**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**Form10-KSB**
| **(Mark One)** |       |                                                                                          |
|----------------|------------|-----------------------------------------------------------------------------------------------|
| **x**          | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**     |
| ** **     | ** ** | ** **                                                                                    |
| ** **     | ** ** | **For the  fiscal year ended June 30, 2006**                                                  |
| ** **     | ** ** | ** **                                                                                    |
|           |       | **Or**                                                                                        |
|           |       |                                                                                          |
| **o**          | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

** **

**Commission File Number 000-28515**

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**FPTECHNOLOGY, INC.**(Name of Small Business Issuer in its Charter)

| **Delaware**                                 | ** ** | **20-3446646**                        |
|----------------------------------------------|------------|---------------------------------------|
| (State of  incorporation)                    |       | (I.R.S. Employer  Identification No.) |
| * *                                     |       | * *                              |
| **181  Wells Avenue, Newton, Massachusetts** |       | **02459**                             |
| (Address of  principal executive offices)    |       | (Zip Code)                            |

 

Registrant’s telephone number, including areacode: **(617) 928-6001**

Securities registered pursuant to Section12(b) of the Act: **None**

Securities registered pursuant to Section12(g) of the Act:

**Common Stock, $.001 par value**(Title of Class)

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Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes xNo o

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B isnot contained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB. x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes oNo x

State issuer’s revenuesfor its most recent fiscal year. $ 3,761,594

The aggregate marketvalue of all stock held by non-affiliates of the registrant was $14,759,514 asof September 15, 2006 (computed by reference to the last sale price of a shareof the registrant’s common stock on that date as reported by the Over theCounter Bulletin Board). For purposes of this computation, it has been assumedthat the shares beneficially held by directors and officers of registrant were “heldby affiliates”; this assumption is not to be deemed to be an admission by suchpersons that they are affiliates of registrant.

State the number ofshares outstanding of each of the issuer’s classes of common equity,as of the latest practicable date:  6,100,441shares of common stock are outstanding as of September 15, 2006.

**DOCUMENTSINCORPORATED BY REFERENCE:**

Noportions of other documents are incorporated by reference into this Report.

Transitional Small Business Disclosure Format (Checkone): Yes o; No x

 

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**FP TECHNOLOGY, INC.**

**Form 10-KSB**

**Annual Report for the Fiscal Year Ended June 30, 2006**

**TABLE OF CONTENTS**
|          | ** ** | **Part I**                                                                                                        |   |
|----------|------------|-------------------------------------------------------------------------------------------------------------------|--------|
| Item  1. |       | Description  of Business                                                                                          |   |
| Item 2.  |       | Description of  Property                                                                                          |   |
| Item 3.  |       | Legal  Proceedings                                                                                                |   |
| Item 4.  |       | Submission of  Matters to a Vote of Security Holders                                                              |   |
|     | ** ** | **Part II**                                                                                                       |   |
| Item 5.  |       | Market for  Equity and Related Stockholder Matters                                                                |   |
| Item 6.  |       | Management’s  Discussion and Analysis or Plan of Operation                                                   |   |
| Item 7.  |       | Financial  Statements                                                                                             |   |
| Item 8.  |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                             |   |
| Item 8A. |       | Controls and  Procedures                                                                                          |   |
| Item 8B. |       | Other  Information                                                                                                |   |
|     | ** ** | **Part III**                                                                                                      |   |
| Item 9.  |       | Directors,  Executive Officers, Promoters and Control Persons; Compliance with Section  16(a) of the Exchange Act |   |
| Item 10. |       | Executive  Compensation                                                                                           |   |
| Item 11. |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                  |   |
| Item 12. |       | Certain  Relationships and Related Transactions                                                                   |   |
| Item 13. |       | Exhibits                                                                                                          |   |
| Item 14. |       | Principal  Accountant Fees and Services                                                                           |   |
|     |       |                                                                                                              |   |
|     |       | Signatures                                                                                                        |   |
|     |       | Financial Statements                                                                                              |   |

 

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**PART I**

This annual reportcontains forward-looking statements as that term is defined in the PrivateSecurities Litigation Reform Act of 1995. These statements relate to futureevents or our future financial performance. In some cases, you can identify forward-lookingstatements by terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”,“believes”, “estimates”, “predicts”, “potential” or “continue” or the negativeof these terms or other comparable terminology. These statements are onlypredictions and involve known and unknown risks, uncertainties and otherfactors, including the risks in the section entitled “Risk Factors”, that maycause our Company’s or our industry’s actual results, levels of activity,performance or achievements to be materially different from any future results,levels of activity, performance or achievements expressed or implied by theseforward-looking statements.  Although webelieve that the expectations reflected in the forward-looking statements arereasonable, we cannot guarantee future results, levels of activity, performanceor achievements.  Except as required byapplicable law, including the securities laws of the United States, we do notintend to update any of the forward-looking statements to conform thesestatements to actual results.

As used in thisannual report, the terms “we”, “us”, “our”, “the Company” or “FPT” mean FPTechnology, Inc., after giving effect to the Reorganization (as described inmore detail under “Business—Corporate History” below).

**ITEM 1.  BUSINESS**

**Summary**

We are a leading providerof CPQ, or “Configure, Price, Quote”, on-demand, multi-tenant software thatautomates and simplifies product pricing and configuration for companies andhelps these enterprises improve order accuracy and reduce their total cost ofsales.  Our predecessor, Firepond, Inc. (“Firepond”),was founded in 1983.  Our suite ofproducts help companies configure, price and quote complex products during thesales process, such as machinery, high technology products or insuranceservices.  Our sales solutions helpcompanies optimize their sales processes, whether their need is to solvecomplex product or pricing configuration, create product catalogs or provide aninteractive selling system, and dramatically improves response time.  Our current customers include Fortune 1000companies such as Symantec, G.E. Tip Trailer, Freightliner, Cummins PowerGeneration, Deere & Company, Horizon Blue Cross Blue Shield, SiemensBuilding Technologies, Steelcase International and Case New Holland.

We market our products under the Firepond brand name:

·                  FirepondOnDemand is an application that enables a company’s sales force and supportingorganizations to configure complex products, and accurately price thoseproducts.  Firepond OnDemand is offeredto customers independently or as an integrated service within theSalesforce.com product called Firepond OnDemand for Salesforce.comTM.

·                  The InteractiveConfigurator Suite is a set of data maintenance tools, shared libraries andapplication program interfaces (APIs) that supply configuration capabilities toan application.  Firepond OnDemand isbuilt on the Interactive Configurator Suite (ICS) technology platform.

We have offered our OnDemand application service sinceAugust 2005.  We execute our sales andmarketing strategy through direct and indirect channels, and currently havesales relationships with several system integrators and resellers.  The recent increase in interest in CPQapplications, combined with the acceptance of the on-demand business model, haveopened new opportunities for us in the form of partnerships with Salesforce.comand other enterprise applications providers which we are actively pursuing.

We believe that our software allows customers toreduce their total cost of sales and service. Our software solutions provide anumber of key benefits, including:

·                  *Lowering Total Cost of Sales:* Sellingcomplex products typically requires the participation of many different partsof an organization without distracting from their primary roles includingsales, 

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engineering,manufacturing, finance, legal, and marketing. Our solution empowers salesrepresentatives with relevant and timely information from each department, suchas design specifications from engineering, production constraints frommanufacturing, discount authorization from finance, terms and conditions fromlegal, and product collateral from marketing.

·                  *Reducing Order Errors:* Using configurationtechnology, complex product recommendations are more likely to result indelivery of the right products to handle the right application. By reducing thecomplexity of the sales process and eliminating the potential for “human”error, our CPQ solution assists companies in ensuring that customers are askedthe proper questions to reach a correct recommendation/configuration. Inaddition, the rules within our configuration engine verify that productsrequested by salespeople, channel partners or customers can be manufactured anddelivered, before an order is placed. In addition, quotation errors can bereduced when sales representatives are armed with correctly configured pricinginformation, authorized discounts, appropriate currency conversion rates andnecessary tax considerations.

·                  *Accelerating Sales Cycles:* By applying anintelligent and logical process flow from the time a lead is received to themoment a valid order is placed, our solutions are designed to optimize thesales process and increase the speed at which a sale can be executed. Quickturnaround in product recommendations, pricing, proposals and financing allowssales representatives to manage more simultaneous opportunities and close themfaster. Eliminating the time necessary to contact the factory or engineeringresources significantly reduces the time it takes for a customer to reach a “buy”decision. Customer satisfaction, in turn, increases as their questions andhesitations are promptly addressed. Further, our CPQ solution helpsmanufacturers distribute new product and pricing information in real-time. Thishigh degree of responsiveness helps foster a strong and lastingcustomer-supplier relationship that we believe is a distinct competitiveadvantage for us.

