strategic realignment to further enhance our focus
on the lead-to-order market as well as measures to
better align our costs with the current economic conditions. In
addition, as a result of a prolonged slowdown of global
information technology spending, specifically within the
enterprise software marketplace, we undertook a plan to
restructure our operations. These actions sought to better align
our cost structure with projected revenue in the future and
preserve cash. We reduced headcount and facilities as well as
wrote off excess equipment and terminated and restructured
certain contractual relationships. Overall, we terminated 19
general and administrative, 19 sales and marketing, 25
professional services and 30 development employees. The
restructuring and other special charges for fiscal 2002 totaled
$3.4 million. These actions further contributed to the
significant decrease in our expenses for fiscal 2002 as compared
to fiscal 2001.

On May 31, 2002, we announced that our
senior management had discovered that our acting vice president
of sales was engaged in fraudulent behavior, including
misrepresenting three customer transactions. The fraudulent
transactions involved three contracts with license amounts
totaling approximately $5 million, including a contract
announced in the quarter ended January 31, 2002, and two
additional transactions that were announced in our May 22,
2002 earnings release as new license contracts for the quarter
ended April 30, 2002. The Companys January 31,
2002 condensed consolidated financial statements have been
restated as reflected in the Companys Form 10-Q/A for
the quarter ended January 31, 2002 as filed with the
Securities

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and Exchange Commission on June 19, 2002, to
reflect the reversal of the first fraudulent transaction. In
addition, the remaining two fraudulent transactions were not
included in the results for the quarter ended April 30,
2002. We undertook an investigation of this matter and
determined that no other transactions were affected. The
Securities and Exchange Commission has initiated a formal
inquiry into this matter and we are cooperating with the
Securities and Exchange Commission. In addition, we have filed a
civil lawsuit against this individual, seeking damages.


On August 16, 2002, we effected a 1-for-10
reverse stock split of the outstanding shares of common stock
and adjusted the par value to $.10 per share as previously
disclosed in our Form 8-K filed with the Securities and
Exchange Commission on August 15, 2002. All references in
our consolidated financial statements and notes thereto, to
common stock share and per share amounts including, options and
warrants to purchase common stock, have been retroactively
restated to reflect the reverse stock split.

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 $16.3 million for
fiscal 2000, $70.3 million for fiscal 2001, and
$23.7 million for fiscal 2002. We currently plan to incur
an annual net loss for fiscal 2003 and are uncertain as to when
we will reach profitability due to low visibility with regard to
expected future revenue.

We have invested heavily in research and
development. 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 that
require the recognition of stock-based compensation expense.
Until July 2001, stock-based compensation relating to employee
grants represented 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. In July 2001, we
completed 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 then 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 $6.60 per share. We accepted
717,929 stock options for exchange and issued 538,438 stock
options in exchange for such tendered options. All option grants
issued in connection with the stock option exchange program are
subject to variable accounting. In addition, we have granted
stock options to non-employees and issued warrants to certain
customers and to strategic business partners. 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.

In fiscal 2002, we also charged $113,000 to
stock-based compensation expense in connection with the
satisfaction of a note between a former officer and us in which
we acquired shares securing the note.

In connection with our Signature Software
acquisition, we issued 27,626 shares of restricted common stock,
valued at approximately $3.9 million, subject to vesting
through September 27, 2002. Vesting of these shares was
based on the retention of certain Signature Software employees
measured on a quarterly basis, as defined. The value of these
restricted shares was recorded as stock-based compensation on a
pro rata basis over the vesting period. Accordingly, we
recognized approximately $600,000 of stock-based compensation in
fiscal 2002, $2,404,000 in fiscal 2001, and $162,000 in fiscal
2000 for these shares. In fiscal 2001, we also recognized
approximately $733,000 in stock-based compensation due to the
acceleration of the vesting of approximately 61,000 shares of
restricted common stock related to one employee termination.

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In the aggregate, we recorded stock-based
compensation expense of approximately $795,000 in fiscal 2002,
$4.5 million in fiscal 2001, and $6.7 million in fiscal
2000. As of October 31, 2002, the deferred compensation
balance of approximately $10,000 will be amortized over the
remaining vesting period of the options and warrants.

We have adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.During
the quarter ended January 31, 2002, we lowered our
estimates of the expected cash flows from the eServicePerformer
product and determined that developed technology and know-how
was significantly impaired. Accordingly, we recorded a
$3.1 million charge to write-off the impaired portion of
developed technology and know-how.

We have adopted SFAS No. 142 Goodwill and
Other Intangible Assets effective November 1, 2001. In
accordance with SFAS 142, the net book value of assembled
workforce was reclassified to goodwill and as a result of an
independent valuation, we determined that without regard to the
reduction in expected cash flows from the eServicePerformer
product determined during the quarter ended January 31,
2002, the goodwill was fully impaired upon adoption and,
accordingly, recorded a cumulative effect of a change in
accounting principle of $4.0 million.

As of October 31, 2002, we had available net
operating losses of approximately $94 million to reduce
future federal income taxes. These carryforwards will 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 Service Code of 1986. Our wholly-owned foreign
subsidiaries have net operating loss carryforwards of
approximately $26 million.

Critical Accounting Policies

In December 2001, the SEC requested that all
registrants list their most critical accounting
policies in the Managements Discussion &
Analysis. The SEC indicated that a critical accounting
policy is one which is both important to the portrayal of
the Companys financial condition and results and requires
our most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters
that are inherently uncertain. We believe that the following
accounting policies fit this definition:

Revenue Recognition.We generate revenue from primarily
product-related license and service revenue. Product-related
license revenue is generated from licensing the rights to the
use of our packaged software products. Product-related service
revenue is generated from sales of maintenance, consulting and
training services performed for customers that license our
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).

We have concluded that generally, where we are
responsible for implementation services for the SalesPerformer
product suite and its components, our implementation services
are essential to the customers use of the packaged
software products. In such arrangements, we recognize revenue
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.

The complexity of the estimation process and
issues related to the assumptions, risks, and uncertainties
inherent in the percentage of completion method of accounting
affect the amount of revenue recorded in each reporting period.
Also, if we do not accurately estimate the resources required or
the scope of work to be performed, or do not manage our projects
properly within the planned periods of time or satisfy our
obligations under the contracts, then future consulting margins
may be significantly and negatively affected or losses on

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existing contracts may need to be recognized. Any
such resulting reductions in margins or contract losses could be
material to our results of operations.


In situations where we are not responsible for
implementation services for the SalesPerformer Suite of
products, we recognize 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 we are not responsible for implementation
services for the SalesPerformer Suite of products, but are
obligated to provide unspecified additional software products in
the future, we recognize 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, we recognize 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. We have determined that implementation services
are not essential to the functionality of the eServicePerformer
product. In situations where we enter into a license agreement
for both its SalesPerformer Suite and its eServicePerformer
product and are responsible for implementation services, we
recognize revenue for the entire arrangement under SOP 81-1.

We execute contracts that govern the terms and
conditions of each software license, maintenance arrangement and
other services arrangements. If an arrangement includes an
acceptance provision, acceptance occurs upon the earlier of
receipt of a written customer acceptance or expiration of the
acceptance period.

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. We use 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. We have 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.

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.

We record deferred revenue on amounts billed or
collected by us before satisfying the above revenue recognition
criteria.

We historically have provided services to develop
highly customized applications utilizing core software
technology. We no longer accept new custom development service
projects and 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. Revenue
from these ongoing arrangements is recognized as the services
are performed.

Valuation of Long-Lived Assets.We periodically review the carrying
value of our long-lived assets for impairment. This review is
based upon our projections of anticipated future cash flows.
While we believe that our estimates of future cash flows are
reasonable, different assumptions regarding such cash flows
could materially affect our evaluations.

Lease Loss Estimates.Our restructuring and other special
charges taken in fiscal 2002 and 2001 included a component for
idle lease space. Our assumptions considered current market
value of similar

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properties and the ability, if any, to sublease
the idle space or any other future use. If actual market
conditions are less favorable than those projected by us,
additional charges may be required related to this idle lease
space.


Results of Operations

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

|                                                                                              |                                                          |                                          |                               |      |      |       |        |      |      |       |        |      |      |       | 
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------- | ----------------------------- | ---- | ---- | ----- | ------ | ---- | ---- | ----- | ------ | ---- | ---- | ----- | 
|                                                                                              |                                                          |                                         
|                                                                                              |                                                          | Years Ended October 31,                 
|                                                                                              |                                                          |                                         
|                                                                                              |                                                          | 2002                                     |                               | 2001 |      | 2000 
|                                                                                              |                                                          |                                          |                               |      |      |      
|Revenue:                                                                                      |                                                          |                                          |                               |      |      |       |        |      |      |       |        |     
|                                                                                              | Product-related revenue:                                 |                                          |                               |      |      |       |        |      |      |       |        |      |     
|                                                                                              |                                                          | License                                  |                               |      | 25.8 | %     |        |      | 32.2 | %     |        |      | 37.3 | %    
|                                                                                              |                                                          | Services and maintenance                 |                               |      | 67.0 |       |        |      | 58.0 |       |        |      | 39.2 |      
|                                                                                              |                                                          |                                          |                               |      |      |       |        |      |      |       |        |     
|                                                                                              |                                                          |                                          | Total product-related revenue |      |      | 92.8  |        |      |      | 90.2  |        |      |      | 76.5  | 
|                                                                                              |                                                          | Custom development services              |                               |      | 7.2  |       |        |      | 9.8  |       |        |      | 23.5 |      
|                                                                                              |                                                          |                                          |                               |      |      |       |        |      |      |       |        |     
|                                                                                              |                                                          |                                          | Total revenue                 |      |      | 100.0 |        |      |      | 100.0 |        |      |      | 100.0 | 
|                                                                                              |                                                          |                                          |                               |      |      |       |        |      |      |       |        |     
|Cost of revenue:                                                                              |                                                          |                                          |                               |      |      |       |        |      |      |       |        |     
|                                                                                              |                                                          | License                                  |                               |      | 0.5  |       |        |      | 1.1  |       |        |      | 0.8  |      
|                                                                                              |                                                          | Product-related services and maintenance |                               |      | 42.4 |       |        |      | 63.1 |       |        |      | 26.6 |      
|                                                                                              |                                                          | Custom development services              |                               |      | 3.4  |       |        |      | 2.5  |       |        |      | 9.3  |      
|                                                                                              |                                                          |                                          |                               |      |      |       |        |      |      |       |        |     
|                                                                                              |                                                          |                                          | Total cost of revenue         |      |      | 46.3  |        |      |      | 66.7  |        |      |      | 36.7  | 
|                                                                                              |                                                          |                                          |                               |      |      |       |        |      |      |       |        |     
|Gross profit                                                                                  |                                                          |                                          | 53.7                          |      |      |       | 33.3   |      |      |       | 63.3   |     
|Operating expenses:                                                                           |                                                          |                                          |                               |      |      |       |        |      |      |       |        |     
|                                                                                              | Sales and marketing                                      |                                          |                               | 36.2 |      |       |        | 54.5 |      |       |        | 45.0 |     
|                                                                                              | Research and development                                 |                                          |                               | 43.2 |      |       |        | 40.9 |      |       |        | 24.6 |     
|                                                                                              | General and administrative                               |                                          |                               | 33.1 |      |       |        | 23.8 |      |       |        | 15.2 |     
|                                                                                              | Stock-based compensation                                 |                                          |                               | 3.7  |      |       |        | 9.7  |      |       |        | 10.8 |     
|                                                                                              | Amortization of goodwill and other intangible
    assets |                                          |                               | 2.2  |      |       |        | 7.7  |      |       |        |     |     
|                                                                                              | Restructuring charge (credit)                            |                                          |                               | 15.8 |      |       |        | 39.6 |      |       |        | (0.8 | )   
|                                                                                              | Settlement of claim                                      |                                          |                               |     |      |       |        | 2.6  |      |       |        |     |     
|                                                                                              | Acquired in-process research and development             |                                          |                               |     |      |       |        | 13.5 |      |       |        |     |     
|                                                                                              | Impairment of developed technology and know-how          |                                          |                               | 14.4 |      |       |        |     |      |       |        |     |     
|                                                                                              |                                                          |                                          |                               |      |      |       |        |      |      |       |        |     
|                                                                                              |                                                          |                                          | Total operating expenses      |      |      | 148.6 |        |      |      | 192.3 |        |      |      | 94.8  | 
|                                                                                              |                                                          |                                          |                               |      |      |       |        |      |      |       |        |     
|Loss from operations                                                                          |                                                          |                                          | (94.9                         | )    |      |       | (159.0 | )    |      |       | (31.5  | )   
|Interest income, net of expense                                                               |                                                          |                                          | 2.3                           |      |      |       | 8.0    |      |      |       | 6.5    |     
|Other income (expense), net                                                                   |                                                          |                                          | 1.5                           |      |      |       | (1.3   | )    |      |       | 1.0    |     
|                                                                                              |                                                          |                                          |                               |      |      |       |        |      |      |       |        |     
|Loss before extraordinary items and cumulative
    effect of a change in accounting principle |                                                          |                                          | (91.1                         | )    |      |       | (152.3 | )    |      |       | (24.0  | )   
|Loss on extinguishment of debt                                                                |                                                          |                                          |                              |      |      |       |       |      |      |       | (2.3   | )   
|Cumulative effect of a change in accounting
    principle                                     |                                                          |                                          | (18.3                         | )    |      |       |       |      |      |       |       |     
|                                                                                              |                                                          |                                          |                               |      |      |       |        |      |      |       |        |     
|Net loss                                                                                      |                                                          |                                          | (109.4                        | )    |      |       | (152.3 | )    |      |       | (26.3  | )   
|Stock dividend to preferred stockholders                                                      |                                                          |                                          |                              |      |      |       |       |      |      |       | (105.8 | )   
|                                                                                              |                                                          |                                          |                               |      |      |       |        |      |      |       |        |     
|Loss applicable to common stockholders                                                        |                                                          |                                          | (109.4                        | )%   |      |       | (152.3 | )%   |      |       | (132.1 | )%  
|                                                                                              |                                                          |                                          |                               |      |      |       |        |      |      |       |        |     

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Comparison of Fiscal Years Ended
October 31, 2002 and 2001

Revenue.Total
revenue decreased $24.5 million, or 53.1%, to
$21.6 million in fiscal 2002 from $46.1 million in
fiscal 2001. This decrease is attributable to a 51.7% decrease
in product-related revenue and a 65.8% decrease in custom
development revenue.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | License.License
    revenue decreased $9.3 million, or 62.4%, to
    $5.6 million in fiscal 2002 from $14.8 million in
    fiscal 2001. License revenue as a percentage of total revenue
    decreased to 25.8% in fiscal 2002 from 32.2% in fiscal 2001. We
    believe the decrease in absolute dollars and as a percentage of
    total 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.                                                                                                                                                                                                                                                                              
|
| | Product Service and Maintenance.Product service and maintenance
    revenue decreased $12.2 million, or 45.7%, to
    $14.5 million in fiscal 2002 from $26.7 million in
    fiscal 2001. Product services revenue as a percentage of total
    revenue increased to 67.0% in fiscal 2002 from 58.0% in fiscal
    2001. The decrease in absolute dollars is attributable primarily
    to the decrease in consulting engagements due to fewer new
    license implementation engagements as well as a reduced level of
    implementation services provided with new and
    post-implementation engagements as compared with fiscal 2001.
    The increase as a percentage of total revenue is due to
    maintenance revenue declining at a substantially lower rate than
    license and services revenue.
|
| | Custom Development Services.Custom development services revenue
    decreased $3.0 million, or 65.8%, to $1.5 million in
    fiscal 2002 from $4.5 million in fiscal 2001. Custom
    development services revenue as a percentage of total revenue
    decreased to 7.2% in fiscal 2002 from 9.8% in fiscal 2001. The
    overall decrease is due to the change of our strategic focus. We
    expect custom development services revenue to continue to
    decline.                                                                                                                                                                                                                                                                                                                                        

Cost of Revenue.Total cost of revenue decreased
$20.8 million, or 67.5%, to $10.0 million in fiscal
2002 from $30.8 million in fiscal 2001. Total cost of
revenue as a percentage of total revenue decreased to 46.3% in
fiscal 2002 from 66.7% in fiscal 2001.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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
    decreased $420,000, or 80.2%, to $104,000 in fiscal 2002 from
    $524,000 in fiscal 2001. Cost of license revenue as a percentage
    of license revenue decreased to 1.9% in fiscal 2002 from 3.5% in
    fiscal 2001. The decrease in absolute dollars and as a
    percentage of license revenue is due primarily to a decrease in
    royalties due for license transactions during the year.                                                                                                                                                                                                                                                                                                                                                                          
|
| | 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 decreased
    $19.9 million, or 68.5%, to $9.2 million in fiscal
    2002 from $29.1 million in fiscal 2001. Cost of
    product-related services and maintenance revenue as a percentage
    of product-related services and maintenance revenue decreased to
    63.2% in fiscal 2002 from 108.9% in fiscal 2001. The decrease in
    absolute dollars and as a percentage of total product-related
    services and maintenance revenue is due primarily to decreased
    staff and consulting resources, increased utilization rate of
    staff, and our effort to cut 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 $434,000,
    or 37.1%, to $737,000 in fiscal 2002 from $1.2 million in
    fiscal 2001. Cost of custom development services as a percentage
    of custom development services revenue increased to 47.6% in
    fiscal 2002 from 25.8% in fiscal 2001. The decrease in absolute
    dollars is due primarily to fewer custom development projects.                                                                                                                                                                                                 

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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 $17.3 million, or 68.9%, to
$7.8 million in fiscal 2002 from $25.1 million in
fiscal 2001. Sales and marketing expenses as a percentage of
total revenue decreased to 36.2% in fiscal 2002 from 54.5% in
fiscal 2001. Sales and marketing expenses decreased in absolute
dollars and as a percentage of total revenue primarily due to
the decrease in headcount in our sales and marketing operations
as a result of the actions we took to restructure our operations
and lower commissions on fewer license transactions, as well as
a decrease in marketing program spending. 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 invest
in marketing programs as necessary.