·                  *Unifying the Sales Process:* Many largecompanies today deliver their products to market through multiple sales channels,including a field sales force, channel distribution partners, and even via theWeb. Our CPQ solution ensures consistency of product and pricing informationacross multiple channels, enhancing a company’s channel management capabilitiesand protecting its brand reputation. For example, a customer-facing Webinterface provides a self-service solution for selling to current customers viathe Web, or can be used to generate desired configurations that can be directedto channel partners. This allows repeat customers to obtain the products theyneed without pulling sales’ attention from new relationships. The sameexperience can be presented to the customer directly using our CPQ solutiondeployed in a mobile environment on a laptop, for example, during a salesperson’s visit to a prospect. Or, a customer can again receive the sameexperience when visiting a dealership and interacting with a salespersonconnected to our system over an intranet.

Our principal place of business is located at 181Wells Avenue, Newton, Massachusetts 02459. Our common stock, par value $0.001 per share (“Common Stock”), trades onthe Over-the-Counter Bulletin Board under the symbol “FPTI.OB.”

**CorporateHistory**

We were incorporated in Delaware in August 2005 as FPTechnology Holdings, Inc.  In September2005, we acquired all of the operating assets, certain liabilities and all ofthe employees of Firepond.  In March2006, we became a wholly-owned subsidiary of AFG Enterprises USA, Inc., apublic shell company (“AFG”).  On June 29,2006, AFG merged with and into us (the “Reorganization”), and we were thesurviving company.  In connection withthe Reorganization we changed our name to “FP Technology, Inc.”

**Recent Financings**

During fiscal 2006, wecompleted two financing transactions which resulted in gross proceeds to theCompany of $57.0 million.  On March 29,2006, we completed the issuance of senior secured notes in an aggregateprincipal amount of $50.0 million together with warrants to acquire up to6,875,000 shares of our 

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Common Stock (the “CAP Financing”).  The proceeds of the CAP Financing areintended to be used for possible business combination transactions.  Further details of the CAP Financing aredescribed below under “Item 6.—Management’s Discussion and Analysis of FinancialCondition and Results of Operations of the Company—Recent Financings”.

In August 2006, we completed a private placement (the “PIPEFinancing”) of 1,000,000 units (the “Units”) at $7.00 per Unit, with each Unitconsisting of one share of our Common Stock and a warrant to purchase oneadditional share of Common Stock at $7.00 per share, exercisable for five yearsafter issuance.  We conducted the PIPEFinancing through two closings which occurred on August 11 and August 31,2006.  The aggregate gross proceeds fromthe PIPE Financing totaled $7,000,000, not including fees and expenses of theoffering.  We are obligated toregister for resale the shares of Common Stock issued in the PIPEFinancing as well as the shares of Common Stock issuable upon exercise ofthe warrants.

**Our Acquisition Strategy**

We intend topursue an acquisition strategy to enhance our OnDemand software productoffering.  We are seeking to offer a fullsuite of OnDemand business applications to our current and prospective customerbase.   Moreover, we believe that we mustexpand our services internationally as part of our growth strategy, and expectto commit resources to this expansion. We conducted the CAP Financing primarily to provide financing for ouracquisition strategy, and we may use the proceeds of the CAP Financing toacquire compatible OnDemand applications and other complementary assets andbusinesses.

The selection of a business opportunity in which toparticipate is complex and may pose, among other risks, those risk describedunder “Risk Factors — Risks Relating to Our Growth Strategy”.  Additionally, as we have only limitedresources available to us, it may be difficult to find good opportunities.  We may acquire assets and companies through acash transaction, or by issuing stock, or a combination of both.  Issuance of additional shares of our Common Stockin connection with an acquisition may dilute the holdings of our currentstockholders.  In addition, we must seekthe prior affirmative vote of the holders (the “Nonconvertible Holders”) of atleast 75% of the principal amount of the outstanding nonconvertible notes (the“Nonconvertible Notes”) issued in the CAP Financing to approve a BusinessCombination Transaction and must comply with the conditions to the funding ofsuch Business Combination Transaction as set forth in the indenture(“Indenture”) entered into in the CAP Financing, including the generalrequirement that the funding amount be at least $15 million and 50% of theamount required to consummate the Business Combination Transaction.  A “Business Combination Transaction” isdefined in the Indenture as the acquisition by us of the majority of the assetsor equity of another entity for a purchase price of at least $15 million.  If a Business Combination Transaction isapproved, a pro rata amount of the principal amount of the Nonconvertible Notesof each Nonconvertible Holder voting in favor of such Business CombinationTransaction will be exchanged for Convertible Notes.  If such Convertible Notes are converted intoour Common Stock, our stockholders may be further diluted.  There can be no assurance that we will beable to identify and acquire any business opportunity based on management’sbusiness judgment, or that the Nonconvertible Holders will approve a BusinessCombination Transaction.

**Productsand Services**

Our products are delivered OnDemand, which means thatour products are delivered as independent, on-demand applications, which caneither be hosted by us or another outsourced service provider.  For example, Firepond OnDemand forSalesforce.comTM is an integrated on-demand CPQ application offered from withinSalesforce.com’sTM on-demand customer relationship management (CRM) applicationsuite with services, maintenance and upgrades included in the monthly subscriptionmodel.  The typical term on a contractfor the OnDemand business is between one and two years.

We offer two products marketed under the Firepondbrand name, Firepond OnDemand, and Interactive Configurator Suite (ICS):

*FirepondOnDemand*

Firepond OnDemand is a tool that enables a company’ssales force and supporting organizations to configure complex products andservices, price accurately those products and services, develop price quotes and generate high quality proposals.  The configured products are buildable whenthe order is sent to the factory (or the configured services areaccepted when sent to the home office) because the database contains all therules necessary

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to ensure error-free configurations.  The rules represent the knowledge of acompany’s engineers, legal staff, product specialists and marketing experts.

In addition to error-free configurations, FirepondOnDemand provides rules-based pricing to handle complex multi-level pricingschemes and it produces reports that can be printed and included in automatedproposals to customers.

Firepond OnDemand provides significant cost savingsover traditional highly-customized configuration systems.  There is no software distribution, nohardware expenditures and limited support requirements.  We also offer help desk services to decreasethe customer’s total cost of ownership. With Firepond OnDemand CPQ application, smaller companies and divisionsof larger companies can afford to implement a CPQ application without having tosecure a multi-million dollar enterprise license.  Firepond OnDemand allows its customers toeliminate any hardware purchases and allows for a quick and easy deployment,which we believe provides the following benefits to customers:

·                  Unique CPQsolution;

·                  Low cost of ownership;

·                  Easy to deploy,configure and use;

·                  No software,hardware or dedicated staff;

·                  Deploys ontoserver – all users have access simultaneously; and

·                  Simple upgrades.

Firepond OnDemand is deployed as a Web service and canbe accessed by customers independently or as an integrated service within theSalesforce.comTM product.  FirepondOnDemand for Salesforce.comTM enables a company’s sales force and supportingorganizations to configure complex products and services and accurately pricethose products and services all from within Salesforce.comTM.  Currently, Firepond OnDemand is tightlyintegrated with the Salesfrorce.comTM application at both the data and processlayer.  Additionally, we have created ajoint product demonstration that is used by our sales team as well asSalesforce.com’sTM sales representatives and sales engineers.

Firepond OnDemand solution has been our primary focussince its launch in August 2005.

*InteractiveConfigurator Suite (ICS)*

Our Interactive Configurator Suite (ICS) is a set ofdata maintenance tools, shared libraries and application programminginterfaces, or APIs, that supply configuration capabilities to anapplication.  Specifically, the ICSincludes:

*Product Data Manager (PDM) –*Usedto create, populate and maintain the configuration database.  Data entry personnel do not need to beprogrammers.  The companion Product DataTester (PDT) allows the data to be tested to ensure it produces the desiredresults.

*Importers –*Avariety of importers provide the ability to import data from a variety ofsources.  The PDM also directly importsextensible markup language (XML) and open database connectivity data sources.

*Configuration Engine –*The engine uses many “solvers” to ensure the product and option selections arevalid, and that the correct pricing is applied.

*Software Development Kit (SDK) –*Thesoftware development kit includes a variety of APIs to integrate theConfiguration Engine into existing applications.

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*Enterprise Resource Planning (ERP)Connector —*An optional ERP Plug-In allows users to importERP data (in an XML format) and export PDM data (to an XML format) to an ERPsystem such as SAP’s R/3.

The Configuration Engine and the data set created withthe PDM are used by our front-end selling systems such as Firepond OnDemand.  However, several of our customers hadexisting sales systems and wanted only to integrate the Configuration Engineinto their systems.  The ICS SoftwareDevelopment Kit provides many options for integrating our configurationtechnology into existing systems.

Key benefits of ICS include:

*Scalable –*TheConfiguration Engine is multi-threaded and is designed to handle hundreds ofconcurrent configurations.  Itsscalability is increased through the optimization of the data and the use of ascalable memory manager.

*Testable –*Sincethe Configuration Engine is data driven, it is vital that the data is correctfor the engine to produce correct results. As part of processing data, the PDM checks the data for many commonerrors and warns the user if any are found. Additionally, the PDT allows the data to be exercised through a simpleuser interface.  The PDT contains a builtin debugger that allows the configuration state to be examined.

*Deployable –*TheConfiguration Engine runs on a variety of platforms including many of theWindows versions, Solaris and Red Hat Linux. It may be accessed on these platforms using the C, C++ and Javainterfaces.  It may be accessed fromother platforms using the Remote Method Invocation (RMI) and EnterpriseJavaBeans (EJB) interfaces.  It has beenimplemented in client / server, standalone and Web environments.

*International Capabilities –*TheICS supports multi-language and multi-currency systems.  The database is double-byte enabled.

*Proven technology –*Our ICS technology has been used forover 20 years – receiving many enhancements over that time.  The result is a stable, robust system that isapplicable to nearly all types of product configuration.

**MarketingStrategy**

Our marketing strategy is to be the leading providerof intelligence-driven software systems that solve the most difficult aspectsof customer acquisition and retention, and quantifiably improve sales andservice effectiveness. To achieve this goal, key elements of our marketingstrategy include the following:

·                  *Market and sell our products and services to “sweetspot” vertical market segments.*We currently offer our Product Suiteof guided selling solutions to targeted vertical market segments, primarilydiscrete manufacturing (including high technology, transportation, constructionmachinery, agricultural equipment, and others) and service based companiesselling complex combinations of services and products.  We have targeted and will continue to targetcompanies within these selected vertical industries with complex products,services or channel relationships as well as organizations with a distributedand connected customer base or dealer/broker network. We believe that ourfocused pursuit of these targeted markets increases our ability to offersolutions that meet the unique needs of our target customers, which may varygreatly across industry segments.

·                  *Offer packaging flexibility to strategicallypenetrate our target markets.*We offer a variety of packagingoptions for our software products to achieve flexibility in aligning ourtechnology with companies in different stages of executing their businessstrategies. For example, customers that have already made a significantinvestment in applications for enterprise resource planning, supply chainmanagement, customer relationship management, or others, can extend the valueof their existing infrastructure through an investment in us. As such, selectedcomponents of each product line are available as individual packaged solutionstailored to specific sales or service channel needs, or specific verticalindustry segments. With each of these product lines, additional functional andtechnology components are available as options, such as integrationcapabilities with third party 

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applications. Byoffering this variety of packaging options, we allow our customers to makestrategic investments in our technology, without necessarily committing to alarger enterprise platform. We will continue to package our product offeringsin a manner designed to remove sales barriers and create recurring revenuestreams.

·                  *Continue to develop and implement leading-edgeproducts.*We will continue to seek to provide products that deliverrobust functionality and that provide our customers a high return on theirinvestment. We have assembled an engineering organization and continue toinvest in research and development activities. In addition, we believe we havetremendous depth in our domain expertise from a professional servicesstandpoint. Although we plan to work more with systems integrator partners infiscal 2007, we will continue to maintain our own professional servicesorganization and leverage the domain expertise of these individuals to help ussuccessfully, and more rapidly, implement our software solutions.

·                  *Work with partners to extend our footprint.*Our partner program is focused ondeveloping four types of relationships: (1) strategic implementationrelationships focused on co-selling; (2) complementary softwarerelationships focused on pre-built integration and co-selling;(3) complementary technology relationships focused on hardware andplatform standards; and (4) indirect distribution channels. We believethese alliances will help to extend our market coverage from both a sales andimplementation perspective, provide us with new business leads, and allow us toprovide our customers with a broader solution. We will seek to strengthen ourrelationship with partners that support our global strategy and partners thatwork with our key clients.

We have developed a set of advanced inference enginescalled “solvers.” Solvers, in effect, are pre-defined rule types that can beselected and applied to any configuration problem. As an alternative tocompanies trying to solve a configuration problem with one or two rule types(which can result in slow rule evaluation and difficult maintenance), ourconfiguration engine provides a wide range of solver types that address thedifferent types of representations that can be found in a configurationproblem. These solvers act upon the customer-defined data model, creatingattributes in the data structures that help our solution interpret the databased on user selections. Our solvers are loaded dynamically based on thebehavior 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 adifferent type of configuration problem. These solvers create attributes in thedata model that define how the data will be interpreted when users makeselections at run-time. In effect, this interpretation of the datarelationships and constraints is the application of the “rules” that configureorders, make product recommendations, and generate price quotes.

**ProfessionalServices and Support**

We offer a range of professional services in majormarkets worldwide. These services help companies use the packaged softwarefunctionality of our product line to create deployments that are specific totheir businesses. Our professional services personnel typically have extensiveexperience in the deployment of enterprise-scale selling systems. When weassist companies in the implementation of our products, or their components, wehelp them determine how their individual selling strategies can be reflected inour packaged technology.

We believe we have developed an innovative approachand rigorous methodology for industry-specific implementations. Offered inspecific vertical industries, we believe our implementation templates helpcustomers achieve a rapid and successful deployment of our applications. Ourexpert professional services team helps 

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customers and third party integrators implement ourproducts. In addition, we have made it a priority to work with partners inorder to provide our customers with greater flexibility in their implementationchoices. The maturity and stability of our products have enabled us toexperience success in working with implementation partners.

Quality training offers the most effective way forcustomers to derive maximum benefit from their investment. We train users inmajor markets worldwide and tailor training materials to the uniquerequirements of individual customers. We also have training programs for ourimplementation partners.

We offer comprehensive support for our product linesto our customers and partners in major markets worldwide. Support services areprovided under annual software maintenance contracts. These contracts arerenewable at the customer’s option and provide for online access to productdocumentation and frequently-asked-questions, support by e-mail or telephone toreport problems or request technical assistance, and notification of servicepack and upgrade availability. Phone support is available on a 24/7 basis forcritical issues.  Our technical supportteam also provides data maintenance, enhancement, and end-user support serviceson a time and materials basis when not covered by our maintenance agreement.

Our technical support analysts have received producttraining and have the experience needed to provide the technical support our customersmay require.  We have support resourcesin the United States, Europe and Japan.

**Customers**

We have targeted, and will continue to target,selected vertical industries with complex products, services or channelrelationships as well as organizations with a distributed and connectedcustomer base or dealer/broker network. Target vertical markets for our softwareare discrete manufacturing companies, including high technology,transportation, construction machinery and agricultural equipment, and healthinsurance providers.  Our currentcustomers include Symantec, G.E. Tip Trailer, Freightliner, Cummins PowerGeneration, Deere & Company, Horizon Blue Cross Blue Shield, SiemensBuilding Technologies, Steelcase International and Case New Holland.

In fiscal 2004, two customers accounted forapproximately 55.7% of our net revenues. In fiscal 2005, four customers accounted for approximately 47.9% of ournet revenue. In fiscal 2006, three customers accounted for approximately 32.7%of our net revenue.  For the year endedJune 30, 2006, as a percentage of total revenues, domestic sales wereapproximately 53.5% and foreign sales were approximately 46.5%.

**Salesand Marketing Execution**

We execute our sales and marketing strategy throughdirect and indirect channels, and currently have sales partnerships with systemintegrators and resellers.  The recentincrease in interest in CPQ applications combined with the acceptance of theon-demand business model have opened up opportunities for partnerships withSalesforce.comTM and other enterprise applications providers which we areactively pursuing.  Additionally, ourpartner in Japan, Kozo Keikaku Engineering (KKE), is one of the country’slargest engineering firms.  KKE resellsand implements our products, on a non-exclusive basis, in the Japanese marketonly.