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 decreased $9.5 million,
or 50.4%, to $9.3 million in fiscal 2002 from
$18.8 million in fiscal 2001. Research and development
expenses as a percentage of total revenue increased to 43.2% in
fiscal 2002 from 40.9% in fiscal 2001. These expenses decreased
in absolute dollars as a result of the reduction in headcount
and decreased utilization of engineering and product development
contractors as a result of the reduction of our workforce.
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 the actions we have taken to reduce our
workforce, as well as a consolidation of our research and
development operations to Minnesota. We will continue to make
necessary investments to enhance our existing products and
develop new products.

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 decreased
$3.8 million, or 34.8%, to $7.2 million in fiscal 2002
from $11.0 million in fiscal 2001. General and
administrative expenses as a percentage of total revenue
increased to 33.1% in fiscal 2002 from 23.8% in fiscal 2001.
These expenses decreased in absolute dollars primarily as a
result of decreased headcount, which resulted in reduced payroll
and other related expenses, offset in part by an increase in
legal expenses and insurance costs. 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 $3.7 million, or 82.2%, to $795,000 in fiscal
2002 from $4.5 million in fiscal 2001. Stock-based
compensation expense as a percentage of total revenue decreased
to 3.7% in fiscal 2002 from 9.7% in fiscal 2001. The decrease in
stock-based compensation expense from the prior year is
primarily the result of a $1.3 million decrease to $82,000
in charges for employee and non-employee stock options and
warrants and a $2.5 million decline in the charge from the
Signature Software acquisition stock grants, partially offset by
a $113,000 charge related to shares we acquired from a
former officer in satisfaction of a loan.

Amortization of Goodwill and Other Intangible
Assets.Amortization of goodwill and
other intangible assets decreased $3.1 million, or 86.3%,
to $486,000 in fiscal 2002 from $3.6 million in fiscal
2001. Amortization of goodwill and other intangible assets as a
percentage of total revenue decreased to 2.2% in fiscal 2002
from 7.7% in fiscal 2001. The decrease is due primarily to the
impairment of goodwill related to the acquisition of Brightware
as a result of the our adoption of SFAS No. 142 Goodwill
and Other Intangible Assets, as well as impairment of
related developed technology and know-how under SFAS
No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets.

Restructuring and Other Special Charges.During fiscal 2002, we announced a
restructuring of our operations to further enhance our focus on
the lead-to-order market and to better align costs
with current economic conditions. In connection with this plan
we incurred $3.4 million of restructuring and other special
charges in fiscal 2002, which included $1.9 million of
employee severance costs, $412,000 of facilities related

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costs, $824,000 of excess fixed asset costs,
$188,000 of excess contractual commitments and termination fees
and $65,000 of other costs. The facilities related costs
represent a $2.9 million charge reported in our results of
operations for the quarter ended July 31, 2002 offset by a
reversal of $2.5 million in the quarter ended
October 31, 2002 as the result of a buy-out settlement
reached in November 2002 in regards to idle lease space. We
terminated 19 general and administrative, 19 sales and
marketing, 25 professional services and 30 development
employees. During fiscal 2001, we announced a restructuring of
our operations due to a continued global slowdown in technology
spending. In connection with this plan, we incurred
$18.2 million of restructuring and other special charges in
fiscal 2001, which included $8.5 million of employee
severance costs, $3.0 million of facilities related costs,
$3.9 million of excess fixed asset costs, $2.0 million
of contract termination fees and $782,000 of other costs. We
terminated 31 general and administrative, 111 sales and
marketing, 159 professional services and
62 development employees, as well as 90 contractors. As of
October 31, 2002, the remainder of the payments for the
restructuring and other special charges will be paid out as
follows: severance payments through January 2003, facilities
related payments through November 2004 and contract termination
fees and other payments through July 2003.


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 us. We
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.We acquired Brightware on
February 15, 2001. 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.

Impairment of Developed Technology and
Know-how.During the quarter ended
January 31, 2002, we lowered our estimates of the expected
revenue from the Brightware products and determined that the
developed technology and know-how intangible asset was
significantly impaired and, accordingly, recorded a
$3.1 million impairment charge.

Interest Income, Net of Expense.Interest income, net of expense
decreased $3.2 million, or 86.2%, to $507,000 in fiscal
2002 from $3.7 million in fiscal 2001. The decrease is due
primarily to our decreased cash and cash equivalents and
short-term investments, as well as a decline in interest rates.

Other Income (Expense), Net.Other income (expense), net primarily
consists of bank fees, certain state and local taxes and foreign
currency transaction gains/losses. Other income (expense), net
increased $945,000, or 151%, to $319,000 in income in fiscal
2002 from $626,000 in expense in fiscal 2001. The increase is
due primarily to foreign currency transaction gains realized in
fiscal 2002.

Cumulative Effect of a Change in Accounting
Principle.With the acquisition of
Brightware in February 2001, we allocated approximately
$4.0 million to goodwill and $2.2 million to assembled
workforce. As of October 31, 2001, accumulated amortization
of goodwill and assembled workforce was $1.8 million and
$519,000, respectively. Effective November 1, 2001, we
adopted SFAS 142, Goodwill and Other Intangible Assetsand reclassified the net book value of assembled workforce
to goodwill. As required under SFAS 142, we completed a
goodwill impairment evaluation. As a result of this evaluation,
we determined that the goodwill was fully impaired and,
accordingly, recorded a cumulative change in accounting
principle charge of $4.0 million.

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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 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.
|
| | 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.                     
|
| | 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.                  

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 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 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 our 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.
|
| | Cost of Custom Development Services Revenue.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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

Sales and Marketing 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 fewer 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.

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Research and Development Expenses.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.

General and Administrative Expenses.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.

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. The decrease
in stock-based compensation expense from the prior year is
primarily the result of a $3.0 million decline in charges
for non-employee stock options and warrants and a
$1.1 million decline in charges for modifications of stock
option terms for employees, partially offset by a
$3.1 million charge from the Signature Software 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 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 fiscal 2001, we recognized
$3.6 million in amortization.

Restructuring and Other Special Charges.Throughout fiscal 2001, we announced
three restructurings of our 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 our cost
structure with projected operations in the future, preserve
cash, and in the case of the Brightware transaction, eliminate
redundant operations. We reduced headcount and facilities as
well as wrote off excess equipment and terminated and
restructured certain contractual relationships. Overall, we
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.

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 us. We
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

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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, Net of Expense.Interest income, net of expense
decreased $365,000, or 9%, 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 198.1%, to
$626,000 in expense in fiscal 2001 from $639,000 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 35,997 shares of
common stock at an exercise price of $52.50 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.

Liquidity and Capital Resources

As of October 31, 2002, cash and cash
equivalents were $13.5 million and short-term investments
were $15.7 million as compared with $34.7 million of
cash and cash equivalents and $9.6 million of short-term
investments as of October 31, 2001. Our working capital at
October 31, 2002 was $18.6 million compared to a
working capital of $30.8 million at October 31, 2001.

Net cash used in operating activities was
$15.5 million in the year ended October 31, 2002,
compared with net cash used in operating activities of $53.0
million in the year ended October 31, 2001, and net cash
provided by operating activities of $3.2 million in the
year ended October 31, 2000. Cash used in operating
activities in the year ended October 31, 2002 was primarily
attributable to our net loss, as well as changes in various
working capital accounts, offset by non-cash restructuring
charges, stock-based compensation, depreciation and
amortization, impairment of development and know-how, and
cumulative effect of a change in accounting principle.

Net cash used in investing activities was
$5.8 million in the year ended October 31, 2002
compared with net cash provided by investing activities of
$16.3 million in the year ended October 31, 2001, and
net cash used in investing activities of $40.7 million in
the year ended October 31, 2000. Net cash used in investing
activities in the year ended October 31, 2002 was primarily
attributable to the purchase of short-term investments offset by
proceeds from sales and maturities of short-term investments.

Net cash provided by financing activities was
$79,000 in the year ended October 31, 2002, compared with
net cash used in financing activities of $8.1 million in
the year ended October 31, 2001, and net cash provided by
financing activities of $114.9 million in the year ended
October 31, 2000. Net cash provided by financing activities
for the year ended October 31, 2002 was from the exercise
of stock options.

We lease facilities under non-cancelable
operating leases which have various expiration dates ranging
from 2002 to 2005. At October 31, 2002, future minimum
annual lease payments amounted to $1.9 million under these
leases.

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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 December 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of SFAS No. 123,(SFAS No. 148),
which provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim
financial statements about our method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. We believe the adoption of this
standard will not have a material effect on our consolidated
financial statements.

In June 2002, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities(SFAS No. 146) which nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). This accounting standard
requires that liabilities associated with exit or disposal
activities initiated after October 31, 2002 be recognized
and measured at fair value when incurred, as opposed to at the
date an entity commits to the exit or disposal plans. We expect
that the adoption of this new standard would have an impact on
the timing of any future restructuring charges.

In April 2002, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical
Corrections(SFAS No. 145). This accounting
standard, which is effective for fiscal years beginning after
May 15, 2002, requires, among other things, that debt
extinguishments used as a part of an entitys risk
management strategy no longer meet the criteria for
classification as extraordinary items. The adoption of
SFAS No. 145 is not expected to have a material effect
on our financial position or results of operations.

Effective November 1, 2001, we adopted SFAS
No. 142, Goodwill and Other Intangible Assets, which
establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes Accounting
Principles Board (APB) Opinion No. 17, Intangible
Assets. SFAS No. 142 requires that goodwill and
intangible assets that have indefinite useful lives not be
amortized but, instead, tested at least annually for impairment.
A two-step impairment test is used to first identify potential
goodwill impairment and then measure the amount of goodwill
impairment loss, if any. Impairment losses that arise due to the
initial application of this standard will be reported as a
cumulative effect of change in accounting principle. See
Note 18 of the Notes to Consolidated Financial
Statements of this annual report for a further discussion
of the impact of this statement on our consolidated financial
statements.

Effective November 1, 2001, we adopted SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This statement supersedes 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

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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. See Note 17 of the Notes to
Consolidated Financial Statements of this annual report
for a further discussion of the impact of this statement on our
consolidated financial statements.





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.     Consolidated
Financial Statements and Supplementary Data

The financial statements and supplementary data
required by this Item 8 are listed in Item 15(a)
(1) and begin at page F-1 of this report.

The quarterly financial information required by
this Item 8 is included in Note 20 of the Notes
to Consolidated Financial Statements.






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

Not applicable




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 2003 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 2003 Annual
Meeting of Stockholders.






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

The response to this item is incorporated by
reference to the information under the caption Security
Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters in our Proxy Statement for the
2003 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 2003 Annual Meeting of Stockholders.






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

Our principal executive officer and principal
financial officer have concluded, based on their evaluation
within 90 days of the filing date of this report, that our
disclosure controls and procedures are effective for

34



---



##### Table of Contents



gathering, analyzing and disclosing the
information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934. There have been no
significant changes in our internal controls or in other factors
that could significantly affect the internal controls subsequent
to the date of their evaluation.





PART IV






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

(a)(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 Accountants
    (PricewaterhouseCoopers LLP)                                                           |  |      | F-2 | 
|Report of Independent Public Accountants (Arthur
    Andersen)                                                               |  |      | F-3 | 
|Consolidated Balance Sheets as of
    October 31, 2002 and 2001                                                              |  |      | F-4 | 
|Consolidated Statements of Operations for the
    Fiscal Years Ended October 31, 2002, 2001 and 2000                         |  |      | F-5 | 
|Consolidated Statements of Stockholders
    Equity (Deficit) for the Fiscal Years Ended October 31,
    2002, 2001 and 2000 |  |      | F-6 | 
|Consolidated Statements of Cash Flows for the
    Fiscal Years Ended October 31, 2002, 2001 and 2000                         |  |      | F-7 | 
|Notes to Consolidated Financial Statements                                                                                   |  |      | F-8 | 

(a)(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.

(a)(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.

(b) Reports on Form 8-K

On August 16, 2002 the registrant filed a
current report on Form 8-K relating to a one-for-ten
reverse split of the common stock.

35



---



##### 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
Bloomington, State of Minnesota, on January 29, 2003.



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



| |     |                    
| | --- | -------------------
| | By: | /s/ SUSAN W. LEDOUX

| |                        
| | -----------------------
| |                        
| | Susan W. Ledoux        
| | Chief Financial Officer

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, 2003
|                                              
|/s/ SUSAN W. LEDOUXSusan W. Ledoux             |  | Chief Financial Officer
    (Principal Financial Officer and Principal Accounting Officer) |  | January 29, 2003
|                                              
|/s/ JOHN CACHIANESJohn Cachianes               |  | Director                                                                                   |  | January 29, 2003
|                                              
|/s/ J. MICHAEL CLINEJ. Michael Cline           |  | Director                                                                                   |  | January 29, 2003
|                                              
|/s/ WILLIAM O. GRABEWilliam O. Grabe           |  | Director                                                                                   |  | January 29, 2003
|                                              
|/s/ ERIC RUBINOEric Rubino                     |  | Director                                                                                   |  | January 29, 2003
|                                              
|/s/ VERNON LAWRENCE WEBERVernon Lawrence Weber |  | Director                                                                                   |  | January 29, 2003

36



---



##### Table of Contents



CERTIFICATIONS

I, Klaus P. Besier, certify that:



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



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



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



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



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

Date: January 29, 2003

/s/ KLAUS P. BESIER




Klaus P. Besier


Chairman, Chief Executive Officer and
Director


(Principal Executive Officer)


37



---



##### Table of Contents



I, Susan W. Ledoux, certify that:



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



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



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



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



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

Date: January 29, 2003

/s/ SUSAN W. LEDOUX




Susan W. Ledoux


Chief Financial Officer


(Principal Financial Officer)


38



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

|                                                                                                                              |  |      |     | 
|----------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                              |  | Page
|                                                                                                                              |  |     
|Report of Independent Accountants
    (PricewaterhouseCoopers LLP)                                                            |  |      | F-2 | 
|Report of Independent Public Accountants (Arthur
    Andersen)                                                                |  |      | F-3 | 
|Consolidated Balance Sheets as of
    October 31, 2002 and 2001.                                                              |  |      | F-4 | 
|Consolidated Statements of Operations for the
    Fiscal Years Ended October 31, 2002, 2001 and 2000                          |  |      | F-5 | 
|Consolidated Statements of Stockholders
    Equity (Deficit) for the Fiscal Years Ended October 31,
    2002, 2001 and 2000. |  |      | F-6 | 
|Consolidated Statements of Cash Flows for the
    Fiscal Years Ended October 31, 2002, 2001 and 2000                          |  |      | F-7 | 
|Notes to Consolidated Financial Statements                                                                                    |  |      | F-8 | 

F-1



---



##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Firepond, Inc.:

In our opinion, the accompanying consolidated
balance sheet as of October 31, 2002 and the related
consolidated statements of operations, stockholders equity
(deficit) and cash flows present fairly, in all material
respects, the financial position of Firepond, Inc. and its
subsidiaries at October 31, 2002, and the results of their
operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally
accepted in the United States of America, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The financial
statements of Firepond, Inc. as of October 31, 2001 and for
each of the two years in the period ended October 31,2001,
prior to the revisions described in Note 1, were audited by
other independent accountants who have ceased operations. Those
independent accountants expressed an unqualified opinion on
those financial statements in their report dated
November 21, 2001, except with respect to the matter
discussed in Note 18 (to those prior period financial
statements) as to which the date is January 14, 2002.

As discussed in Note 18 to the consolidated
financial statements, the Company changed its method of
accounting for goodwill and other intangible assets upon
adoption of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible
Assetson November 1, 2001.

As discussed above, the financial statements of
Firepond, Inc. as of October 31, 2001, and for each of the
two years in the period ended October 31, 2001, were
audited by other independent accountants who have ceased
operations. As described in Note 1, these financial
statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets, which was adopted by the Company as of
November 1, 2001. As also discussed in Note 1, these
financial statements were also revised to reflect the 1-for-10
reverse stock split, which was effective August 16, 2002.
We audited the transitional disclosures for 2001 and 2000
described in Note 1. We also audited the adjustments
described in Note 1 that were applied to revise the 2001
and 2000 financial statements for the 1-for-10 reverse stock
split. In our opinion, such adjustments and transitional
disclosures are appropriate and have been properly applied.
However, we were not engaged to audit, review, or apply any
procedures to the 2001 or 2000 financial statements of the
Company other than with respect to such adjustments and
transitional disclosures, accordingly, we do not express an
opinion or any other form of assurance on the 2001 or 2000
financial statements taken as a whole.



| |                           
| | --------------------------
| | PricewaterhouseCoopers LLP

Boston, Massachusetts

December 4, 2002


F-2



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##### Table of Contents



REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

THIS REPORT IS A COPY OF THE PREVIOUSLY ISSUED
REPORT COVERING FISCAL YEARS 2001 AND 2000. THE PREDECESSOR
AUDITOR HAS NOT REISSUED ITS REPORT.

AS DISCUSSED IN NOTE 1, FIREPOND, INC. HAS
REVISED ITS FINANCIAL STATEMENTS FOR THE YEARS ENDED
OCTOBER 31, 2001 AND 2000 TO INCLUDE THE TRANSITIONAL
DISCLOSURES REQUIRED BY STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS, AND TO REFLECT A 1-FOR-10 REVERSE STOCK SPLIT. THE
ANDERSEN REPORT DOES NOT EXTEND TO THESE CHANGES. THE REVISIONS
TO THE 2001 AND 2000 FINANCIAL STATEMENTS RELATED TO THESE
TRANSITIONAL DISCLOSURES AND THE 1-FOR-10 REVERSE STOCK SPLIT
WERE REPORTED ON BY PRICEWATERHOUSECOOPERS LLP, AS STATED IN
THEIR REPORT APPEARING HEREIN.

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)






---

|  |                                                                                                                                                                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The Companys consolidated balance sheet as
    of October 31, 2000 and the consolidated statements of
    operations, stockholders equity (deficit) and cash
    flows for the year ended October 31, 1999 are not included
    in this Form 10-K. Additionally, the discussion of the
    subsequent event previously discussed in Note 18, is now
    included in Note 10.

F-3



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                            |                                                                                    |                                                                                                                |        |          |        |   |        |          |        | 
|------------------------------------------- | ---------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ------ | -------- | ------ | - | ------ | -------- | ------ | 
|                                            |                                                                                    |                                                                                                               
|                                            |                                                                                    | October 31,                                                                                                   
|                                            |                                                                                    |                                                                                                               
|                                            |                                                                                    | 2002                                                                                                           |        | 2001    
|                                            |                                                                                    |                                                                                                                |        |         
|                                            |                                                                                    |                                                                                                               
|                                            |                                                                                    | (In thousands, except per                                                                                     
|                                            |                                                                                    | share data)                                                                                                   
|ASSETS                                     
|Current assets:                             |                                                                                    |                                                                                                                |        |          |        |   |        |         
|                                            | Cash and cash equivalents                                                          |                                                                                                                | $      | 13,479   |        |   | $      | 34,660   |       
|                                            | Short-term investments                                                             |                                                                                                                |        | 15,690   |        |   |        | 9,593    |       
|                                            | Accounts receivable, net of allowance for
    doubtful accounts of $463 and $1,292 |                                                                                                                |        | 2,798    |        |   |        | 10,310   |       
|                                            | Unbilled revenue                                                                   |                                                                                                                |        | 268      |        |   |        | 594      |       
|                                            | Restricted cash                                                                    |                                                                                                                |        | 199      |        |   |        |         |       
|                                            | Prepaid expenses and other current assets                                          |                                                                                                                |        | 982      |        |   |        | 2,118    |       
|                                            |                                                                                    |                                                                                                                |        |          |        |   |        |         
|                                            |                                                                                    | Total current assets                                                                                           |        |          | 33,416 |   |        |          | 57,275 | 
|                                            | Property and equipment, net                                                        |                                                                                                                |        | 2,105    |        |   |        | 5,356    |       
|                                            | Goodwill, net of accumulated amortization of $0
    and $2,278                     |                                                                                                                |        |         |        |   |        | 7,371    |       
|                                            | Other intangible assets, net of accumulated
    amortization of $77 and $1,157     |                                                                                                                |        | 137      |        |   |        | 3,743    |       
|                                            | Restricted cash                                                                    |                                                                                                                |        | 190      |        |   |        | 550      |       
|                                            | Other assets                                                                       |                                                                                                                |        | 511      |        |   |        | 843      |       
|                                            |                                                                                    |                                                                                                                |        |          |        |   |        |         
|                                            |                                                                                    | $                                                                                                              | 36,359 |          |        | $ | 75,138 |         
|                                            |                                                                                    |                                                                                                                |        |          |        |   |        |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY   
|Current liabilities:                        |                                                                                    |                                                                                                                |        |          |        |   |        |         
|                                            | Accounts payable                                                                   |                                                                                                                | $      | 1,546    |        |   | $      | 1,790    |       
|                                            | Accrued liabilities                                                                |                                                                                                                |        | 5,062    |        |   |        | 7,752    |       
|                                            | Accrued merger and restructuring                                                   |                                                                                                                |        | 2,266    |        |   |        | 6,179    |       
|                                            | Deferred revenue                                                                   |                                                                                                                |        | 5,952    |        |   |        | 10,802   |       
|                                            |                                                                                    |                                                                                                                |        |          |        |   |        |         
|                                            |                                                                                    | Total current liabilities                                                                                      |        |          | 14,826 |   |        |          | 26,523 | 
|Long-term accrued merger and restructuring  |                                                                                    |                                                                                                                | 160    |          |        |   | 1,102  |         
|Commitments and contingencies (see Note 10) |                                                                                    |                                                                                                                |        |          |        |   |        |         
|Stockholders equity:                       |                                                                                    |                                                                                                                |        |          |        |   |        |         
|Preferred stock, $0.10 par value           |                                                                                    |                                                                                                                |        |          |        |   |        |         
|                                            |                                                                                    | Authorized  5,000,000 shares;                                                                                 |        |          |        |   |        |          |        | 
|                                            |                                                                                    | Issued and outstanding  none at
    October 31, 2002 and October 31, 2001                                     |        |          |       |   |        |          |       | 
|Common stock, $0.10 par value              |                                                                                    |                                                                                                                |        |          |        |   |        |         
|                                            |                                                                                    | Authorized  100,000,000 shares;                                                                               |        |          |        |   |        |          |        | 
|                                            |                                                                                    | Issued and outstanding  3,684,983
    shares at October 31, 2002 and 3,731,687 shares at
    October 31, 2001 |        |          | 369    |   |        |          | 373    | 
|                                            | Additional paid-in capital                                                         |                                                                                                                |        | 198,935  |        |   |        | 202,231  |       
|                                            | Accumulated deficit                                                                |                                                                                                                |        | (172,094 | )      |   |        | (148,416 | )     
|                                            | Loans receivable                                                                   |                                                                                                                |        | (4,287   | )      |   |        | (4,407   | )     
|                                            | Deferred compensation                                                              |                                                                                                                |        | (10      | )      |   |        | (1,285   | )     
|                                            | Accumulated other comprehensive loss                                               |                                                                                                                |        | (1,540   | )      |   |        | (983     | )     
|                                            |                                                                                    |                                                                                                                |        |          |        |   |        |         
|                                            |                                                                                    | Total stockholders equity                                                                                     |        |          | 21,373 |   |        |          | 47,513 | 
|                                            |                                                                                    |                                                                                                                |        |          |        |   |        |         
|                                            |                                                                                    | $                                                                                                              | 36,359 |          |        | $ | 75,138 |         
|                                            |                                                                                    |                                                                                                                |        |          |        |   |        |         

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

F-4



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |        |        |        | 
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ----------------------------- | ----- | ------ | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | 
|                                                                                              |                                                                                                                               |                                            
|                                                                                              |                                                                                                                               | Fiscal Years Ended October 31,             
|                                                                                              |                                                                                                                               |                                            
|                                                                                              |                                                                                                                               | 2002                                        |                               | 2001  |        | 2000  
|                                                                                              |                                                                                                                               |                                             |                               |       |        |       
|                                                                                              |                                                                                                                               |                                            
|                                                                                              |                                                                                                                               | (In thousands, except per share data)      
|Revenue:                                                                                      |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|                                                                                              | Product-related revenue:                                                                                                      |                                             |                               |       |        |        |         |        |        |        |         |        |       
|                                                                                              |                                                                                                                               | License                                     |                               | $     | 5,584  |        |         | $      | 14,848 |        |         | $      | 23,128 |       
|                                                                                              |                                                                                                                               | Services and maintenance                    |                               |       | 14,505 |        |         |        | 26,709 |        |         |        | 24,265 |       
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|                                                                                              |                                                                                                                               |                                             | Total product-related revenue |       |        | 20,089 |         |        |        | 41,557 |         |        |        | 47,393 | 
|                                                                                              |                                                                                                                               | Custom development services                 |                               |       | 1,549  |        |         |        | 4,532  |        |         |        | 14,579 |       
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|                                                                                              |                                                                                                                               |                                             | Total revenue                 |       |        | 21,638 |         |        |        | 46,089 |         |        |        | 61,972 | 
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|                                                                                              | Cost of revenue:                                                                                                              |                                             |                               |       |        |        |         |        |        |        |         |        |       
|                                                                                              |                                                                                                                               | License                                     |                               |       | 104    |        |         |        | 524    |        |         |        | 499    |       
|                                                                                              |                                                                                                                               | Product-related services and maintenance(1) |                               |       | 9,168  |        |         |        | 29,094 |        |         |        | 16,485 |       
|                                                                                              |                                                                                                                               | Custom development services                 |                               |       | 737    |        |         |        | 1,171  |        |         |        | 5,773  |       
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|                                                                                              |                                                                                                                               |                                             | Total cost of revenue         |       |        | 10,009 |         |        |        | 30,789 |         |        |        | 22,757 | 
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|Gross profit                                                                                  |                                                                                                                               |                                             | 11,629                        |       |        |        | 15,300  |        |        |        | 39,215  |       
|Operating expenses:                                                                           |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|                                                                                              | Sales and marketing(1)                                                                                                        |                                             |                               | 7,826 |        |        |         | 25,131 |        |        |         | 27,904 |       
|                                                                                              | Research and development(1)                                                                                                   |                                             |                               | 9,349 |        |        |         | 18,838 |        |        |         | 15,264 |       
|                                                                                              | General and administrative(1)                                                                                                 |                                             |                               | 7,164 |        |        |         | 10,981 |        |        |         | 9,449  |       
|                                                                                              | Stock-based compensation                                                                                                      |                                             |                               | 795   |        |        |         | 4,470  |        |        |         | 6,680  |       
|                                                                                              | Amortization of goodwill and other intangible
    assets                                                                      |                                             |                               | 486   |        |        |         | 3,554  |        |        |         |       |       
|                                                                                              | Restructuring and other special charges                                                                                       |                                             |                               | 3,420 |        |        |         | 18,243 |        |        |         | (500   | )     
|                                                                                              | Settlement of claim                                                                                                           |                                             |                               |      |        |        |         | 1,211  |        |        |         |       |       
|                                                                                              | Acquired in-process research and development                                                                                  |                                             |                               |      |        |        |         | 6,200  |        |        |         |       |       
|                                                                                              | Impairment of developed technology and know-how                                                                               |                                             |                               | 3,120 |        |        |         |       |        |        |         |       |       
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|                                                                                              |                                                                                                                               |                                             | Total operating expenses      |       |        | 32,160 |         |        |        | 88,628 |         |        |        | 58,797 | 
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|Loss from operations                                                                          |                                                                                                                               |                                             | (20,531                       | )     |        |        | (73,328 | )      |        |        | (19,582 | )     
|Interest income                                                                               |                                                                                                                               |                                             | 643                           |       |        |        | 3,777   |        |        |        | 5,071   |       
|Interest expense                                                                              |                                                                                                                               |                                             | (136                          | )     |        |        | (104    | )      |        |        | (1,033  | )     
|Other income (expense), net                                                                   |                                                                                                                               |                                             | 319                           |       |        |        | (626    | )      |        |        | 639     |       
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|Loss before extraordinary items and cumulative
    effect of a change in accounting principle |                                                                                                                               |                                             | (19,705                       | )     |        |        | (70,281 | )      |        |        | (14,905 | )     
|Loss on extinguishment of debt                                                                |                                                                                                                               |                                             |                              |       |        |        |        |        |        |        | (1,437  | )     
|Cumulative effect of a change in accounting
    principle                                     |                                                                                                                               |                                             | (3,973                        | )     |        |        |        |        |        |        |        |       
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|Net loss                                                                                      |                                                                                                                               |                                             | (23,678                       | )     |        |        | (70,281 | )      |        |        | (16,342 | )     
|Stock dividend paid to preferred stockholders                                                 |                                                                                                                               |                                             |                              |       |        |        |        |        |        |        | (65,542 | )     
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|Loss applicable to common stockholders                                                        |                                                                                                                               | $                                           | (23,678                       | )     |        | $      | (70,281 | )      |        | $      | (81,884 | )     
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|Net loss per share:                                                                           |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|                                                                                              | Basic and diluted loss per share before
    extraordinary items and cumulative effect of a change in
    accounting principle |                                             | $                             | (5.37 | )      |        | $       | (19.52 | )      |        | $       | (5.27  | )     
|                                                                                              | Extraordinary item                                                                                                            |                                             |                               |      |        |        |         |       |        |        |         | (0.51  | )     
|                                                                                              | Cumulative effect of a change in accounting
    principle                                                                     |                                             |                               | (1.09 | )      |        |         |       |        |        |         |       |       
|                                                                                              | Stock dividend paid to preferred stockholders                                                                                 |                                             |                               |      |        |        |         |       |        |        |         | (23.17 | )     
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|                                                                                              | Basic and diluted loss per share applicable to
    common stockholders                                                        |                                             | $                             | (6.46 | )      |        | $       | (19.52 | )      |        | $       | (28.95 | )     
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|                                                                                              | Basic and diluted weighted average common shares
    outstanding                                                              |                                             |                               | 3,668 |        |        |         | 3,601  |        |        |         | 2,828  |       
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|Pro forma net loss per share:                                                                 |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|                                                                                              | Pro forma net loss per share                                                                                                  |                                             |                               |       |        |        |         |        |        |        | $       | (4.97  | )     
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       
|                                                                                              | Pro forma basic and diluted weighted average
    common shares outstanding                                                    |                                             |                               |       |        |        |         |        |        |        |         | 3,287  |       
|                                                                                              |                                                                                                                               |                                             |                               |       |        |        |         |        |        |        |         |       



---



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

|                               |                            |                                |     |      |  |      |       |       |  |   |       |       | 
|------------------------------ | -------------------------- | ------------------------------ | --- | ---- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                               |                            |                               
|                               |                            | Fiscal Years Ended October 31,
|                               |                            |                               
|                               |                            | 2002                           |     | 2001 |  | 2000
|                               |                            |                                |     |      |  |     
|Cost of revenue                |                            | $                              | 72  |      |  | $    | 84    |       |  | $ | 568   |      
|Operating expenses:            |                            |                                |     |      |  |      |       |       |  |   |       |      
|                               | Sales and marketing        |                                |     | 2    |  |      |       | 181   |  |   |       | 4,193 | 
|                               | Research and development   |                                |     | 111  |  |      |       | 300   |  |   |       | 1,261 | 
|                               | General and administrative |                                |     | 610  |  |      |       | 3,905 |  |   |       | 658   | 
|                               |                            |                                |     |      |  |      |       |       |  |   |       |      
|Total stock-based compensation |                            | $                              | 795 |      |  | $    | 4,470 |       |  | $ | 6,680 |      
|                               |                            |                                |     |      |  |      |       |       |  |   |       |      