Our sales team is organized geographically, with afocus for our product line on discrete manufacturing (including hightechnology, transportation, construction machinery, agricultural equipment, andothers).

We are continually driving market awareness anddeveloping leads in our target markets through a series of integrated sales andmarketing campaigns. Our marketing organization utilizes a variety of programsto support our sales efforts, including market and product research andanalysis, product and strategy updates with industry analysts, public relationsactivities and speaking engagements, Internet-based and direct mail marketingprograms, seminars and trade shows, brochures, data sheets and white papers, andweb site marketing.

**Researchand Development**

Our research and development team is responsible forproduct planning, design and development of functionality within our softwareproducts, general release and quality assurance functions, third party integration

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and developing templates for target verticalindustries.  We expect to continue toinvest in research and development in the future.  We incurred research and development expensesof approximately $1.1 million and $1.8 million in the eight month period endedJune 30, 2005 and the fiscal year ended June 30, 2006, respectively.

**Competition**

The markets for sales configuration are intenselycompetitive, constantly evolving, and subject to rapid technological change. Weencounter competition for our product line from a number of different sources,including in-house technical staffs, traditional customer relationshipmanagement vendors, enterprise resource planning vendors, and other vendors ofsales configuration point solutions. Of these vendors, our principalcompetitors include SAP, Oracle, Trilogy, Selectica, Big Machines, Webcom, andQuoteWerks among others.  There are asubstantial number of other companies focused on providing Internet-basedsoftware applications for customer relationship management that may offercompetitive products in the future. However, we believe that the market forsales configuration solutions is still in its formative stage, and that nocurrently identified competitor represents a dominant presence in this market**.**

We expect competition to increase as a result ofsoftware industry consolidation. For example, a number of enterprise softwarecompanies have acquired point solution providers to expand their productofferings. Our competitors may also package their products in ways that maydiscourage users from purchasing our products. Current and potentialcompetitors may establish alliances among themselves or with third parties oradopt aggressive pricing policies to gain market share. In addition, newcompetitors could emerge and rapidly capture market share.

Although we believe we have advantages over ourcompetitors in terms of the functionality and comprehensiveness of oursolution, as well as our targeted vertical focus, there can be no assurancethat we can maintain our competitive position against current and potentialcompetitors, especially those with longer operating histories, greater namerecognition or substantially greater financial, technical, marketing,management, service, support and other resources.

We believe that the principal competitive factors inour target markets include:

·                  adherenceto emerging Internet-based technology standards;

·                  comprehensivenessof applications;

·                  adaptability,flexibility and scalability;

·                  real-time,interactive capability with customers, partners, vendors and suppliers;

·                  ability tosupport vertical industry requirements;

·                  ease ofapplication use and deployment;

·                  speed ofimplementation;

·                  customer serviceand support; and

·                  initial priceand total cost of ownership.

**ProprietaryRights**

We regard our products as proprietary.  We attempt to protect our products by relyingon a combination of copyright, patent, trade secret and trademark laws,restrictions on disclosure and other methods. In particular, we have developed and use registered trademarks andcopyrights in our business.  We hold over200 copyrights related to our business. In addition, we own two trademark registrations in the United States andhave four trademark applications pending with the United States Patent and TrademarkOffice.  Federal registration of atrademark 

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enables the registered owner of the mark to bar theunauthorized use of the registered mark in connection with similar products inthe same channels of trade by any third party anywhere in the United States,regardless of whether the registered owner has ever used the trademark in thearea where the unauthorized use occurs. We have filed applications and own trademark registrations and intend toregister additional trademarks in foreign countries where products are or maybe sold in the future.  We own onetrademark registration in the European Union and have two trademarkapplications pending with the Office for the Harmonization of IntellectualProperty.  We also have one trademarkapplication pending with the Japan Trademark Office.  We believe these trademarks and copyrightsconstitute valuable assets, adding to our recognition and the marketing of ourproducts and that these proprietary rights have been and will continue to beimportant in enabling us to compete.

Our software products are dependent, in part, on anon-exclusive worldwide license from Orion IP, LLC (“Orion”) to utilize certaincritical patents and related rights in connection with the conduct of ourbusiness.   Pursuant to a patentpurchase agreement (“Patent Purchase Agreement”) entered into by and betweenOrion and Firepond on January 28, 2004, Firepond sold, transferred, assignedand set over to Orion all rights, title and interest in 14 United Statespatents and 7 United States patent applications related to, among other things**,**methodspracticed by Firepond and software designed, built and sold by Firepond as itsown product****(the “Patents”), fora purchase price of $1,000.000 payable pursuant to a promissory note.  Pursuant to a non-exclusive patent licenseagreement (“License Agreement”) executed between Orion and the Company on March28, 2006, Orion granted us a non-exclusive, royalty free, worldwide,non-transferable, non-exclusive right and license under the Patents, withoutthe right to sublicense, solely to make, use, sell, offer for sale, and import ourproducts and services in connection with our business activities.  The License Agreement will continue withrespect to each Patent until such Patent is no longer in force.

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

**Employees**

At June 30, 2006, we had a total of 48 employees, ofwhich 21 were in research and development, 13 were in professional services andsupport, 5 were in sales and marketing, and 9 were in finance andadministration.  None of our employeesare represented by a labor union.

**RiskFactors**

*Ourbusiness, results of operations and financial condition may be materially andadversely affected due to any of the following risks. The risks described beloware not the only ones we face. Additional risks we are not presently aware ofor that we currently believe are immaterial may also impair our businessoperations. The trading price of our Common Stock could decline due to any ofthese risks, and you could lose all or part of your investment. In assessingthese risks, you should also refer to the other information contained orincorporated by reference in this Report, including our consolidated financialstatements and related notes.*

**Risk Relating to Our Business**

**Our “OnDemand” businessis unproven, which makes it difficult to evaluate a large portion of our futurebusiness and prospects.**

While we and our predecessors have been in businessfor over 20 years, the OnDemand software market is relatively new.  Firepondbegan offering OnDemand services in 2005, which makes evaluation of our current business and futureprospects difficult.  The revenue andincome potential of our business and the OnDemand 

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software market are unproven.  In addition, because the market for OnDemandCPQ software is new and rapidly evolving, we have limited insight into trendsthat affect this business.  You mustconsider our business andprospects in light of the risks and difficulties we may encounter as a companyin a new and rapidly evolving market. Factors that may affect market acceptance of the OnDemand softwareservice include:

·      reluctance by enterprises to migrate to anon-demand application service;

·                  the price andperformance of this service;

·                  the level ofcustomization we can offer;

·                  theavailability, performance and price of competing products and services;

·                  reluctance byenterprises to trust third parties to store and manage their internal data; and

·                  adverse publicityabout us, our service or the viability or security of on-demand applicationservices generally from third party reviews, industry analyst reports andadverse statements made by competitors.

Many of these factors are beyond our control.  Our success will depend to a substantialextent on the willingness of enterprises, large and small, to increase theiruse of on-demand application services in general, and for CPQ in particular.Many enterprises have invested substantial personnel and financial resources tointegrate traditional enterprise software into their businesses, and thereforemay be reluctant or unwilling to migrate to on-demand application services.Furthermore, some enterprises may be reluctant or unwilling to use on-demandapplication services because they have concerns regarding the risks associatedwith security capabilities, among other things, of the technology deliverymodel associated with these services. If enterprises do not perceive thebenefits of on-demand application services, then the market for these servicesmay not develop at all, or it may develop more slowly than we expect, either ofwhich would significantly adversely affect our operating results. In addition,as a new company in this unproven market, we have limited insight into trendsthat may develop and affect our business. We may make errors in predicting andreacting to relevant business trends, which could harm our business.  The inability of our OnDemand applicationservice to achieve widespread market acceptance would harm our business andhave a material adverse effect on us.

**We and our predecessorshave incurred losses in the past and we may not be able to maintainprofitability in the future.**

We incurred a net loss of $69,203 for the elevenmonths ended October 31, 2004, net income of $2,041,192 for the eight monthsended June 30, 2005 and a loss of $4,783,181 for the fiscal year ended June 30,2006.  Our predecessor, Firepond,incurred quarterly and annual losses intermittently since it was formed in1983, and regularly since fiscal 1997. Firepond incurred net losses of $20.6million in fiscal 2003, $23.7 million in fiscal 2002, $70.3 millionfor fiscal 2001, and $16.3 million for fiscal 2000.  We may not be able to establish or maintainprofitable operations in the future.  Wealso expect that our operating expenses will continue to increase in thefuture.  We cannot provide assurance thatwe will be able to generate sufficient revenue to establish or maintainprofitability.  You should not considerany historical performance of us or Firepond as necessarily being indicative ofour future results.