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

F-5



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

|                                                                |  |                                       |            |              |  |        |      |       |  |            |           |             |  |   |     |   |  |   |         |   |  |   |          |  
|--------------------------------------------------------------- |  | ------------------------------------- | ---------- | ------------ |  | ------ | ---- | ----- |  | ---------- | --------- | ----------- |  | - | --- | - |  | - | ------- | - |  | - | -------- | -
|                                                                |  |                                       |            |              |  |        |      |      
|                                                                |  | Preferred Stock                       |            | Common Stock |  |        |      |      
|                                                                |  |                                       |            |              |  |        |      |      
|                                                                |  |                                       |            | $0.10        |  |        |      | $0.10 |  | Additional |           |            
|                                                                |  |                                       |            | Par          |  |        |      | Par   |  | Paid-in    |           | Accumulated
|                                                                |  | Shares                                |            | Value        |  | Shares |      | Value |  | Capital    |           | Deficit    
|                                                                |  |                                       |            |              |  |        |      |       |  |            |           |            
|                                                                |  |                                      
|                                                                |  | (In thousands, except per share data)
|Balance, October 31, 1999                                       |  |                                       | 1,909,779  |              |  | $      | 191  |       |  |            | 1,007,281 |             |  | $ | 101 |   |  | $ | 62,380  |   |  | $ | (61,793  | )
|Exercise of common stock options and warrants                   |  |                                       |           |              |  |        |     |       |  |            | 303,582   |             |  |   | 30  |   |  |   | 9,844   |   |  |   |         |  
|Payments by stockholders                                        |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   |        |   |  |   |         |  
|Issuance of common stock at initial public
    offering         |  |                                       |           |              |  |        |     |       |  |            | 566,666   |             |  |   | 57  |   |  |   | 113,742 |   |  |   |         |  
|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                 |  |                                       | (1,909,779 | )            |  |        | (191 | )     |  |            | 1,273,186 |             |  |   | 127 |   |  |   | 64      |   |  |   |         |  
|Priority payments to stockholders                               |  |                                       |           |              |  |        |     |       |  |            | 381,258   |             |  |   | 38  |   |  |   | (38     | ) |  |   |         |  
|Deferred stock- based compensation                              |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   | 2,965   |   |  |   |         |  
|Stock-based compensation expense                                |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   |        |   |  |   |         |  
|Issuance of restricted common shares                            |  |                                       |           |              |  |        |     |       |  |            | 27,626    |             |  |   | 3   |   |  |   | 3,896   |   |  |   |         |  
|Currency translation adjustment                                 |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   |        |   |  |   |         |  
|Unrealized net loss on investments                              |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   |        |   |  |   |         |  
|Net loss                                                        |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   |        |   |  |   | (16,342  | )
|Comprehensive loss for the year ended
    October 31, 2000      |  |                                       |            |              |  |        |      |       |  |            |           |             |  |   |     |   |  |   |         |   |  |   |          |  
|                                                                |  |                                       |            |              |  |        |      |       |  |            |           |             |  |   |     |   |  |   |         |   |  |   |          |  
|Balance, October 31, 2000                                       |  |                                       |           |              |  |        |     |       |  |            | 3,559,599 |             |  |   | 356 |   |  |   | 195,166 |   |  |   | (78,135  | )
|Exercise of common stock options and warrants                   |  |                                       |           |              |  |        |     |       |  |            | 39,557    |             |  |   | 4   |   |  |   | 1,546   |   |  |   |         |  
|Deferred stock- based compensation reversal                     |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   | (322    | ) |  |   |         |  
|Stock-based compensation expense                                |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   |        |   |  |   |         |  
|Issuance of shares for acquisition of Brightware                |  |                                       |           |              |  |        |     |       |  |            | 132,531   |             |  |   | 13  |   |  |   | 5,841   |   |  |   |         |  
|Loans receivable                                                |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   |        |   |  |   |         |  
|Currency translation adjustment                                 |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   |        |   |  |   |         |  
|Unrealized net gain on investments                              |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   |        |   |  |   |         |  
|Net loss                                                        |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   |        |   |  |   | (70,281  | )
|Comprehensive loss for the year ended
    October 31, 2001      |  |                                       |            |              |  |        |      |       |  |            |           |             |  |   |     |   |  |   |         |   |  |   |          |  
|                                                                |  |                                       |            |              |  |        |      |       |  |            |           |             |  |   |     |   |  |   |         |   |  |   |          |  
|Balance, October 31, 2001                                       |  |                                       |           |              |  |        |     |       |  |            | 3,731,687 |             |  |   | 373 |   |  |   | 202,231 |   |  |   | (148,416 | )
|Exercise of common stock options and warrants                   |  |                                       |           |              |  |        |     |       |  |            | 16,558    |             |  |   | 2   |   |  |   | 77      |   |  |   |         |  
|Deferred stock- based compensation                              |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   | (593    | ) |  |   |         |  
|Stock-based compensation expense                                |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   |        |   |  |   |         |  
|Return of shares for acquisition of Brightware                  |  |                                       |           |              |  |        |     |       |  |            | (62,762   | )           |  |   | (6  | ) |  |   | (2,773  | ) |  |   |         |  
|Loans receivable                                                |  |                                       |           |              |  |        |     |       |  |            | (500      | )           |  |   |    |   |  |   | (7      | ) |  |   |         |  
|Currency translation adjustment                                 |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   |        |   |  |   |         |  
|Unrealized net gain on investments                              |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   |        |   |  |   |         |  
|Net loss                                                        |  |                                       |           |              |  |        |     |       |  |            |          |             |  |   |    |   |  |   |        |   |  |   | (23,678  | )
|Comprehensive loss for the year ended
    October 31, 2002      |  |                                       |            |              |  |        |      |       |  |            |           |             |  |   |     |   |  |   |         |   |  |   |          |  
|                                                                |  |                                       |            |              |  |        |      |       |  |            |           |             |  |   |     |   |  |   |         |   |  |   |          |  
|Balance, October 31, 2002                                       |  |                                       |           |              |  | $      |     |       |  |            | 3,684,983 |             |  | $ | 369 |   |  | $ | 198,935 |   |  | $ | (172,094 | )
|                                                                |  |                                       |            |              |  |        |      |       |  |            |           |             |  |   |     |   |  |   |         |   |  |   |          |  

[Additional columns below]

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

|                                                                |  |                                       |        |              |  |               |        |                  |  |               |        |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------------------------------- | ------ | ------------ |  | ------------- | ------ | ---------------- |  | ------------- | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                |  |                                       |        |              |  | Accumulated   |        |                  |  |              
|                                                                |  |                                       |        |              |  | Other         |        |                  |  | Comprehensive
|                                                                |  | Loans                                 |        | Deferred     |  | Comprehensive |        | Stockholders    |  | Income       
|                                                                |  | Receivable                            |        | Compensation |  | Income/(Loss) |        | Equity (Deficit) |  | (Loss)       
|                                                                |  |                                       |        |              |  |               |        |                  |  |              
|                                                                |  |                                      
|                                                                |  | (In thousands, except per share data)
|Balance, October 31, 1999                                       |  | $                                     | (13    | )            |  | $             | (5,893 | )                |  | $             | (327   | ) |  | $ | (5,354  | ) |  |   |         |  
|Exercise of common stock options and warrants                   |  |                                       |       |              |  |               |       |                  |  |               |        |   |  |   | 9,874   |   |  |   |         |  
|Payments by stockholders                                        |  |                                       | 13     |              |  |               |       |                  |  |               |       |   |  |   | 13      |   |  |   |         |  
|Issuance of common stock at initial public
    offering         |  |                                       |       |              |  |               |       |                  |  |               |       |   |  |   | 113,799 |   |  |   |         |  
|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                              |  |                                       |       |              |  |               | (2,965 | )                |  |               |       |   |  |   |        |   |  |   |         |  
|Stock-based compensation expense                                |  |                                       |       |              |  |               | 6,680  |                  |  |               |       |   |  |   | 6,680   |   |  |   |         |  
|Issuance of restricted common shares                            |  |                                       |       |              |  |               | (3,899 | )                |  |               |       |   |  |   |        |   |  |   |         |  
|Currency translation adjustment                                 |  |                                       |       |              |  |               |       |                  |  |               | (515   | ) |  |   | (515    | ) |  | $ | (515    | )
|Unrealized net loss on investments                              |  |                                       |       |              |  |               |       |                  |  |               | (4     | ) |  |   | (4      | ) |  |   | (4      | )
|Net loss                                                        |  |                                       |       |              |  |               |       |                  |  |               |       |   |  |   | (16,342 | ) |  |   | (16,342 | )
|                                                                |  |                                       |        |              |  |               |        |                  |  |               |        |   |  |   |         |   |  |   |         |  
|Comprehensive loss for the year ended
    October 31, 2000      |  |                                       |        |              |  |               |        |                  |  |               |        |   |  |   |         |   |  | $ | (16,861 | )
|                                                                |  |                                       |        |              |  |               |        |                  |  |               |        |   |  |   |         |   |  |   |         |  
|Balance, October 31, 2000                                       |  |                                       |       |              |  |               | (6,077 | )                |  |               | (846   | ) |  |   | 110,464 |   |  |   |         |  
|Exercise of common stock options and warrants                   |  |                                       |       |              |  |               |       |                  |  |               |       |   |  |   | 1,550   |   |  |   |         |  
|Deferred stock- based compensation reversal                     |  |                                       |       |              |  |               | 322    |                  |  |               |       |   |  |   |        |   |  |   |         |  
|Stock-based compensation expense                                |  |                                       |       |              |  |               | 4,470  |                  |  |               |       |   |  |   | 4,470   |   |  |   |         |  
|Issuance of shares for acquisition of Brightware                |  |                                       |       |              |  |               |       |                  |  |               |       |   |  |   | 5,854   |   |  |   |         |  
|Loans receivable                                                |  |                                       | (4,407 | )            |  |               |       |                  |  |               |       |   |  |   | (4,407  | ) |  |   |         |  
|Currency translation adjustment                                 |  |                                       |       |              |  |               |       |                  |  |               | (150   | ) |  |   | (150    | ) |  |   | (150    | )
|Unrealized net gain on investments                              |  |                                       |       |              |  |               |       |                  |  |               | 13     |   |  |   | 13      |   |  |   | 13      |  
|Net loss                                                        |  |                                       |       |              |  |               |       |                  |  |               |       |   |  |   | (70,281 | ) |  |   | (70,281 | )
|                                                                |  |                                       |        |              |  |               |        |                  |  |               |        |   |  |   |         |   |  |   |         |  
|Comprehensive loss for the year ended
    October 31, 2001      |  |                                       |        |              |  |               |        |                  |  |               |        |   |  |   |         |   |  | $ | (70,418 | )
|                                                                |  |                                       |        |              |  |               |        |                  |  |               |        |   |  |   |         |   |  |   |         |  
|Balance, October 31, 2001                                       |  |                                       | (4,407 | )            |  |               | (1,285 | )                |  |               | (983   | ) |  |   | 47,513  |   |  |   |         |  
|Exercise of common stock options and warrants                   |  |                                       |       |              |  |               |       |                  |  |               |       |   |  |   | 79      |   |  |   |         |  
|Deferred stock- based compensation                              |  |                                       |       |              |  |               | 675    |                  |  |               |       |   |  |   | 82      |   |  |   |         |  
|Stock-based compensation expense                                |  |                                       |       |              |  |               | 600    |                  |  |               |       |   |  |   | 600     |   |  |   |         |  
|Return of shares for acquisition of Brightware                  |  |                                       |       |              |  |               |       |                  |  |               |       |   |  |   | (2,779  | ) |  |   |         |  
|Loans receivable                                                |  |                                       | 120    |              |  |               |       |                  |  |               |       |   |  |   | 113     |   |  |   |         |  
|Currency translation adjustment                                 |  |                                       |       |              |  |               |       |                  |  |               | (512   | ) |  |   | (512    | ) |  |   | (512    | )
|Unrealized net gain on investments                              |  |                                       |       |              |  |               |       |                  |  |               | (45    | ) |  |   | (45     | ) |  |   | (45     | )
|Net loss                                                        |  |                                       |       |              |  |               |       |                  |  |               |       |   |  |   | (23,678 | ) |  |   | (23,678 | )
|                                                                |  |                                       |        |              |  |               |        |                  |  |               |        |   |  |   |         |   |  |   |         |  
|Comprehensive loss for the year ended
    October 31, 2002      |  |                                       |        |              |  |               |        |                  |  |               |        |   |  |   |         |   |  | $ | (24,235 | )
|                                                                |  |                                       |        |              |  |               |        |                  |  |               |        |   |  |   |         |   |  |   |         |  
|Balance, October 31, 2002                                       |  | $                                     | (4,287 | )            |  | $             | (10    | )                |  | $             | (1,540 | ) |  | $ | 21,373  |   |  |   |         |  
|                                                                |  |                                       |        |              |  |               |        |                  |  |               |        |   |  |   |         |   |  |   |         |  