**Our quarterly revenue andoperating results are volatile and difficult to predict, and if we fail to meetthe expectations of investors, the market price of our Common Stock wouldlikely decline significantly.**

Our revenue and operating results are likely tofluctuate significantly from quarter to quarter, due to a number of factors.These factors include:

·      our ability to retain and increase salesto existing customers, attract new customers and satisfy our customers’requirements;

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·                  the timing ofadditional investments in our OnDemand application service and in ourmaintenance services;

·                  technicaldifficulties or interruptions in our service;

·                  the rate ofexpansion and effectiveness of our sales force;

·                  the length ofthe sales cycle for our service;

·                  our ability toform strategic relationships with third parties for the distribution of oursoftware, and the level of costs that these arrangements entail;

·                  our ability topromote software products, as well as the cost and effectiveness of suchadvertising;

·                  costs orpotential limitations on our business activities resulting from litigation andregulatory developments in our industry, which could be significant;

·                  our ability toobtain additional customers or to derive additional revenue from our existingcustomers;

·                  downward pricingpressures on our software licenses;

·                  costs associatedwith any future acquisitions;

·                  our ability torespond to technological developments in our industry; and

·                  fluctuations ineconomic and market conditions, particularly those affecting the market fortechnology spending or the industries of our customers, such as manufacturing,insurance and financial services.

Many of these factors are largely outside of ourcontrol, and there are many facets of each of these factors over which we havelimited control. As a result of the factors above and the evolving nature ofour business and industry, we may be unable to forecast our revenue accurately.We plan our expenses based on operating plans and estimates of future revenue.We may be unable to adjust our spending in a timely manner to compensate forany unexpected revenue shortfalls. Additionally, a failure to meet our revenueor expense projections would have an immediate and negative impact on ouroperating results. If this were to happen, the market price of our Common Stockwould likely decline significantly.

**Restrictive covenants in theIndenture governing the Notes issued in the CAP Financing and the relatedsecurities purchase agreement, and any additional indebtedness that we mayincur, may restrict our ability to pursue our business strategies.**

The Indenture governing the Notes issued in the CAPFinancing and the related securities purchase agreement limit our ability,among other things, to:

·                  incuradditional indebtedness without the prior consent of the Note holders;

·                  incurliens;

·                  redeem,repurchase, or declare or pay any dividend or distribution on our capitalstock;

·                  consolidate,merge, sell or otherwise dispose of all or substantially all of our assets orenter into a Business Combination Transaction;

·                  issueto our directors, officers or consultants Company equity or securitiesconvertible into equity without the prior approval of the Note holders; and

·                  enterinto transactions with our affiliates.

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Inaddition, the Indenture includes other and more restrictive covenants and,subject to certain exceptions, prohibits us from prepaying our otherindebtedness while indebtedness under the Notes is outstanding. The Indenturealso requires us to maintain compliance with specified financial ratios andminimum subscriber targets.  Our abilityto comply with these ratios may be affected by events beyond our control.

Therestrictions contained in the Indenture and the securities purchase agreementcould limit our ability to plan for or react to market conditions, meet capitalneeds or make acquisitions or otherwise restrict our activities or businessplans.  A breach of any of theserestrictive covenants or our inability to comply with the required financialratios could result in a default under the Indenture.  If a default occurs, the Note holders may,among other remedies, elect to declare all borrowings outstanding, togetherwith accrued interest and other fees, to be immediately due and payable.  The Note holders also have the right in thesecircumstances to terminate any commitments they have to provide furtherborrowings.  If we are unable to repayoutstanding borrowings when due, the Note holders also have the right toproceed against the collateral, including our available cash, granted to themto secure the indebtedness.  If theindebtedness under our CAP Financing and the Notes were to be accelerated, wecannot assure you that our assets would be sufficient to repay in full thatindebtedness and our other indebtedness.

Indebtednessincurred under the CAP Financing, and other debt financings that we may securefrom time to time (subject to the restrictions imposed by the Indenture), couldhave other important consequences, such as:

·                  makingit more difficult for us to satisfy our debt obligations;

·                  requiringus to dedicate a substantial portion of our cash flow from operations topayments on our indebtedness, thereby reducing the availability of our cashflow to fund acquisitions, working capital, capital expenditures, research anddevelopment efforts and other general corporate purposes;

·                  increasingour vulnerability to and limit our flexibility in planning for, or reacting to,changes in our business and the industry in which we operate;

·                  placingus at a competitive disadvantage compared to our competitors that have lessdebt; and

·                  limitingour ability to borrow additional funds.

To service ourindebtedness, we will require a significant amount of cash.  All or a portion of the cash required toservice the Notes issued in the CAP Financing may be provided by investment ofthe proceeds of the CAP Financing in government-issued debt securities.  However these investments may not provideenough funds to satisfy our debt service on the Notes.  Our ability to generate cash depends on manyfactors beyond our control.  We cannotassure you that our business will generate sufficient cash flow from operationsor that future borrowings will be available to us in an amount sufficient topay our indebtedness or to fund our other liquidity needs.

Further details ofthe CAP Financing are described below under “Item 6.—Management’s Discussionand Analysis of Financial Condition and Results of Operations of the Company—RecentFinancings”.

**Failureto expand our relationships with third party channels may adversely impact oursupport and maintenance of existing customers, delay the implementation of ourproducts and delay the growth of our revenue.**

Our businessstrategy includes expanding and increasing third party channels which licenseand support our products, such as resellers, distributors, OEMs, systemintegrators and consulting firms. This often requires that these third partiesrecommend our products to their customers and install and support our productsfor their customers. To increase our revenue and implementation capabilities,we must develop and expand our relationships with these third parties. Inaddition, if these firms fail to implement our products successfully for theirclients, we may not have the resources to implement our products on theschedule required by the client which would result in our inability torecognize revenue from the license of our products to these customers.

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**We donot have an adequate history with our subscription model to predict the rate ofcustomer subscription renewals and the impact these renewal rates will have onour future revenue or operating results.**

Our customers haveno obligation to renew their subscriptions for our service after the expirationof their initial subscription period.  Inaddition, these customers may renew for a lower priced edition of our serviceor for fewer subscriptions. We have limited historical data with respect torates of customer subscription renewals, so we cannot accurately predictcustomer renewal rates. Our customers’ renewal rates may decline or fluctuateas a result of a number of factors, including their dissatisfaction with ourservice and their ability to continue their operations and spending levels. Ifour customers do not renew their subscriptions for our service, our revenuewill decline and our business will suffer.

Our future successalso depends in part on our ability to sell additional features or enhancededitions of our service to our current customers. This may require increasinglysophisticated and costly sales efforts that are targeted at our customers’senior management. If these efforts are not successful, our business maysuffer.

**Because we willrecognize revenue from subscriptions for our service over the term of thesubscription, downturns or upturns in sales may not be immediately reflected inour operating results.**

We generallyrecognize license/subscription revenue from our products ratably over the termsof the license/subscription agreements, which are typically 12 to 24 months,although terms can range from 1 to 60 months. As a result, much of the revenuethat we report in each quarter is deferred revenue from license/subscriptionagreements entered into during previous quarters.  Consequently, a decline in new or renewedlicenses/subscriptions in any one quarter will not necessarily be fullyreflected in the revenue in that quarter and will negatively affect our revenuein future quarters.  In addition, we maybe unable to adjust our cost structure to reflect these reduced revenues.  Accordingly, the effect of significantdownturns in sales and market acceptance of our products and services may notbe fully reflected in our results of operations until future periods. Ourlicense/subscription model also makes it difficult for us to rapidly increaseour revenue through additional sales in any period, as revenue from newcustomers must be recognized over the applicable subscription term.