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

F-6



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                 |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |         |       |        |         |  
|---------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | -
|                                                                 |                                                                                               |                                                                       
|                                                                 |                                                                                               | Fiscal Years Ended October 31,                                        
|                                                                 |                                                                                               |                                                                       
|                                                                 |                                                                                               | 2002                                                                   |                                           | 2001                                                    |       | 2000  
|                                                                 |                                                                                               |                                                                        |                                           |                                                         |       |       
|                                                                 |                                                                                               |                                                                       
|                                                                 |                                                                                               | (In thousands)                                                        
|Cash flows from operating activities:                            |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        
|                                                                 | Net loss                                                                                      |                                                                        | $                                         | (23,678                                                 | )     |        | $       | (70,281 | )     |        | $       | (16,342 | )    
|                                                                 | 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)                             |                                           |                                                         | 1,292 |        |         |         | 4,256 |        |         |         | (500  | )     
|                                                                 |                                                                                               | Issuance of warrants to a customer                                     |                                           |                                                         |      |        |         |         |      |        |         |         | 409   |       
|                                                                 |                                                                                               | Stock-based compensation expense                                       |                                           |                                                         | 795   |        |         |         | 4,470 |        |         |         | 6,680 |       
|                                                                 |                                                                                               | Loss on disposal of property and equipment                             |                                           |                                                         |      |        |         |         |      |        |         |         | 44    |       
|                                                                 |                                                                                               | Depreciation and amortization                                          |                                           |                                                         | 2,862 |        |         |         | 8,190 |        |         |         | 3,062 |       
|                                                                 |                                                                                               | Impairment of developed technology and know-how                        |                                           |                                                         | 3,120 |        |         |         |      |        |         |         |      |       
|                                                                 |                                                                                               | Cumulative effect of change in accounting
    principle                |                                           |                                                         | 3,973 |        |         |         |      |        |         |         |      |       
|                                                                 |                                                                                               | Non-cash interest expense                                              |                                           |                                                         |      |        |         |         |      |        |         |         | 467   |       
|                                                                 |                                                                                               | Loss on early extinguishment of debt                                   |                                           |                                                         |      |        |         |         |      |        |         |         | 1,437 |       
|                                                                 |                                                                                               | Changes in assets and liabilities, net of effects
    of acquisitions: |                                           |                                                         |       |        |         |         |       |        |         |         |       |       
|                                                                 |                                                                                               |                                                                        | Accounts receivable                       |                                                         |       | 7,317  |         |         |       | 5,474  |         |         |       | (5,247 | )      
|                                                                 |                                                                                               |                                                                        | Unbilled services                         |                                                         |       | 292    |         |         |       | 1,082  |         |         |       | (485   | )      
|                                                                 |                                                                                               |                                                                        | Prepaid expenses and other current assets |                                                         |       | 1,392  |         |         |       | 594    |         |         |       | (1,171 | )      
|                                                                 |                                                                                               |                                                                        | Accounts payable                          |                                                         |       | (287   | )       |         |       | (5,603 | )       |         |       | 858    |        
|                                                                 |                                                                                               |                                                                        | Accrued liabilities                       |                                                         |       | (2,789 | )       |         |       | (7,161 | )       |         |       | 7,210  |        
|                                                                 |                                                                                               |                                                                        | Deferred revenue                          |                                                         |       | (4,979 | )       |         |       | (5,881 | )       |         |       | 6,702  |        
|                                                                 |                                                                                               |                                                                        | Restructuring accrual                     |                                                         |       | (4,855 | )       |         |       | 5,637  |         |         |       | 108    |        
|                                                                 |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        
|                                                                 |                                                                                               |                                                                        |                                           | Net cash (used in) provided by operating
    activities |       |        | (15,545 | )       |       |        | (53,023 | )       |       |        | 3,232   |  
|                                                                 |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        
|Cash flows from investing activities:                            |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        
|                                                                 | Purchases of short-term investments                                                           |                                                                        |                                           | (38,864                                                 | )     |        |         | (13,303 | )     |        |         | (49,628 | )    
|                                                                 | Purchases of long-term investments                                                            |                                                                        |                                           |                                                        |       |        |         |        |       |        |         | (2,558  | )    
|                                                                 | Proceeds from the sale and maturities of short
    and long-term investments                  |                                                                        |                                           | 32,721                                                  |       |        |         | 40,470  |       |        |         | 15,449  |      
|                                                                 | Purchases of property and equipment                                                           |                                                                        |                                           | (392                                                    | )     |        |         | (4,115  | )     |        |         | (3,856  | )    
|                                                                 | Return of cash from escrow                                                                    |                                                                        |                                           | 617                                                     |       |        |         |        |       |        |         |        |      
|                                                                 | Decrease in restricted cash                                                                   |                                                                        |                                           | 161                                                     |       |        |         |        |       |        |         |        |      
|                                                                 | Payment for acquisition, net of cash acquired and
    acquisition costs paid                  |                                                                        |                                           |                                                        |       |        |         | (6,855  | )     |        |         | 29      |      
|                                                                 | (Increase) decrease in other assets                                                           |                                                                        |                                           |                                                        |       |        |         | 88      |       |        |         | (179    | )    
|                                                                 |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        
|                                                                 |                                                                                               |                                                                        |                                           | Net cash provided by (used in) investing
    activities |       |        | (5,757  | )       |       |        | 16,285  |         |       |        | (40,743 | )
|                                                                 |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        
|Cash flows from financing activities:                            |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        
|                                                                 | Payments on line of credit                                                                    |                                                                        |                                           |                                                        |       |        |         |        |       |        |         | (6,740  | )    
|                                                                 | Borrowings on note payable                                                                    |                                                                        |                                           | 880                                                     |       |        |         |        |       |        |         |        |      
|                                                                 | Payments on note payable                                                                      |                                                                        |                                           | (880                                                    | )     |        |         |        |       |        |         |        |      
|                                                                 | Payments on long-term debt                                                                    |                                                                        |                                           |                                                        |       |        |         | (395    | )     |        |         | (2,003  | )    
|                                                                 | Payments on Brightware debt                                                                   |                                                                        |                                           |                                                        |       |        |         | (4,860  | )     |        |         |        |      
|                                                                 | Issuance of loans receivable                                                                  |                                                                        |                                           |                                                        |       |        |         | (4,407  | )     |        |         |        |      
|                                                                 | Proceeds from common stock issuance, net of
    offering costs                                |                                                                        |                                           |                                                        |       |        |         |        |       |        |         | 113,800 |      
|                                                                 | Proceeds from stock options and warrants exercised                                            |                                                                        |                                           | 79                                                      |       |        |         | 1,550   |       |        |         | 9,845   |      
|                                                                 | Increase (decrease) in subscription
    receivables                                           |                                                                        |                                           |                                                        |       |        |         |        |       |        |         | 13      |      
|                                                                 |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        
|                                                                 |                                                                                               |                                                                        |                                           | Net cash provided by (used in) financing
    activities |       |        | 79      |         |       |        | (8,112  | )       |       |        | 114,915 |  
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                               |                                                                        | 42                                        |                                                         |       |        | 10      |         |       |        | (24     | )      
|                                                                 |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        
|Net increase (decrease) in cash and cash
    equivalents         |                                                                                               |                                                                        | (21,181                                   | )                                                       |       |        | (44,840 | )       |       |        | 77,380  |        
|Cash and cash equivalents, beginning of year                     |                                                                                               |                                                                        | 34,660                                    |                                                         |       |        | 79,500  |         |       |        | 2,120   |        
|                                                                 |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        
|Cash and cash equivalents, end of year                           |                                                                                               | $                                                                      | 13,479                                    |                                                         |       | $      | 34,660  |         |       | $      | 79,500  |        
|                                                                 |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        
|Supplemental cash flow information:                              |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        
|                                                                 | Interest paid                                                                                 |                                                                        | $                                         | 136                                                     |       |        | $       | 104     |       |        | $       | 665     |      
|                                                                 |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        
|Non-cash investing and financing activities:                     |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        
|                                                                 | Warrants issued in conjunction with subordinated
    notes payable                            |                                                                        | $                                         |                                                        |       |        | $       |        |       |        | $       | 1,904   |      
|                                                                 |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        
|                                                                 | Conversion of preferred stock into common stock                                               |                                                                        | $                                         |                                                        |       |        | $       |        |       |        | $       | 191     |      
|                                                                 |                                                                                               |                                                                        |                                           |                                                         |       |        |         |         |       |        |         |        

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) considers itself to be a
pioneer in software solutions that help companies with complex
products convert more leads into accurate orders. Companies with
complex products may achieve a measurable and meaningful return
on investment in Firepond technology by reducing their total
cost of sales, whether they sell through a direct sales force,
an indirect channel network or via the web.

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. 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.

On May 31, 2002, the Company announced that
its senior management had discovered that its acting vice
president of sales was engaged in fraudulent behavior, including
misrepresenting three customer transactions. The fraudulent
transactions involved three contracts with license amounts
totaling approximately $5 million, including a contract
announced in the quarter ended January 31, 2002. The other
two fraudulent transactions were announced in the Companys
May 22, 2002 earnings release as new license contracts for
the second quarter ended April 30, 2002. The Companys
January 31, 2002 condensed consolidated financial
statements have been restated as reflected in the Companys
Form 10-Q/ A for the quarter ended January 31, 2002 as
filed with the Securities and Exchange Commission on
June 19, 2002, to reflect the reversal of the first
fraudulent transaction. In addition, the remaining two
fraudulent transactions were not included in the results for the
quarter ended April 30, 2002. The Company has completed its
investigation of this matter and has determined that no other
transactions were affected. The Securities and Exchange
Commission has initiated a formal inquiry into this matter and
the Company is cooperating with the Securities and Exchange
Commission. In addition, the Company has filed a civil lawsuit
seeking damages against this individual.

These financial statements have been revised to
include transitional disclosures required by Statement of
Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, which was adopted by the
Company as of November 1, 2001, and is disclosed in
Note 18. In addition, these financial statements have been
revised to reflect the 1-for-10 reverse stock split discussed in
Note 11.

2.     Significant
Accounting Policies

(a) Principles
of Consolidation

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. Certain prior year amounts have been reclassified to
conform to the current year presentation.



| |                     
| | --------------------
| | (b) 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.

F-8



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                        
| | -----------------------
| | (c) Revenue Recognition

The Company recognizes revenue based on the
provisions of the American Institute of Certified Pubic
Accountants (AICPA) 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, where
the Company is responsible for implementation services for the
SalesPerformer product suite and its components, the
implementation services are essential to the customers use
of the packaged software products. In such arrangements, the
Company recognizes revenue 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
product suite, 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 product
suite; 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. 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.

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. If an
arrangement includes an acceptance provision, acceptance occurs
upon the earlier of receipt of a written customer acceptance or
expiration of the acceptance period.

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 SOP 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

F-9



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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 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:

|                            |  |                    |       |      |  |   |        | 
|--------------------------- |  | ------------------ | ----- | ---- |  | - | ------ | 
|                            |  |                   
|                            |  | Fiscal Years Ended
|                            |  | October 31,       
|                            |  |                   
|                            |  | 2002               |       | 2001
|                            |  |                    |       |     
|                            |  |                   
|                            |  | (In thousands)    
|Product license             |  | $                  | 1,851 |      |  | $ | 5,073  | 
|Product-related services    |  |                    | 1,353 |      |  |   | 1,957  | 
|Product-related maintenance |  |                    | 2,581 |      |  |   | 3,379  | 
|Custom development services |  |                    | 167   |      |  |   | 393    | 
|                            |  |                    |       |      |  |   |        | 
|                            |  | $                  | 5,952 |      |  | $ | 10,802 | 
|                            |  |                    |       |      |  |   |        | 

Unbilled revenue of $268,000 at October 31,
2002 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.



| |                                    
| | -----------------------------------
| | 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.



| |                    
| | -------------------
| | (d) 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(o).

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.



| |                      
| | ---------------------
| | (e) Advertising Costs

Advertising costs are expensed as incurred.



| |                 
| | ----------------
| | (f) 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.

F-10



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                  
| | ---------------------------------
| | (g) Cash and Cash
    Equivalents

The Company accounts for cash equivalents based
on the guidance in 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 consist of money
market, commercial paper and U.S. federal agency securities.
Cash equivalents are carried at cost, which approximates fair
market value. Total cash equivalents were $9,985,000 and
$31,884,000 at October 31, 2002 and 2001, respectively.



| |                               
| | ------------------------------
| | (h) 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 primarily of
commercial paper and U.S. corporate debt securities with an
original maturity of less than a year from the balance sheet
date. These investments are carried at their market value.
Unrealized investment gains and temporary losses are included as
a separate component of stockholders equity.



| |                               
| | ------------------------------
| | (i) 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, as follows:

|                                |  |             
|------------------------------- |  | ------------
|Computer equipment and software |  | 2 to 5 years
|Furniture and fixtures          |  | 7 years     
|Leasehold improvements          |  | 5 years     

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.



| |                                        
| | ---------------------------------------
| | (j) 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. 144, Accounting for the Impairment
or Disposal of Long-Lived Assetswhich superceded 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 non-financial 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 $824,000 during fiscal 2002 and
$3,891,000 during fiscal 2001 in connection with a restructuring
of the Companys operations, (see Note 7(c)). In
addition, the Company recorded a $3,120,000 charge in fiscal
2002 to write-off the impaired portion of developed technology
and know-how in conjunction with its Brightware acquisition,
(see Note 17).



| |                                     
| | ------------------------------------
| | (k) 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 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

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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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:

|                   |                   |           |  |                     |  |           |  |                |   |  |  |   |  |  |  |    |  
|------------------ | ----------------- | --------- |  | ------------------- |  | --------- |  | -------------- | - |  |  | - |  |  |  | -- | -
|                   |                   |           |  |                    
|                   |                   | Revenue   |  | Accounts Receivable
|                   |                   |           |  |                    
|                   |                   |           |  | Percent of          |  |           |  | Percent of    
|                   |                   | Number of |  | Total               |  | Number of |  | Total Accounts
|                   |                   | Customers |  | Revenue             |  | Customers |  | Receivable    
|                   |                   |           |  |                     |  |           |  |               
|Fiscal year ended: |                   |           |  |                     |  |           |  |                |   |  |  |   |  |  |  |   
|                   | October 31, 2002. |           |  | 1                   |  |           |  | 19             | % |  |  | 2 |  |  |  | 27 | %
|                   | October 31, 2001. |           |  | 1                   |  |           |  | 17             | % |  |  | 1 |  |  |  | 16 | %
|                   | October 31, 2000. |           |  | 2                   |  |           |  | 32             | % |  |  | 2 |  |  |  | 27 | %



| |                              
| | -----------------------------
| | (l) 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.



| |                                 
| | --------------------------------
| | (m) 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 (APB), Opinion No. 25, Accounting for
Stock Issued to Employees,and follows the disclosure-only
alternative under SFAS No. 123, see Note 11(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.



| |                                     
| | ------------------------------------
| | (n) Foreign Currency
    Translation

The local currency is the functional currency of
the Companys subsidiaries. Assets and liabilities are
translated into U.S. dollars at exchange rates in effect at the
balance sheet date, and income and expense items are translated
at average rates for the period. Consolidated foreign currency
transaction results included in other income (expense), net,
were gains of $353,000 in 2002, losses of $510,000 in 2001 and
gains of $821,000 in 2000.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | (o) 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.



| |                                         
| | ----------------------------------------
| | (p) Recent Accounting
    Pronouncements

In December 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amend-

F-12



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

ment of SFAS No. 123,(SFAS No. 148), which provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements
about the Companys method of accounting for stock-based
employee compensation and the effect of the method used on
reported results. The adoption of this standard is not expected
to have a material effect on the Companys consolidated
financial statements.

In June 2002, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities(SFAS No. 146) which nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). This accounting standard
requires that liabilities associated with exit or disposal
activities initiated after October 31, 2002 be recognized
and measured at fair value when incurred as opposed to at the
date an entity commits to the exit or disposal plans. The
Company expects that the adoption of this new standard would
have an impact on the timing of any future restructuring charges.

In April 2002, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical
Corrections(SFAS No. 145). This accounting standard,
which is effective for fiscal years beginning after May 15,
2002, requires, among other things, that debt extinguishments
used as a part of an entitys risk management strategy no
longer meet the criteria for classification as extraordinary
items. The adoption of SFAS No. 145 is not expected to have
a material effect on the Companys financial position or
results of operations.

Effective November 1, 2001, the Company
adopted SFAS No. 142, Goodwill and Other Intangible
Assets, which establishes financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes
Accounting Principles Board (APB) Opinion No. 17,
Intangible Assets. SFAS No. 142 requires that
goodwill and intangible assets that have indefinite useful lives
not be amortized but, instead, tested at least annually for
impairment. A two-step impairment test is used to first identify
potential goodwill impairment and then measure the amount of
goodwill impairment loss, if any. Impairment losses that arise
due to the initial application of this standard will be reported
as a cumulative effect of change in accounting principle. See
Note 18 for a further discussion of the impact of this
statement on the Companys consolidated financial
statements.

Effective November 1, 2001, the Company
adopted SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement supersedes
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. See Note 17 for a
further discussion of the impact of this statement on the
Companys consolidated financial statements.

F-13



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     Short-term
Investments

The amortized cost and fair value of short-term
investments consist of the following:

|                              |                              |                   |        |            |  |   |        |        | 
|----------------------------- | ---------------------------- | ----------------- | ------ | ---------- |  | - | ------ | ------ | 
|                              |                              |                  
|                              |                              | Fiscal Year Ended
|                              |                              | October 31, 2002 
|                              |                              |                  
|                              |                              | Amortized Cost    |        | Fair Value
|                              |                              |                   |        |           
|                              |                              |                  
|                              |                              | (In thousands)   
|Short-term investments:       |                              |                   |        |            |  |   |        |       
|U.S corporate debt securities |                              | $                 | 10,610 |            |  | $ | 10,598 |       
|Commercial paper              |                              |                   | 4,593  |            |  |   | 4,593  |       
|U.S. agency debt obligations  |                              |                   | 499    |            |  |   | 499    |       
|                              |                              |                   |        |            |  |   |        |       
|                              | Total short-term investments |                   | $      | 15,702     |  |   | $      | 15,690 | 
|                              |                              |                   |        |            |  |   |        |       

At October 31, 2002, unrealized gains on
U.S. corporate debt securities were approximately $1,000. The
corresponding unrealized losses were approximately $13,000.

|                              |                              |                   |       |            |  |   |       |       | 
|----------------------------- | ---------------------------- | ----------------- | ----- | ---------- |  | - | ----- | ----- | 
|                              |                              |                  
|                              |                              | Fiscal Year Ended
|                              |                              | October 31, 2001 
|                              |                              |                  
|                              |                              | Amortized Cost    |       | Fair Value
|                              |                              |                   |       |           
|                              |                              |                  
|                              |                              | (In thousands)   
|Short-term investments:       |                              |                   |       |            |  |   |       |      
|U.S corporate debt securities |                              | $                 | 4,506 |            |  | $ | 4,512 |      
|Commercial paper              |                              |                   | 3,087 |            |  |   | 3,089 |      
|U.S. agency debt obligations  |                              |                   | 1,991 |            |  |   | 1,992 |      
|                              |                              |                   |       |            |  |   |       |      
|                              | Total short-term investments |                   | $     | 9,584      |  |   | $     | 9,593 | 
|                              |                              |                   |       |            |  |   |       |      

At October 31, 2001, unrealized gains on
U.S. corporate debt securities, commercial paper, and U.S.
agency debt were approximately $6,000, $2,000, and $1,000,
respectively.

Realized gains of available-for-sale securities
for the year ended October 31, 2001were approximately $2,000.

4.     Property and
Equipment

Property and equipment consist of the following:

|                        |                                                 |                             |       |        |       |  |       |        |       | 
|----------------------- | ----------------------------------------------- | --------------------------- | ----- | ------ | ----- |  | ----- | ------ | ----- | 
|                        |                                                 |                            
|                        |                                                 | Fiscal Years Ended         
|                        |                                                 | October 31,                
|                        |                                                 |                            
|                        |                                                 | 2002                        |       | 2001  
|                        |                                                 |                             |       |       
|                        |                                                 |                            
|                        |                                                 | (In thousands)             
|Property and equipment: |                                                 |                             |       |        |       |  |       |       
|                        | Computer equipment and software                 |                             | $     | 5,523  |       |  | $     | 7,978  |      
|                        | Furniture and fixtures                          |                             |       | 586    |       |  |       | 1,418  |      
|                        | Leasehold improvements                          |                             |       | 369    |       |  |       | 561    |      
|                        |                                                 |                             |       |        |       |  |       |       
|                        |                                                 |                             | 6,478 |        |       |  | 9,957 |       
|                        | Less: accumulated depreciation and amortization |                             |       | (4,373 | )     |  |       | (4,601 | )    
|                        |                                                 |                             |       |        |       |  |       |       
|                        |                                                 | Property and equipment, net |       | $      | 2,105 |  |       | $      | 5,356 | 
|                        |                                                 |                             |       |        |       |  |       |       

Depreciation expense was approximately $2,353,000
for fiscal 2002, $4,151,000 for fiscal 2001, and $3,021,000 for
fiscal 2000.

F-14



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     Accrued
Liabilities

Accrued liabilities consist of the following:

|                                 |                           |                    |       |       |  |   |       |       | 
|-------------------------------- | ------------------------- | ------------------ | ----- | ----- |  | - | ----- | ----- | 
|                                 |                           |                   
|                                 |                           | Fiscal Years Ended
|                                 |                           | October 31,       
|                                 |                           |                   
|                                 |                           | 2002               |       | 2001 
|                                 |                           |                    |       |      
|                                 |                           |                   
|                                 |                           | (In thousands)    
|Consulting and professional fees |                           | $                  | 1,054 |       |  | $ | 991   |      
|Compensation and benefits        |                           |                    | 898   |       |  |   | 2,199 |      
|Sales, use and other taxes       |                           |                    | 1,338 |       |  |   | 1,740 |      
|Facilities and office expenses   |                           |                    | 908   |       |  |   | 782   |      
|Other                            |                           |                    | 864   |       |  |   | 2,040 |      
|                                 |                           |                    |       |       |  |   |       |      
|                                 | Total accrued liabilities |                    | $     | 5,062 |  |   | $     | 7,752 | 
|                                 |                           |                    |       |       |  |   |       |      

6.     Accumulated
Other Comprehensive Loss

The components of accumulated other comprehensive
loss are as follows:

|                                                                   |  |                    |        |      |  |   |      |  
|------------------------------------------------------------------ |  | ------------------ | ------ | ---- |  | - | ---- | -
|                                                                   |  |                   
|                                                                   |  | Fiscal Years Ended
|                                                                   |  | October 31,       
|                                                                   |  |                   
|                                                                   |  | 2002               |        | 2001
|                                                                   |  |                    |        |     
|                                                                   |  |                   
|                                                                   |  | (In thousands)    
|Unrealized (loss) gain on short-term and
    long-term investments |  |                    | (36    | )    |  |   | 9    |  
|Foreign currency translation                                       |  |                    | (1,504 | )    |  |   | (992 | )
|                                                                   |  |                    |        |      |  |   |      |  
|Accumulated other comprehensive loss                               |  | $                  | (1,540 | )    |  | $ | (983 | )
|                                                                   |  |                    |        |      |  |   |      |  

7.     Restructuring
and Other Special Charges



| |                
| | ---------------
| | (a) Fiscal 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 idle lease space of its
Mankato facility. In March 2000, the Company negotiated a new
lease for less space, eliminating the future obligation for the
idle space. As a result, during fiscal 2000, the Company
reversed $500,000 of the restructuring accrual representing the
remaining obligation for the idle lease space.



| |                
| | ---------------
| | (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 considered current market values 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.



| |                
| | ---------------
| | (c) Fiscal 2002

During the quarter ended July 31, 2002, the
Company undertook plans to restructure its operations as a
result of a prolonged slowdown of global information technology
spending, specifically within the enterprise software
marketplace. As such, the Company announced a strategic
realignment to further enhance its focus on the
lead-to-order market as well as measures to better
align its cost structure with projected revenue and preserve
cash. The Company reduced headcount and facilities as well as
wrote off excess equipment and terminated and restructured
certain contractual relationships. Overall, the Company
terminated 19 general and administrative, 19 sales and
marketing, 25 professional services and 30 development
employees. The restructuring and other special charges for the
quarter ended July 31, 2002 totaled $5.9 million.

F-16



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The significant components of the restructuring
and other special charges were as follows:

|                                                        |  |               |       | 
|------------------------------------------------------- |  | ------------- | ----- | 
|                                                        |  | Quarter Ended
|                                                        |  | July 31, 2002
|                                                        |  |              
|Employee severance costs                                |  | $             | 1,931 | 
|Facilities related costs                                |  |               | 2,886 | 
|Impairment of property and equipment                    |  |               | 824   | 
|Excess contractual commitments and termination
    fees |  |               | 188   | 
|Other                                                   |  |               | 65    | 
|                                                        |  |               |       | 
|                                                        |  | $             | 5,894 | 
|                                                        |  |               |       | 

The facilities related cost component consists of
idle lease space and lease termination fees associated with
closing the Companys Netherlands, United Kingdom and San
Rafael, California facilities. The Companys assumptions
considered current market value of similar properties and
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 as well as leasehold write-offs resulting from
reductions-in-force and office closures.



| |                                        
| | ---------------------------------------
| | (d) Lease Termination of Idle
    Space

In November 2002, the Company reached a
lease buy-out settlement for its leased space in California for
which a portion of the estimated lease liability had been
accrued in the fiscal 2001 and fiscal 2002 restructuring
accruals, as well as part of merger related costs associated
with the Brightware acquisition. The net settlement for this
idle facility was $1.6 million. To reflect the resolution
of the idle lease space liability, the Company recorded a
$2.5 million reversal to its previously recorded
restructuring charges in its fourth quarter fiscal 2002 for the
difference between the amounts paid in November 2002 and
the amounts previously accrued for estimated future payments.



| |                                         
| | ----------------------------------------
| | (e) Accrued Merger and
    Restructuring

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

|                                  |                            |                                  |   |       |        |      |   |       |        |   |   |       |      |  
|--------------------------------- | -------------------------- | -------------------------------- | - | ----- | ------ | ---- | - | ----- | ------ | - | - | ----- | ---- | -
|                                  |                            |                                 
|                                  |                            | Fiscal Years Ended October 31,  
|                                  |                            |                                 
|                                  |                            | 2002                             |   | 2001  |        | 2000
|                                  |                            |                                  |   |       |        |     
|                                  |                            |                                 
|                                  |                            | (In thousands)                  
|Accrued merger and restructuring: |                            |                                  |   |       |        |      |   |       |        |   |   |      
|                                  | Balance, beginning of year |                                  | $ | 7,281 |        |      | $ | 142   |        |   | $ | 1,247 |     
|                                  |                            | Provision                        |   |       | 5,894  |      |   |       | 20,830 |   |   |       |     |  
|                                  |                            | Reversal of prior restructurings |   |       | (2,635 | )    |   |       |       |   |   |       | (500 | )
|                                  |                            | Purchase price adjustment        |   |       |       |      |   |       | 1,016  |   |   |       |     |  
|                                  |                            | Severance payments               |   |       | (4,093 | )    |   |       | (6,585 | ) |   |       | (605 | )
|                                  |                            | Facilities related payments      |   |       | (1,502 | )    |   |       | (855   | ) |   |       |     |  
|                                  |                            | Contract termination fees        |   |       | (777   | )    |   |       | (1,121 | ) |   |       |     |  
|                                  |                            | Other payments                   |   |       | (775   | )    |   |       | (2,408 | ) |   |       |     |  
|                                  |                            | Asset impairment write-offs      |   |       | (967   | )    |   |       | (3,738 | ) |   |       |     |  
|                                  |                            |                                  |   |       |        |      |   |       |        |   |   |      
|                                  | Balance, end of year       |                                  | $ | 2,426 |        |      | $ | 7,281 |        |   | $ | 142   |     
|                                  |                            |                                  |   |       |        |      |   |       |        |   |   |      

F-17



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The short-term portion of the accrued merger and
restructuring is approximately $2,266,000 and the long-term
portion is approximately $160,000. The long-term portion of the
accrued merger and restructuring will be paid out through fiscal
2005. The balance of the restructuring as of October 31,
2002 will be paid out as follows: severance payments through
January 2003, facilities related payments through November 2004
and contract termination fees and other payments through July
2003.

The accrued merger and restructuring taken in
fiscal 2001 and 2002 included a component for idle lease space.
The Companys assumptions considered current market value
of similar properties and the ability, if any, to sublease the
idle space or any other future use. If actual market conditions
are less favorable than those projected by the Company,
additional charges may be required related to this idle lease
space.

8.     Financings

During fiscal 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, both bearing
interest at the prime rate plus 2.0%. 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
35,997 shares of common stock at an exercise price of $52.50 per
share expiring on the fifth anniversary of the warrant issue
date. The estimated fair value of these warrants totaling
$2,789,000 was determined using the Black-Scholes valuation
model. 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.

F-18



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

9.     Income
Taxes

The income tax provision (benefit) is as
follows:

|                                        |                               |                                |   |        |   |      |   |         |   |   |   |        |  
|--------------------------------------- | ----------------------------- | ------------------------------ | - | ------ | - | ---- | - | ------- | - | - | - | ------ | -
|                                        |                               |                               
|                                        |                               | Fiscal Years Ended October 31,
|                                        |                               |                               
|                                        |                               | 2002                           |   | 2001   |   | 2000
|                                        |                               |                                |   |        |   |     
|                                        |                               |                               
|                                        |                               | (In thousands)                
|Current income tax provision (benefit)  |                               |                                |   |        |   |      |   |         |   |   |   |       
|                                        | Federal                       |                                | $ |       |   |      | $ |        |   |   | $ |       |  
|                                        | State                         |                                |   |       |   |      |   |        |   |   |   |       |  
|                                        | Foreign                       |                                |   |       |   |      |   |        |   |   |   |       |  
|                                        |                               |                                |   |        |   |      |   |         |   |   |   |       
|                                        |                               |                                |  |        |   |      |  |         |   |   |  |       
|                                        |                               |                                |   |        |   |      |   |         |   |   |   |       
|Deferred income tax provision (benefit) |                               |                                |   |        |   |      |   |         |   |   |   |       
|                                        | Federal                       |                                |   | (5,996 | ) |      |   | (13,149 | ) |   |   | (4,499 | )
|                                        | State                         |                                |   | (691   | ) |      |   | (1,512  | ) |   |   | (821   | )
|                                        | Foreign                       |                                |   | 806    |   |      |   | (5,122  | ) |   |   | (996   | )
|                                        | Change in valuation allowance |                                |   | 5,881  |   |      |   | 19,783  |   |   |   | 6,316  |  
|                                        |                               |                                |   |        |   |      |   |         |   |   |   |       
|                                        |                               |                                |  |        |   |      |  |         |   |   |  |       
|                                        |                               |                                |   |        |   |      |   |         |   |   |   |       
|Tax provision (benefit)                 |                               | $                              |  |        |   | $    |  |         |   | $ |  |       
|                                        |                               |                                |   |        |   |      |   |         |   |   |   |       

The Companys deferred tax assets (net of
deferred tax liabilities) are comprised primarily of the
following:

|                                              |  |                    |         |      |  |   |         |  
|--------------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------- | -
|                                              |  |                   
|                                              |  | Fiscal Years Ended
|                                              |  | October 31,       
|                                              |  |                   
|                                              |  | 2002               |         | 2001
|                                              |  |                    |         |     
|                                              |  |                   
|                                              |  | (In thousands)    
|Net operating losses and credit carryforwards |  | $                  | 45,600  |      |  | $ | 40,884  |  
|Nondeductible reserves and accruals           |  |                    | 806     |      |  |   | 1,912   |  
|Depreciation and amortization                 |  |                    | 213     |      |  |   | 163     |  
|Capitalized research and development          |  |                    | 8,214   |      |  |   | 5,781   |  
|Other                                         |  |                    | 63      |      |  |   | 16      |  
|                                              |  |                    |         |      |  |   |         |  
|Gross deferred tax assets                     |  |                    | 54,896  |      |  |   | 48,756  |  
|Valuation allowance                           |  |                    | (54,896 | )    |  |   | (48,756 | )
|                                              |  |                    |         |      |  |   |         |  
|Net deferred tax assets                       |  | $                  |        |      |  | $ |        |  
|                                              |  |                    |         |      |  |   |         |  

As of October 31, 2002, the Company has
available net operating losses of approximately $94 million
to reduce future federal income taxes. 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 $26 million. A valuation allowance has been
provided for the full amount of the deferred tax assets, due to
the uncertainty of realization. Included in the valuation
allowance at October 31, 2002 is approximately
$18 million for deferred tax assets attributable to the
exercise of stock options for which subsequently recognized tax
benefits, if any, will be credited directly to additional
paid-in capital.

F-19



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

10.     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, among other things, that the Company 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 the
Company believes the claims against it are without merit and
intend to defend the action vigorously, the litigation is in the
preliminary stage and the Company cannot predict the outcome
with certainty. The Company may incur substantial legal fees and
expenses, and the litigation may divert the attention of some of
the Companys key management. The Companys defense of
this litigation, regardless of its outcome, may be costly and
time-consuming. Should the outcome of the litigation be adverse
to the Company, it could be required to pay significant monetary
damages to the plaintiffs, which could harm the 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 the
Companys common stock between the date of its initial
public offering and December 6, 2000. The complaints name
as defendants the Company and certain of its directors and
officers, Fleet Boston Robertson Stephens, and other parties as
underwriters 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 the
Company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.
The action against the Company is being coordinated with over
three hundred other nearly identical actions filed against other
companies. A motion to dismiss addressing issues common to the
companies and individuals who have been sued in these actions
was filed in July 2002. An opposition to the motion was
filed on behalf of the plaintiffs and a reply brief was filed on
behalf of the companies. The fully briefed issues are now
pending before the court. In October 2002, the court
dismissed the individual defendants from the case without
prejudice based upon stipulations of dismissal filed by the
plaintiffs and the individual defendants. While the Company
believes the claims against it are without merit and intend to
defend the actions vigorously, the litigation is in the
preliminary stage, and the Company cannot predict the outcome
with certainty. The Company may incur substantial legal fees and
expenses, and the litigation may divert the attention of some of
the Companys key management. The Companys defense of
this litigation, regardless of its outcome, may be costly and
time-consuming. Should the outcome of the litigation be adverse
to the Company, it could be required to pay significant monetary
damages to the plaintiffs, which could harm the business.

F-20



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 the Companys
business, financial condition, or results of operations.



| |           
| | ----------
| | (b) Leases

The Company leases its office space under
operating leases expiring at various dates through
January 2005. Rent expense under these agreements totaled
approximately $1,960,000 in fiscal 2002, $2,999,000 in fiscal
2001, and $2,882,000 in fiscal 2000. The rent expense for
fiscal 2001 includes $413,000 of sublease income.

At October 31, 2002, the minimum future
obligations under operating leases, exclusive of sublease income
are as follows:

|                                      |       |                |       |       | 
|------------------------------------- | ----- | -------------- | ----- | ----- | 
|                                      |       | Amount        
|                                      |       |               
|                                      |       | (In thousands)
|For the Fiscal Year Ended October 31, |       |                |       |      
|                                      | 2003. |                | $     | 1,165 | 
|                                      | 2004. |                |       | 609   | 
|                                      | 2005. |                |       | 114   | 
|                                      |       |                |       |      
|                                      |       | $              | 1,888 |      
|                                      |       |                |       |      

In addition to the above future minimum
obligations, in November 2002, the Company reached a lease buy
out settlement for an idle leased space which had total
remaining lease payments of $7.7 million prior to reaching
the settlement terms. The net settlement for this idle facility
was payment of $1.6 million.



| |                     
| | --------------------
| | (c) Letter of Credit

The Company is obligated to maintain an
irrevocable standby letter of credit of approximately $190,000,
which would be payable upon default of the Companys
non-cancelable 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.