**Themarket in which we participate is intensely competitive, and if we do notcompete effectively, our operating results could be harmed.**

The market for CRMand CPQ applications is intensely competitive and rapidly changing, barriers toentry are relatively low, and with the introduction of new technologies andmarket entrants, we expect competition to intensify in the future.  Many of our current and potential competitorshave longer operating histories, greater name recognition and substantiallygreater resources than we do. Therefore, they may be able to respond morequickly than we can to new or changing opportunities, technologies, standardsor customer requirements.  Some of ourprincipal competitors offer their products at a lower price, which has resultedin pricing pressures. If we are unable to maintain our current pricing, ouroperating results could be negatively impacted. In addition, pricing pressuresand increased competition generally could result in reduced sales, reducedmargins or the failure of our service to achieve or maintain more widespreadmarket acceptance, any of which could harm our business.  If we fail to compete effectively, ouroperating results will be harmed.

**Ifwe are unable to introduce new and enhanced products on a timely basis thatrespond effectively to changing technology, our revenue may decline.**

Our market ischaracterized by rapid technological change, changes in customer requirements,frequent new product and service introductions and enhancements, and evolvingindustry standards. Advances in Internet technology or in e-commerce softwareapplications, or the development of entirely new technologies to replaceexisting software, could lead to new competitive products that have betterperformance or lower prices than our products and could render our productsobsolete and unmarketable. In addition, if a new software language or operatingsystem becomes standard or is widely adopted in our industry, we may need torewrite portions of our products in another computer language or for anotheroperating system to remain competitive. If we are unable to develop new andenhanced products on a timely basis that respond to changing technology, ourbusiness could be seriously harmed.

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**A delayed recoveryin information technology spending could reduce sales of our products.**

Average licensefees for our product suite have historically ranged from approximately lessthan a hundred thousand dollars to several million dollars. Often thisrepresents a significant information technology capital expenditure for thecompanies to which we target our sales efforts. In addition, regardless of thecost of our products, many companies may elect not to pursue informationtechnology projects, which may incorporate our product suites or theirindividual components, as a result of the global information technologyspending slowdown. Consequently, if the current global environment ininformation technology spending should continue or decline even further,whether resulting from a weakened economy or other factors, we may be unable tomaintain or increase our sales volumes and achieve our targeted revenue growth.In addition, we depend on our customers to pay recurring maintenance fees fortechnical support and product upgrades. Often, this represents a significantand recurring information technology capital expenditure for our customers. Asa result, if the global environment in information technology should continueor decline further, whether resulting from a weakened economy or other factors,we may be unable to maintain our maintenance revenues at their current levelsand achieve our targeted revenues. Furthermore, we expect that our historical maintenance revenues willdecline with time as we expend more resources on our OnDemand products and lessresources on our historical maintenance customers.   In the event such revenues decline we maymake the decision to sell or abandon our historical maintenance business.  This would cause an immediate decline in ourfuture revenues and could result in us not meeting our targeted revenueobjectives.

**Defects in ourproducts and services could diminish demand for our products and services andsubject us to substantial liability.**

Because our products and services are complex and haveincorporated a variety of software both developed in-house and acquired fromthird party vendors, our products and services may have errors or defects thatusers identify after they begin using them that could result in unanticipateddowntime for our subscribers and harm our reputation and our business.  Traditional enterprise software products andInternet-based services frequently contain undetected errors when firstintroduced or when new versions or enhancements are released.  Our products may be particularly susceptibleto bugs or performance degradation because of the evolving nature of Internettechnologies and the stress that full deployment of our products over theInternet to thousands of end-users may cause. We have from time to time found defects in our products and services andnew errors in our existing products and services may be detected in thefuture.  Since our customers use our products and services for importantaspects of their business, any errors, defects or other performance problemswith our products or services could hurt our reputation and may damage ourcustomers’ businesses.  If that occurs,customers could elect not to renew, or delay or withhold payment to us, wecould lose future sales or customers may make warranty claims against us, whichcould result in an increase in our provision for doubtful accounts, an increasein collection cycles for accounts receivable or the expense and risk oflitigation.

In addition, if one of our products fails, a customermay assert a claim for substantial damages against us, regardless of ourresponsibility for the failure.  Ourproduct liability insurance may not cover claims brought against us. Productliability claims could require us to spend significant time and money inlitigation or to pay significant damages. Any product liability claims, whether or not successful, could seriouslydamage our reputation and our business.

**We rely onthird-party hardware and software that may be difficult to replace or whichcould cause errors or failures of our service.**

We rely on hardware purchased or leased and softwarelicensed from third parties in order to offer our service, including WeblogicApplication Server software from BEA and a non-exclusive worldwide license fromOrion IP, LLC to utilize certain critical patents and related rights in connectionwith the conduct of our business. This hardware and software may not continueto be available on commercially reasonable terms, or at all. Any loss of theright to use any of this hardware or software could result in delays in theprovisioning of our service until equivalent technology is either developed byus, or, if available, is identified, obtained and integrated.  Any such loss, in turn, could prevent theimplementation or impair the functionality of our products, delay new productintroductions, or injure our reputation. In addition, any errors or defects in third-party hardware or softwarecould result in errors or a failure of our service which could harm ourbusiness.

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**Difficultiesassociated with the protection of our intellectual property and potentialclaims alleging infringement of third party’s intellectual property could harmour ability to compete and result in significant expense to us and loss ofsignificant rights.**

Our success and ability to compete is dependent inpart upon our proprietary technology.  In addition, our software products are dependent, in part, on anon-exclusive worldwide license from Orion IP, LLC to utilize certain criticalpatents and related rights in connection with the conduct of its business.  Any infringement of our proprietary rightscould result in significant litigation costs, and any failure to adequatelyprotect our proprietary rights could result in our competitors’ offeringsimilar products, potentially resulting in loss of a competitive advantage anddecreased revenue. Existing patent, copyright, trademark and trade secret lawsafford only limited protection. In addition, the laws of some foreign countriesdo not protect our proprietary rights to the same extent as do the laws of theUnited States. Therefore, we may not be able to protect our proprietary rightsagainst unauthorized third party copying or use. Furthermore, policing theunauthorized use of our products is difficult. Some of our contractualarrangements provide third parties with access to our source code and otherintellectual property upon the occurrence of specified events. This accesscould enable these third parties to use our intellectual property and sourcecode to develop and manufacture competing products, which would adversely affectour performance and ability to compete. Litigation may be necessary in thefuture to enforce our intellectual property rights, to protect our tradesecrets or to determine the validity and scope of the proprietary rights ofothers. This litigation could result in substantial costs and diversion ofresources and could materially adversely affect our future operating results.

Further, the software industry is characterized by theexistence of frequent litigation of intellectual property rights. From time totime, third parties may assert patent, copyright, trademark and otherintellectual property rights to technologies that are important to ourbusiness. Any claims, with or without merit, could be time-consuming, result incostly litigation, divert the efforts of our technical and managementpersonnel, cause product shipment delays, disrupt our relationships with ourcustomers or require us to enter into royalty or licensing agreements, any ofwhich could have a material adverse effect upon our operating results. We mayalso be obligated to indemnify our business partners in any such litigation,which could further exhaust our resources. Furthermore, as a result of an intellectual property challenge, we maybe prevented from providing some or all of our services unless we enter intoroyalty, license or other agreements. Royalty or licensing agreements, ifrequired, may not be available on terms acceptable to us.  If a claim against us is successful and wecannot obtain a license to the relevant technology on acceptable terms, licensea substitute technology or redesign our products to avoid infringement, ourbusiness, financial condition and results of operations would be materiallyadversely affected.

**We depend on keypersonnel and must attract and retain qualified personnel to be successful.**

Our success depends upon the continued contributionsof our senior management, sales, engineers, and professional servicespersonnel, who perform important functions and would be difficult to replace.Also, we believe that our future success is highly dependent on William Santo,our Chief Executive Officer. The loss of the services of any key personnel,particularly senior management, sales, engineers, or professional servicespersonnel could seriously harm our business.

In addition, to continue to execute on our growthplan, we must attract and retain other highly qualified personnel. Competitionfor these personnel is intense, especially for engineers with high levels ofexperience in designing and developing software and Internet-related servicesand senior sales executives. We may not be successful in attracting andretaining qualified personnel. We and our predecessors have from time to timein the past experienced, and we expect to experience in the future, difficultyin hiring and retaining highly skilled employees with appropriatequalifications. Many of the companies with which we compete for experiencedpersonnel have greater resources than we have. In addition, in makingemployment decisions, particularly in the Internet and high-technologyindustries, job candidates often consider the value of the stock options theyare to receive in connection with their employment. Volatility in the price ofour stock may therefore adversely affect our ability to attract or retain keyemployees. Furthermore, the new requirement to expense stock options maydiscourage us from granting the size or type of stock option awards that jobcandidates require to join our company. In order to attract personnel to meet our technical development needs inthe future we may have to pay above market rates or open satelliteoffices.  Such additional costs couldnegatively impact our profitability.  Ifwe fail to attract new personnel or fail to retain and motivate our currentpersonnel, our business and future growth prospects could be harmed.

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**We depend on ourdirect sales force for a significant portion of our current sales and ourgrowth depends on the ability of this direct sales force to increase sales to alevel that will allow us to reach and maintain profitability.**

Our ability to increase sales will depend on ourability to train and retain top quality sales people who are able to targetprospective customers’ senior management, and who can productively andefficiently generate and service large accounts. Competition for theseindividuals is intense, and we may not be able to attract, assimilate or retainhighly qualified personnel in the future. Turnover among our sales staff hasbeen significant and a number of our employees have left or beenterminated.  In addition, new hiresrequire significant training and may, in some cases, take more than a yearbefore they achieve full productivity. Recent hires and planned hires may not become as productive as we wouldlike. If we are unable to retain qualified sales personnel, or if newly hiredpersonnel fail to develop the necessary skills or to reach productivity whenanticipated, we may not be able to increase sales of our products and services.

In addition, in connection with our effort tostreamline our operations, reduce costs and bring its staffing andinfrastructure in line with industry standards, Firepond restructured itsorganization and reduced its workforce. In connection with the restructurings,during fiscal 2001 Firepond terminated 363 employees and 90 consultants, andduring fiscal 2002 it terminated 93 employees. In fiscal 2003, Firepond eliminated 55 positions and shut down itsforeign offices.  In fiscal 2004,Firepond eliminated 36 positions and continued to streamline its operations byclosing its Bloomington office.  Thisrestructuring may also yield unanticipated consequences, such as attritionbeyond our planned reduction in workforce and loss of employee morale anddecreased performance. Continuity of personnel is an important factor in thesuccessful completion of our business plan and ongoing turnover in ourpersonnel could materially and adversely impact our sales and marketingefforts, current customer implementations, and our development projects. Webelieve that hiring and retaining qualified individuals at all levels isessential to our success, and there can be no assurance that we will besuccessful in attracting and retaining the necessary personnel.

**If our securitymeasures are breached and unauthorized access is obtained to a customer’s data,our service may be perceived as not being secure, customers may curtail or stopusing our service and we may incur significant liabilities.**

Our service involves the storage and transmission ofcustomers’ proprietary information, and security breaches could expose us to arisk of loss of this information, litigation and possible liability. If oursecurity measures are breached as a result of third-party action, employeeerror, malfeasance or otherwise, and, as a result, someone obtains unauthorizedaccess to one of our customers’ data, our reputation will be damaged, ourbusiness may suffer and we could incur significant liability. Becausetechniques used to obtain unauthorized access or to sabotage systems changefrequently and generally are not recognized until launched against a target, wemay be unable to anticipate these techniques or to implement adequatepreventative measures. If an actual or perceived breach of our security occurs,the market perception of the effectiveness of our security measures could beharmed and we could lose sales and customers.

**Interruptions ordelays in service from our third-party Web hosting facility could impair thedelivery of our service and harm our business.**

We provide our OnDemand service through computerservers located at two separate third-party computer server facilities, QwestCommunications International (“Qwest”) located in Minneapolis, Minnesota andOpSource, Inc. (“OpSource”) located in Ashburn, Virginia.  The OpSource facility is a SAS70 Type-IIservice facility, a security rating that is required by many OnDemandcustomers.  As such we are in the processof transitioning much of our OnDemand hosting operations from Qwest to OpSource.   We do not control the operation of either ofthese facilities, which are subject to damage or interruption from earthquakes,floods, fires, power loss, telecommunications failures and similar events. Theyare also subject to break-ins, sabotage, intentional acts of vandalism, workstoppages, strikes and similar misconduct. Despite precautions taken at thesefacilities, the occurrence of a natural disaster, a decision to close either orboth facilities without adequate notice or other unanticipated problems could resultin lengthy interruptions in our service. In addition, the failure by Qwest and/or OpSource to provide ourrequired data communications capacity could result in interruptions in ourservice.  We are currently in the processof obtaining additional business continuity services and additional data centercapacity; 

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however, none of these services or capacity arecurrently operational.  Any damage to, orfailure of, our systems could result in interruptions in our service.Interruptions in our service may reduce our revenue, cause us to issue creditsor pay penalties, cause customers to terminate their subscriptions andadversely affect our renewal rates. Our business will be harmed if ourcustomers and potential customers believe our service is unreliable.

**Controlby our principal stockholder will limit your ability to influence the outcomeof director elections and other matters requiring stockholder approval.**

Douglas Croxall, the Chairman of our Board ofDirectors, currently beneficially holds, directly or indirectly, 2,802,414shares or approximately 45.9% of the issued and outstanding shares of ourCommon Stock as of September 15, 2006. Therefore, Mr. Croxall will have the ability to materially influence theelection of our Board of Directors and the outcome of any matter presented fora vote to our stockholders.  Thisconcentration of ownership could also have the effect of delaying or preventinga change in our control or discouraging a potential acquirer from attempting toobtain control of us, which in turn could have a material adverse effect on themarket price of the Common Stock or prevent our stockholders from realizing apremium over the market price for their shares of Common Stock.

**We are incurringincreased costs as a result of being a public company, compared to thehistorical operations of Firepond.**

As a public company, we are incurring significantlegal, accounting and other expenses that we or Firepond did not incur as aprivate company.  Firepond became aprivate company on December 3, 2003.  Inaddition, the Sarbanes-Oxley Act of 2002, as well as new rules implemented bythe SEC, requires changes in corporate governance practices of publiccompanies.  In addition, if, as planned,our stock is listed on Nasdaq, the American Stock Exchange or another majorexchange, we will incur additional compliance expenses.  We expect these new rules and regulations toincrease our legal and financial compliance costs and to make some activitiesmore time-consuming and costly. In addition, we will incur additional costsassociated with our public company reporting requirements. We also expect thesenew rules and regulations to make it more difficult and more expensive for usto obtain director and officer liability insurance and we may be required toaccept reduced policy limits and coverage or incur substantially higher coststo obtain the same or similar coverage. As a result, it may be more difficultfor us to attract and retain qualified persons to serve on our Board ofDirectors or as executive officers.

**Our compliancewith the Sarbanes-Oxley Act of 2002 and SEC rules concerning internal controlsmay be time consuming, difficult and costly.**

It may be time consuming, difficult and costly for usto develop and implement the additional internal controls, processes andreporting procedures required by the Sarbanes-Oxley Act. We may need to hireadditional financial reporting, internal auditing and other finance staff inorder to develop and implement appropriate additional internal controls,processes and reporting procedures. If we are unable to comply with theserequirements of the Sarbanes-Oxley Act, we may not be able to obtain theindependent accountant certifications that the Sarbanes-Oxley Act requires publiclytraded companies to obtain.

**If we fail tocomply in a timely manner with the requirements of Section 404 of theSarbanes-Oxley Act of 2002 regarding internal control over financial reportingor to remedy any material weaknesses in our internal controls that we mayidentify, such failure could result in material misstatements in our financialstatements, cause investors to lose confidence in our reported financialinformation and have a negative effect on the trading price of our CommonStock.**

Pursuant to Section 404 of the Sarbanes-Oxley Actof 2002 and current SEC regulations, beginning with our annual report onForm 10-KSB for our fiscal year ending June 30, 2008, we will be requiredto furnish a report by our management on our internal control over financialreporting. Such report will contain, among other matters, an assessment of theeffectiveness of our internal control over financial reporting as of the end of2007. We will soon begin the process of documenting and testing our internalcontrol procedures in order to satisfy these requirements, which is likely toresult in increased general and administrative expenses and may shiftmanagement time and attention from revenue-generating activities to complianceactivities. While our management is expending significant resources in aneffort to complete this important project, there can be no assurance that wewill be able to 

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achieve our objective on a timely basis. There alsocan be no assurance that our auditors will be able to issue an unqualifiedopinion on management’s assessment of the effectiveness of our internal controlover financial reporting. Failure to achieve and maintain an effective internalcontrol environment or complete our Section 404 certifications could havea material adverse effect on our stock price.

In addition, in connection with our on-goingassessment of the effectiveness of our internal control over financialreporting, we may discover “material weaknesses” in our internal controls asdefined in standards established by the Public Company Accounting OversightBoard, or the PCAOB. A material weakness is a significant deficiency, orcombination of significant deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The PCAOB defines “significantdeficiency” as a deficiency that results in more than a remote likelihood thata misstatement of the financial statements that is more than inconsequentialwill not be prevented or detected.