11.     Stockholders
Equity



| |                   
| | ------------------
| | (a) Capitalization

On August 16, 2002, the Company effected a
1-for-10 reverse stock split of the outstanding shares of common
stock and adjusted the par value to $.10 per share as previously
disclosed in the Companys Form 8-K filed with the
Securities and Exchange Commission on August 15, 2002. All
references in the Companys consolidated financial
statements and notes thereto, to common stock share and per
share amounts, including options and warrants to purchase common
stock have been retroactively restated to reflect the reverse
stock split.

On February 4, 2000, the Company completed
its initial public offering of 500,000 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 66,666 shares. At the offering price of
$220.00 per share, the Company received $113.8 million from
these transactions, net of underwriting discounts and
commissions and offering expenses.

F-21



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                    
| | -------------------
| | (b) Preferred Stock

Prior to the Companys initial public
offering, the Company had outstanding 418,887 shares of
series A preferred stock, 57,033 shares of series C
preferred stock, 673,398 shares of series F preferred
stock, and 760,455 shares of series G 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 1,273,182 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 40,403 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 a
number of shares of common stock determined by dividing the
amount payable by $120.00. The Companys board of directors
elected to make these payments as a stock dividend of 381,257
shares of common stock upon consummation of the Companys
initial public offering. At the initial public offering price of
$220.00 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

The Company has adopted four stock option plans:
the 1997 Stock Option Plan in May 1997, the 1999 Director
Stock Option Plan in September 1999, the 1999 Stock Option
and Grant Plan in November 1999, and the Brightware
Acquisition Stock Option Plan in January 2001. For all four
stock options plans, the exercise price and vesting are
determined by the board of directors at the date of grant and
options generally vest over three years and expire five years
after the date of grant.

On November 8, 1999, the Board of Directors
adopted and on January 4, 2000 the stockholders approved an
increase in the number of shares of common stock reserved for
issuance under the 1997 Stock Option Plan from 789,681 shares to
939,681 shares. As of October 31, 2002, 222,784 shares were
available for future issuance under this plan. The Company has
reserved 50,000 shares of common stock for issuance under the
1999 Director Stock Option Plan. As of October 31, 2002,
19,439 shares were available for future issuance under this
plan. 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 the 1999 Stock Option and Grant Plan from 300,000 to
800,000 shares. As of October 31, 2002, 680,912 shares were
available for future issuance under this plan. The Company has
reserved 100,000 shares of common stock for issuance under the
Brightware Acquisition Stock Option Plan. As of October 31,
2002, 98,732 shares were available for future issuance under
this plan.

F-22



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Option activity for fiscal 2000, fiscal 2001 and
fiscal 2002 was as follows:

|                              |           |           |         |                 |   |          |               |                |  |   |       |        | 
|----------------------------- | --------- | --------- | ------- | --------------- | - | -------- | ------------- | -------------- |  | - | ----- | ------ | 
|                              |           |           |         |                 |   | Weighted
|                              |           |           |         |                 |   | Average 
|                              |           | Number of |         |                 |   | Exercise
|                              |           | Shares    |         | Price Per Share |   | Price   
|                              |           |           |         |                 |   |         
|Outstanding, October 31, 1999 |           |           | 765,262 |                 |   | $        | 39.45  72.20 |                |  | $ | 41.62 |       
|                              | Granted   |           |         | 521,501         |   |          |               | 0.10  960.00  |  |   |       | 126.00 | 
|                              | Exercised |           |         | (164,208        | ) |          |               | 39.45  110.00 |  |   |       | 40.90  | 
|                              | Canceled  |           |         | (136,030        | ) |          |               | 39.45  960.00 |  |   |       | 80.90  | 
|                              |           |           |         |                 |   |          |               |                |  |   |       |       
|Outstanding, October 31, 2000 |           |           | 986,525 |                 |   |          | 0.10  638.75 |                |  |   | 80.92 |       
|                              | Granted   |           |         | 1,096,376       |   |          |               | 0.10  105.63  |  |   |       | 19.03  | 
|                              | Exercised |           |         | (39,211         | ) |          |               | 0.10  72.15   |  |   |       | 39.13  | 
|                              | Canceled  |           |         | (1,291,675      | ) |          |               | 5.30  638.75  |  |   |       | 68.50  | 
|                              |           |           |         |                 |   |          |               |                |  |   |       |       
|Outstanding, October 31, 2001 |           |           | 752,015 |                 |   |          | 0.10  317.50 |                |  |   | 14.22 |       
|                              | Granted   |           |         | 275,476         |   |          |               | 2.50  13.30   |  |   |       | 6.75   | 
|                              | Exercised |           |         | (16,558         | ) |          |               | 0.10  12.60   |  |   |       | 4.72   | 
|                              | Canceled  |           |         | (368,860        | ) |          |               | 5.00  317.50  |  |   |       | 13.32  | 
|                              |           |           |         |                 |   |          |               |                |  |   |       |       
|Outstanding, October 31, 2002 |           |           | 642,073 |                 |   | $        | 0.10  297.50 |                |  | $ | 11.78 |       

Options exercisable for fiscal 2000, fiscal 2001,
and fiscal 2002 were 314,100, 226,290, and 296,660,
respectively. Weighted average exercise price of options
exercisable at October 31, 2000, 2001, and 2002 was $54.79,
$20.96, and $14.81, respectively.

The following table summarizes information
relating to currently outstanding and exercisable options as of
October 31, 2002.

|                |                |             |  |                  |         |          |  |           |     |          |  |   |       |  |  |  |         |  |  |   |       | 
|--------------- | -------------- | ----------- |  | ---------------- | ------- | -------- |  | --------- | --- | -------- |  | - | ----- |  |  |  | ------- |  |  | - | ----- | 
|                |                |             |  |                 
|                |                | 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   
|                |                |             |  |                  |         |          |  |           |     |         
|$               | 0.10  5.00    |             |  |                  | 116,152 |          |  |           | 4.8 |          |  | $ | 2.53  |  |  |  | 4,696   |  |  | $ | 0.70  | 
|                | 6.40  6.90    |             |  |                  | 342,892 |          |  |           | 3.8 |          |  |   | 6.60  |  |  |  | 206,334 |  |  |   | 6.60  | 
|                | 7.10  20.00   |             |  |                  | 133,246 |          |  |           | 5.6 |          |  |   | 11.09 |  |  |  | 45,897  |  |  |   | 11.26 | 
|                | 21.30  297.50 |             |  |                  | 49,783  |          |  |           | 6.5 |          |  |   | 70.83 |  |  |  | 39,733  |  |  |   | 63.20 | 
|                |                |             |  |                  |         |          |  |           |     |          |  |   |       |  |  |  |         |  |  |   |       | 
|                | Totals         |             |  |                  | 642,073 |          |  |           | 4.5 |          |  | $ | 11.78 |  |  |  | 296,660 |  |  | $ | 14.81 | 
|                |                |             |  |                  |         |          |  |           |     |          |  |   |       |  |  |  |         |  |  |   |       | 

The weighted average grant date fair value for
options granted in fiscal 2002 whose exercise price was equal to
the fair market value on the date of grant was $5.64, for
options granted in fiscal 2001 it was $11.68, and for options
granted in fiscal 2000 it was $113.57. There were no options
granted in fiscal 2002 whose exercise price was less than fair
value on the date of grant. 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 $10.82 and $0.10 per share, respectively. The
weighted average grant date fair value and weighted average
exercise price for options granted in fiscal 2000 whose exercise
price was less than fair value on the date of grant was $184.01
and $26.78 per share, respectively.

F-23



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                    
| | -----------------------------------
| | Employee and Director Stock Options

The Company granted stock options to employees
that require the recognition of stock-based compensation
expense. Until July 2001, stock-based compensation relating to
employee grants represented 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
on the date of grant of the Companys common stock for
financial reporting purposes. The expense was $411,000 and
$1,489,000 in fiscal 2001 and 2000, 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. Accordingly, there was no stock-based
compensation or unamortized deferred compensation associated
with these grants in fiscal 2002.

In July 2001, the Company completed 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 at a ratio of three to four.
The new options were granted on July 31, 2001, with an
exercise price of $6.60 per share. The Company accepted 717,929
stock options for exchange and issued 538,438 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 issued in conjunction with the stock option
exchange program are subject to variable accounting. In fiscal
years 2002 and 2001, the Company recorded a reversal of $18,000
in stock based compensation expense and a charge of $188,000 of
stock based compensation expense, respectively. As of
October 31, 2002, the Company has recorded no deferred
compensation associated with these options because the fair
market value of the Companys common stock fell below the
option price.

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.



| |                           
| | --------------------------
| | Non-employee 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 $101,000 of stock based
compensation expense in fiscal 2002, a reversal of $49,000 in
stock based compensation expense in fiscal 2001, and $1,825,000
of stock based compensation expense in fiscal 2000, related to
these options. As of October 31, 2002, the deferred
compensation balance of $10,000, 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 a private equity investment
firm to purchase 19,043 shares of series B preferred stock
at an exercise price of $196.90 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 63,479 shares of common stock at an exercise
price of $59.10 per share. As of October 31, 2002, this
warrant was no longer outstanding.

In July 1997, the Company issued a warrant to
purchase 20,000 shares of common stock to a vendor at $39.45 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.

F-24



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In connection with the series F preferred
stock financing in February 1999, the Company sold warrants
to purchase 44,890 shares of series F preferred stock at an
exercise price of $53.40 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 50,000 shares of common stock
to customers and strategic partners. Warrants to purchase a
total of 38,455 shares have been issued from this pool of which
warrants to purchase 7,999 shares remain outstanding as of
October 31, 2002. In October 1999, the Company issued a
warrant to a strategic partner to purchase 8,333 shares of
common stock at an exercise price of $72.15 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
$72 in fiscal 2002, a $2,000 reversal of expense in fiscal 2001,
and approximately $79,000 in fiscal 2000 related to this grant.
In November 1999, in connection with a consulting arrangement
the Company issued a warrant to purchase an aggregate of 20,790
shares of common stock at an exercise price of $72.15 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 February 2000, in connection with a
strategic business alliance, the Company issued a warrant to
purchase 3,333 shares of common stock at an exercise price of
$140.00 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 1,940 shares vested in
fiscal 2000 and, accordingly, the Company recorded a stock-based
compensation charge of $320,000 in fiscal 2000. No shares
vested in fiscal 2002 or 2001, so no stock-based compensation
charge was taken in either fiscal year. In the fiscal year 2000,
the Company issued fully vested warrants in connection with
license arrangements to three customers. The three warrant
grants were to purchase 3,000 shares of common stock at an
exercise price of $110.00 per share, 1,000 shares of common
stock at an exercise price of $359.38 per share, and 666 shares
of common stock at an exercise price of $99.00 per share. The
estimated values of these warrants totaled $417,000 at the time
of grant and were recorded as reductions in the amount of
deferred revenue to be recognized associated with these
customers.

As fully described in Note 8, in November
1999, in conjunction with the Companys issuance of a
$6.0 million subordinated note, the Company issued fully
vested warrants to purchase an aggregate of 35,997 shares of
common stock at an exercise price of $52.50 per share to the
holders of the subordinated note. The warrants expire on
November 11, 2004. As of October 31, 2002, none of
these warrants had been exercised.



| |                                           
| | ------------------------------------------
| | (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 its entire employee
stock-based compensation plans beginning in fiscal 1997.

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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has computed the pro forma
disclosures required under SFAS No. 123 for options granted
during fiscal 2002, fiscal 2001 and fiscal 2000 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,
|                                       |  |                               
|                                       |  | 2002                           |  | 2001        |  | 2000       
|                                       |  |                                |  |             |  |            
|Risk-free interest rate                |  | 4.0%                           |  | 3.1%  5.8% |  | 5.7%  6.7%
|Expected dividend yield                |  |                               |  |            |  |           
|Expected lives                         |  | 5 years                        |  | 2.7 years   |  | 5 years    
|Expected volatility                    |  | 117%                           |  | 130%        |  | 100%       
|Weighted average grant date fair value |  | $5.64                          |  | $11.68      |  | $113.57    

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,       
|                                                  |  |                                      
|                                                  |  | 2002                                  |         | 2001 |  | 2000
|                                                  |  |                                       |         |      |  |     
|                                                  |  |                                      
|                                                  |  | (In thousands, except per share data)
|Net loss applicable to shareholders, as reported  |  | $                                     | (23,678 | )    |  | $    | (70,281 | ) |  | $ | (81,884  | )
|Net loss applicable to shareholders, pro forma    |  |                                       | (38,641 | )    |  |      | (96,704 | ) |  |   | (102,027 | )
|Basic and diluted net loss per share, as reported |  | $                                     | (6.46   | )    |  | $    | (19.52  | ) |  | $ | (28.95   | )
|Basic and diluted net loss per share, pro forma   |  |                                       | (10.53  | )    |  |      | (26.85  | ) |  |   | (36.07   | )

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.



| |                                 
| | --------------------------------
| | (e) Common Stock
    Outstanding

The shares issued but held in escrow in
connection with the Companys acquisition of Signature
Software, Inc. were released from escrow in September 2002.
The shares issued but held in escrow related to the
Companys acquisition of Brightware, Inc. were released
from escrow during the quarter ended April 30, 2002.



| |                     
| | --------------------
| | (f) 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
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 50,000 shares of the Companys common stock
valued at $155,500 at October 31, 2002, and is generally
not a recourse obligation of the borrower, with specified
exceptions. Amounts totaling $4,000,000 have been advanced to
Mr. Besier under this facility as of October 31, 2002.

In addition, the Company issued notes to two
former officers of the Company totaling $270,000 and to a former
employee of the Company in the amount of $125,000. During the
quarter ended January 31, 2002, in connection with the
termination of one of the former officers employment with
the Company, the Company

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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

acquired the shares securing the note, in the
amount of $120,000, from the officer in satisfaction of the
amounts due under the note. This amount was charged to stock
based compensation expense during the period.



| |                       
| | ----------------------
| | (g) Net Loss Per Share



| |                   
| | ------------------
| | 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 by the
weighted average number of common shares outstanding, and
diluted loss per share, which is computed by dividing the net
loss 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 anti-dilutive and were excluded
from the diluted net loss per share calculations.

Common stock options and warrants outstanding
which were not included in the calculation of diluted net loss
per share since their inclusion would be anti-dilutive were
694,000 in fiscal 2002, 841,000 in fiscal 2001, and 1,076,000 in
fiscal 2000.



| |                             
| | ----------------------------
| | 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, 2000
|                             |                                                                                                                 |                 
|                             |                                                                                                                 | (In thousands)  
|Pro forma basic and diluted: |                                                                                                                 |                  |  |      
|                             | Weighted average common shares outstanding used
    in computing basic and diluted net loss per share           |                  |  | 2,828 | 
|                             | Weighted average common shares issuable upon the
    conversion of preferred stock                              |                  |  | 352   | 
|                             | Weighted average common shares issuable upon
    settlement of the priority payments                            |                  |  | 100   | 
|                             | Weighted average common shares issuable upon
    exercise of series F preferred stock warrants                  |                  |  | 7     | 
|                             |                                                                                                                 |                  |  |      
|                             | Weighted average common shares outstanding used
    in computing pro forma basic and diluted net loss per share |                  |  | 3,287 | 
|                             |                                                                                                                 |                  |  |      

12.     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 has the option to match 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. There were no employer match contributions in fiscal
2002. Operations have been charged for cash contributions to the
plan of approximately $662,000 for fiscal 2001 and $463,000 for
fiscal 2000.

F-27



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13.     Related-Party
Transactions

The Company contracts with a third party, EPAM
Systems, to provide software development and implementation
services on an outsourced basis. The majority owner of EPAM
Systems was an employee of the Company until May 31, 2001.
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. As of October 31, 2001,
approximately 25 employees and contractors of EPAM Systems were
performing services for the Company. During fiscal 2002, the
Company reduced the use of contract engineers and ended fiscal
2002 using only three EPAM Systems contractors. The Company
terminated the agreement with EPAM Systems in December 2002.

Software development and cost of product-related
services costs under this contract which have been expensed in
the accompanying consolidated statements of operations were
$445,000, $5,599,000, and $4,530,000 for fiscal years ended
October 31, 2002, 2001, and 2000, 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 7(b).

14.     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,
|                                 |                                                      |                               
|                                 |                                                      | 2002                           |   | 2001  |   | 2000
|                                 |                                                      |                                |   |       |   |     
|                                 |                                                      |                               
|                                 |                                                      | (in thousands)                
|Allowance for doubtful accounts: |                                                      |                                |   |       |   |      |   |       |   |  |   |      
|                                 | Balance, beginning of year                           |                                | $ | 1,292 |   |      | $ | 1,115 |   |  | $ | 410   | 
|                                 | Provision (reduction) for doubtful accounts          |                                |   | (500  | ) |      |   | 271   |   |  |   | 705   | 
|                                 | Write-offs                                           |                                |   | (329  | ) |      |   | (94   | ) |  |   |      | 
|                                 |                                                      |                                |   |       |   |      |   |       |   |  |   |      
|                                 | Balance, end of year                                 |                                | $ | 463   |   |      | $ | 1,292 |   |  | $ | 1,115 | 
|                                 |                                                      |                                |   |       |   |      |   |       |   |  |   |      
|Reserve for loss contracts:      |                                                      |                                |   |       |   |      |   |       |   |  |   |      
|                                 | Balance, beginning of year                           |                                | $ | 600   |   |      | $ | 600   |   |  | $ | 500   | 
|                                 | Provision (reduction) for loss contracts
    reserve |                                |   | (300  | ) |      |   |      |   |  |   | 100   | 
|                                 | Payments and/or costs incurred                       |                                |   |      |   |      |   |      |   |  |   |      | 
|                                 |                                                      |                                |   |       |   |      |   |       |   |  |   |      
|                                 | Balance, end of year                                 |                                | $ | 300   |   |      | $ | 600   |   |  | $ | 600   | 
|                                 |                                                      |                                |   |       |   |      |   |       |   |  |   |      

15.     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.

Through October 31, 2002, the Company viewed
its operations and managed its business as two segments,
product-related licenses and services and custom development
services. The Companys reportable segments were strategic
business units that provide distinct services to the end
customer. They were managed

F-28



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

separately because each business segment requires
different marketing and management strategies. The
Companys approach was based on the way that management
organized the segments within the Company for making operating
decisions and assessing performance. Beginning with its fiscal
year ending October 31, 2003, the Company will begin
combining the two segments into one reporting segment because
management determined that the custom development services
segment was insufficient in size to warrant separately viewing
and managing the engagements and resources.

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
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.

A substantial portion of the Companys
revenue is derived from the United States with approximately
51%, 36%, and 28% coming from foreign countries for the fiscal
years ended October 31, 2002, 2001 and 2000. The United
Kingdom, Switzerland, and Japan each contributed at least 10% of
our revenue for the year ended October 31, 2002. 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 fiscal 2000.

16.     Signature
Software 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 27,626 shares of
restricted common stock to the 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. 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 27,626 shares of restricted common stock,
valued at approximately $3.9 million, were 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 was recorded as
stock based compensation on a pro rata basis over the vesting
period. Accordingly, the Company recognized approximately
$600,000 of stock-based compensation for these shares in fiscal
2002, $2,404,000 in fiscal 2001, and $162,000 in fiscal 2000. In
fiscal 2001, the Company 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  |  
|                                   |                                        |                |   |     

F-29



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

17.     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 Company markets the acquired product as its
eServicePerformer product line. The original purchase price of
the acquisition was $13,669,000, which was composed of
$5,228,000 in cash, 130,000 shares of Firepond common stock
valued at $5,865,000, and $2,576,000 in acquisition related
costs. The value of approximately 150,000 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. The
acquisition was accounted for using the purchase method and
accordingly, the results of operations of Brightware from the
date of acquisition have been included in the results of
operations of the Company. The consideration payable was subject
to a final accounting of Brightwares net assets as of
February 15, 2001 and a portion of the consideration was
placed in escrow to satisfy claims for damages. In connection
therewith, during the quarter ended January 31, 2002, the
Company received $520,000 of cash and 55,300 shares of the
Companys common stock previously escrowed to satisfy
claims in connection with the transaction. This release from
escrow had the effect of reducing the purchase price recorded by
the Company by approximately $2,968,000 to $10,701,000. During
the quarter ended April 30, 2002, the Company received
approximately $98,000 of cash and 7,498 shares of the
Companys common stock previously escrowed to satisfy
claims for damages. This release from escrow had the effect of
reducing the purchase price recorded by the Company by an
additional approximately $430,000 to $10,271,000.

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                            |                |   | 4,051   |  
|                           |                                     |                |   |        
|                           | Total purchase price                |                | $ | 10,271  |  
|                           |                                     |                |   |        

As part of the purchase price allocation, all
intangible assets that were 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 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,

F-30



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 the 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 was allocated to goodwill.

During the quarter ended January 31, 2002,
the Company lowered its estimates of the expected cash flows
from the eServices product and determined that developed
technology and know-how was significantly impaired. As such, in
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
recorded a $3,120,000 charge to write-off the impaired portion
of developed technology and know-how leaving a balance of
approximately $215,000 as of January 31, 2002, which is
being amortized over two years. The circumstances leading to the
impairment related directly to the Companys strategic
decision to focus on its core value proposition in the
lead-to-order market with its SalesPerformer product
because of the continued global slowdown in information
technology spending and the Companys need to focus its
resources to reach profitability. As a result of the change in
strategic direction, the Company lowered the eServices revenue
forecasts, operating profits and cash flows, resulting in the
impairment charge of the developed technology and know-how.

Through October 31, 2001, the Company
amortized goodwill over a period of three years; however, the
Company adopted SFAS No. 142, Accounting for Goodwill
and Other Intangible Assets,effective November 1,
2001. SFAS No. 142 requires that goodwill, including
amounts related to assembled workforce, no longer be amortized,
instead, goodwill will be subject to an assessment of impairment
by applying a fair-value based test at least annually. As such,
in accordance with SFAS No. 142, the net book value of
assembled workforce was reclassified to goodwill and as a result
of an independent valuation, the Company determined that,
without regard to the reduction in expected cash flows from the
eServices product determined during the quarter ended
January 31, 2002, the goodwill was fully impaired upon
adoption and, accordingly, recorded a cumulative effect of a
change in accounting principle of $3,973,000. See Note 18.

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

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,
|                                           |  |                               
|                                           |  | 2001                           |         | 2000
|                                           |  |                                |         |     
|                                           |  |                               
|                                           |  | (In thousands, except per     
|                                           |  | share data)                   
|Net sales                                  |  | $                              | 48,412  |      |  | $ | 78,443  |  
|Loss before extraordinary item             |  |                                | (74,710 | )    |  |   | (37,725 | )
|Net loss                                   |  |                                | (74,710 | )    |  |   | (39,162 | )
|Net loss per share  basic and
    diluted |  | $                              | (20.39  | )    |  | $ | (10.49  | )

F-31



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

18.     Goodwill and
Other Intangible Assets  Adoption of Statement
No. 142

In July 2001, the FASB issued SFAS No. 142
Goodwill and Other Intangible Assets, which establishes
financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. The Company early adopted SFAS
No. 142 on November 1, 2001, the beginning of its
fiscal year. SFAS No. 142 requires that goodwill and
intangible assets that have indefinite useful lives not be
amortized but, instead, tested at least annually for impairment.
Accordingly, the Company reclassified the net book value of
assembled workforce to goodwill and ceased amortization of all
goodwill on November 1, 2001. Intangible assets that have
finite useful lives, consisting of developed technology and
know-how, continue to be amortized over their useful lives.

The standard also requires that goodwill be
tested for impairment annually. In the year of adoption, the
standard required a transitional goodwill impairment evaluation,
which was a two-step process. The first step was a screen for
whether there was an indication that goodwill was impaired as of
November 1, 2001. To do this, the Company identified its
reporting units and determined the carrying value of each by
assigning the Companys assets and liabilities, including
existing goodwill, to them as of November 1, 2001. The
Company then determined the fair value of each reporting unit by
using a combination of present value and multiple of earnings
valuation techniques and compared it to the reporting
units carrying value. As of January 31, 2002, the
Company completed this first step, which indicated that goodwill
recorded during the Brightware acquisition was impaired as of
November 1, 2001.

In the second step, the Company compared the
implied fair value of the affected reporting units
goodwill to its carrying value to measure the amount of
impairment. The fair value of goodwill was determined by
allocating the reporting units fair value to all of its
assets and liabilities in a manner similar to a purchase price
allocation in accordance with SFAS No. 141 Business
Combinations. As of January 31, 2002, the Company
completed this second step and measured and recognized a
transitional impairment loss of $3,973,000 as a cumulative
effect of a change in accounting principle in its statement of
operations.

In accordance with SFAS No. 142 the fair
value used to determine the impairment was based on a
combination of earnings multiples and discounted cash flow
valuation techniques. The circumstances leading to the goodwill
impairment related to both a global slow down in information
technology spending as well as a significant decrease in
comparable company market valuations. The negative economic
trend lowered the eServices operating profits and cash flows and
is evidence that initial growth expectations when Brightware was
acquired have not materialized. The decline in comparable
company market valuations resulted in reduced earnings multiples.

The following is the pro-forma effect on net loss
and net loss per share had SFAS No. 142 been in effect for
the fiscal year ended October 31, 2001 (table in thousands,
except per share amounts):

|                                                            |  |                   |         |  
|----------------------------------------------------------- |  | ----------------- | ------- | -
|                                                            |  | Fiscal Year Ended
|                                                            |  | October 31, 2001 
|                                                            |  |                  
|Net loss                                                    |  | $                 | (70,281 | )
|Add back: Impact of goodwill and workforce
    amortization |  |                   | 2,278   |  
|                                                            |  |                   |         |  
|Pro forma net loss                                          |  | $                 | (68,003 | )
|                                                            |  |                   |         |  
|Net loss per share, basic and diluted                       |  | $                 | (19.52  | )
|Add back: Impact of goodwill and workforce
    amortization |  |                   | 0.63    |  
|                                                            |  |                   |         |  
|Pro forma net loss per share, basic and diluted             |  | $                 | (18.89  | )
|                                                            |  |                   |         |  

F-32



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

19.     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.

20.     Quarterly
Statement of Operations Information (unaudited)

The following table presents a summary of
quarterly results of operations for 2002 and 2001:

|                                                                                                                                      |  |                |       |          |  |           |        |             |  |             |        |          |  |           |         |             |  |   |         |   |  |   |         |   |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----- | -------- |  | --------- | ------ | ----------- |  | ----------- | ------ | -------- |  | --------- | ------- | ----------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------ | -
|                                                                                                                                      |  |               
|                                                                                                                                      |  | Quarter Ended 
|                                                                                                                                      |  |               
|                                                                                                                                      |  | October 31,    |       | July 31, |  | April 30, |        | January 31, |  | October 31, |        | July 31, |  | April 30, |         | January 31,
|                                                                                                                                      |  | 2002           |       | 2002     |  | 2002      |        | 2002        |  | 2001        |        | 2001     |  | 2001      |         | 2001       
|                                                                                                                                      |  |                |       |          |  |           |        |             |  |             |        |          |  |           |         |            
|                                                                                                                                      |  |               
|                                                                                                                                      |  | (In thousands)
|Total revenue                                                                                                                         |  | $              | 4,420 |          |  | $         | 4,318  |             |  | $           | 5,404  |          |  | $         | 7,497   |             |  | $ | 9,113   |   |  | $ | 10,114  |   |  | $ | 12,315  |   |  | $ | 14,547 |  
|Gross profit                                                                                                                          |  | $              | 2,725 |          |  | $         | 2,008  |             |  | $           | 2,503  |          |  | $         | 4,394   |             |  | $ | 3,908   |   |  | $ | 3,371   |   |  | $ | 2,753   |   |  | $ | 5,268  |  
|Income(loss) before extraordinary items and
    cumulative effect of a change in accounting principle                                 |  | $              | 571   |          |  | $         | (9,077 | )           |  | $           | (4,142 | )        |  | $         | (7,055  | )           |  | $ | (13,677 | ) |  | $ | (21,355 | ) |  | $ | (26,641 | ) |  | $ | (8,608 | )
|Net income(loss)                                                                                                                      |  | $              | 571   |          |  | $         | (9,077 | )           |  | $           | (4,142 | )        |  | $         | (11,028 | )           |  | $ | (13,677 | ) |  | $ | (21,355 | ) |  | $ | (26,641 | ) |  | $ | (8,608 | )
|Basic and diluted income(loss) per share before
    extraordinary items and cumulative effect of a change in
    accounting principle |  | $              | 0.15  |          |  | $         | (2.46  | )           |  | $           | (1.13  | )        |  | $         | (1.94   | )           |  | $ | (3.77   | ) |  | $ | (5.90   | ) |  | $ | (7.38   | ) |  | $ | (2.42  | )
|Basic and diluted net income(loss) per share
    applicable to common stockholders                                                    |  | $              | 0.15  |          |  | $         | (2.46  | )           |  | $           | (1.13  | )        |  | $         | (3.03   | )           |  | $ | (3.77   | ) |  | $ | (5.90   | ) |  | $ | (7.38   | ) |  | $ | (2.42  | )

F-33



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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(2)   |                     |  | Certificate of Amendment to Third Amended and
    Restated Certificate of Incorporation (filed as Exhibit 3.1
    to the Registrants Current Report on Form 8-K, dated
    August 16, 2002, and incorporated herein by reference).                                                                                                                                                                                   
|        | 3.3(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      |                     |  | Specimen certificate for shares of common stock,
    $.10 par value, of the Registrant.                                                                                                                                                                                                                                                                                                                               
|        | 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(3)  |                     |  | 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(4)  |                     |  | Amended and Restated 1997 Stock Option Plan
    (filed as Exhibit 10.3 to the Registrants Annual
    Report on Form 10-K, dated January 29, 2002, and
    incorporated herein by reference).                                                                                                                                                                                                                         
|        | 10.4(4)  |                     |  | Amended and Restated 1999 Stock Option and Grant
    Plan (filed as Exhibit 10.4 to the Registrants Annual
    Report on Form 10-K, dated January 29, 2002, and
    incorporated herein by reference).                                                                                                                                                                                                               
|        | 10.5(4)  |                     |  | Amended and Restated 1999 Director Plan (filed as
    Exhibit 10.5 to the Registrants Annual Report on
    Form 10-K, dated January 29, 2002, and incorporated
    herein by reference).                                                                                                                                                                                                                             
|        | 10.6(5)  |                     |  | 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    |                     |  | Employment Agreement dated August 20, 2002
    between Registrant and Klaus P. Besier.                                                                                                                                                                                                                                                                                                                                
|        | 10.11    |                     |  | Employment Agreement dated August 20, 2002
    between Registrant and Susan W. Ledoux.                                                                                                                                                                                                                                                                                                                                
|        | 10.12    |                     |  | Employment Agreement dated August 20, 2002
    between Registrant and Christian J. Misvaer.                                                                                                                                                                                                                                                                                                                           
|        | 10.13    |                     |  | Offer Letter dated October 30, 1998 between
    Registrant and Sosaburo Shinzo.                                                                                                                                                                                                                                                                                                                                       
|        | 10.14(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).
|        | 10.15    |                     |  | 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 (filed as
    Exhibit 10.17 to the Registrants Annual Report on
    Form 10-K, dated January 29, 2002, and incorporated
    herein by reference).                                                                                   



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##### Table of Contents



|        |           |                     |  |                                                                                                                                                                                                                                                                                                                                                                  
|------- | --------- | ------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |                    
|Number  |           | Exhibit Description
|        |           |                    
|        | 10.16(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).
|        | 10.17     |                     |  | Lease of 8009 34th Avenue South, Bloomington,
    Minnesota between the Registrant, as Tenant, and Glenborough
    Fund V, Limited Partnership, as Landlord dated as of November
    21, 2001.                                                                                                                                                                   
|        | 10.18     |                     |  | Lease of 1983 Premier Drive, Mankato, Minnesota
    between the Registrant, as Tenant, and Petrie Development Corp.,
    as Landlord dated as of December 2, 1998.                                                                                                                                                                                               
|        | 10.19     |                     |  | Amendment to lease of 1983 Premier Drive,
    Mankato, Minnesota between the Registrant, as Tenant, and
    Premier Drive Properties, L.L.C., as Landlord dated as of
    March 16, 2000.                                                                                                                                                                        
|        | 10.20     |                     |  | Second amendment to lease of 1983 Premier Drive,
    Mankato, Minnesota between the Registrant, as Tenant, and
    Technology Plus of Mankato, Inc., as Landlord dated as of
    December 7, 2001.                                                                                                                                                               
|        | 21.1      |                     |  | Subsidiaries.                                                                                                                                                                                                                                                                                                                                                    
|        | 23.1      |                     |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                                                                                                           



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| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 August 16, 2002.                                       
|   
|(3) | 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.                
|   
|(4) | Originally filed as an Exhibit to the
    Registrants Annual Report on Form 10-K as filed with
    the SEC on January 29, 2002.                                      
|   
|(5) | Originally filed as an Exhibit to the
    Registrants Registration Statement on Form S-8 as
    filed with the SEC on February 20, 2001.