In the event that a material weakness is identified,we will employ qualified personnel and adopt and implement policies andprocedures to address any material weaknesses that we identify. However, theprocess of designing and implementing effective internal controls is acontinuous effort that requires us to anticipate and react to changes in ourbusiness and the economic and regulatory environments and to expend significantresources to maintain a system of internal controls that is adequate to satisfyour reporting obligations as a public company. We cannot assure you that themeasures we will take will remediate any material weaknesses that we mayidentify or that we will implement and maintain adequate controls over ourfinancial process and reporting in the future.

Any failure to complete our assessment of our internalcontrol over financial reporting, to remediate any material weaknesses that wemay identify or to implement new or improved controls, or difficultiesencountered in their implementation, could harm our operating results, cause usto fail to meet our reporting obligations or result in material misstatementsin our financial statements. Any such failure could also adversely affect theresults of the periodic management evaluations of our internal controls and, inthe case of a failure to remediate any material weaknesses that we mayidentify, would adversely affect the annual auditor attestation reportsregarding the effectiveness of our internal control over financial reportingthat are required under Section 404 of the Sarbanes-Oxley Act of 2002.Inadequate internal controls could also cause investors to lose confidence inour reported financial information, which could have a negative effect on thetrading price of our Common Stock.

**RisksRelating to Our Growth Strategy**

**We might requireadditional capital to support business growth, and this capital might not beavailable.**

We intend to continue to make investments to supportour business growth and may require additional funds to respond to businesschallenges or opportunities, including the need to develop new services orenhance our existing service, enhance our operating infrastructure or acquirecomplementary businesses and technologies. In March 2006, we consummated the CAP Financing in which we secured agross amount of $50.0 million in new financing through the issuance of seniorsecured notes.  The proceeds of the CAPFinancing may be used to fund a Business Combination Transaction, subject tothe approval of holders of at least 75% of the principal amount of outstandingNonconvertible Notes.  We have noassurance that such approval can be obtained in connection with a proposedBusiness Combination Transaction. Accordingly, we may need to engage in equity or debt financings tosecure additional funds.  Under the termsof the Indenture governing the Notes, we generally are required to obtain theconsent of the Note holders to incur any additional indebtedness.  If additional debt financing is required, wemay not be able to obtain the requisite consent of the Note holders.

In addition, if we raise additional funds throughfurther issuances of equity or convertible debt securities, our existingstockholders could suffer significant dilution, and any new equity securitieswe issue could have rights, preferences and privileges superior to those ofholders of our Common Stock.  Holders ofour Common Stock may be further diluted upon the conversion of theNonconvertible Notes issued in the CAP Financing to Convertible Notes followingthe approval of a Business Combination Transaction, and the subsequentconversion of the Convertible Notes into our Common Stock, or upon the exerciseof the CAP Warrants and PIPE Warrants issued in connection with thosefinancings.

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As discussed above, the Indenture governing the Notesimposes covenants that restrict our business operations and our ability toincur additional debt.  If we were tosecure additional debt financing in the future, we could be subject toadditional restrictive covenants relating to our capital raising activities andother financial and operational matters, which may make it more difficult forus to obtain additional capital and to pursue business opportunities, includingpotential acquisitions. In addition, we may not be able to obtain additionalfinancing on terms favorable to us, if at all. If we are unable to obtainadequate financing or financing on terms satisfactory to us, when we requireit, our ability to continue to support our business growth and to respond to businesschallenges could be significantly limited.

**Difficulties andfinancial burdens associated with mergers and acquisitions could harm ourbusiness and financial results.**

On February 15, 2001, Firepond acquired all ofthe outstanding stock of Brightware, Inc. This acquisition proved difficult to integrate into Firepond’soperations and product base.  In May 2004,Firepond sold the Brightware assets to a third party.  We will seek to acquire additional assets orcompanies that require integration of operations or products with our presentoperations or products.  Presentmanagement has not made any acquisitions or investments to date on our behalf,and therefore our ability as an organization to make acquisitions orinvestments is unproven.  Acquisitionsand investments involve numerous risks, including:

·                  difficulties inintegrating operations, technologies, services and personnel;

·                  exposure tounknown liabilities of the acquired asset or business;

·                  diversion offinancial and managerial resources from existing operations;

·                  risk of enteringnew markets;

·                  potentialwrite-offs of acquired assets or investments;

·                  potential lossof key employees;

·                  additionalacquisition costs and unanticipated expenses;

·                  inability togenerate sufficient revenue to offset acquisition or investment costs or to payoff any debt incurred therewith, including any debt incurred under the CAPFinancing; and

·                  delays incustomer purchases due to uncertainty.

Any merger or acquisition of or by us may not producethe revenue, earnings or business synergies that we anticipated, and anacquired product, service or technology might not perform as expected.  Prior to completing a merger or acquisition,it is difficult to determine if such benefits can actually be realized.  The process of integrating companies into ourbusiness or integrating our company into another business may also result inunforeseen difficulties. Unforeseen operating difficulties may absorbsignificant management attention, which we might otherwise devote to our existingbusiness.  In addition, the process mayrequire significant financial resources that we might otherwise allocate toother activities, including the ongoing development or expansion of ourexisting operations. If we pursue a future merger or acquisition, ourmanagement could spend a significant amount of time and effort identifying andcompleting the merger or acquisition. If we make a future acquisition, we couldissue equity securities which would dilute current stockholders’ percentage ownership,incur substantial debt, assume contingent liabilities or incur a one-timecharge.  In addition, we may issueadditional shares of Common Stock upon the conversion of the Convertible Notesthat may be issued following the approval of a Business CombinationTransaction, which may further dilute our stockholders.

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**Our planned growthcould strain our personnel resources and infrastructure, and if we are unableto implement appropriate controls and procedures, we may not be able tosuccessfully implement our business plan.**

Our plans provide for rapid growth in headcount andoperations, which will place significant strain on our management and ouradministrative, operational and financial infrastructure.  We anticipate that further growth will berequired to address increases in our customer base, as well as our expansioninto new geographic areas.  Our successwill depend in part upon the ability of our senior management to manage thisgrowth effectively.  To do so, we mustcontinue to hire, train and manage new employees as needed.  If our new hires perform poorly, or if we areunsuccessful in hiring, training, managing and integrating these new employees,or if we are not successful in retaining our existing employees, our businessmay be harmed.  To manage the expectedgrowth of our operations andpersonnel, we will need to continue to improve our operational, financial andmanagement controls and our reporting systems and procedures.  The additional headcount and capitalinvestments we are adding will increase our cost base, which will make it moredifficult for us to offset any future revenue shortfalls by offsetting expensereductions in the short term.  If we failto successfully manage our growth, we will be unable to execute our businessplan.

We recently hired a new senior management team,including William Santo (CEO), Carol Ferrari (VP-Marketing), Jerry Keefe (VP-Operations)and Stephen Peary (CFO).  This team hasnot worked together previously and may not work effectively together.  Moreover, the new management team has limitedexperience in developing, marketing, selling, implementing and servicing CPQsoftware.  The new team may not be ableto meet our business objectives, including the marketing of our new OnDemandproduct.  There can be no assurance thatwe will be able to successfully manage future expansion, and any inability todo so could have a material adverse effect on our business, results ofoperations and financial condition.

**Any efforts we maymake in the future to expand our service beyond the CPQ market may not succeed.**

To date, we have focused our business on providingon-demand application services for the CPQ market, but we may in the futureseek to expand into other markets. However, any efforts to expand beyond theCPQ market may never result in significant revenue growth for us. In addition,efforts to expand our on-demand application service beyond the CPQ market maydivert management resources from existing operations and require us to commitsignificant financial resources to an unproven business, which may harm ourbusiness.

**Aswe expand our services internationally, our business will be susceptible toadditional risks associated with international operations.**

We believe we must expand our services internationallyand expect to commit significant resources to this expansion.  As we increase our international activities,we will be exposed to additional challenges, including:

·                  fluctuations incurrency exchange rates;

·                  seasonalfluctuations in purchasing patterns in other countries;

·                  differentregulatory requirements;

·                  difficulties incollecting accounts receivable in other countries;

·                  the burdens ofcomplying with a wide variety of foreign laws;

·                  challenges instaffing and managing foreign operations;

·                  political and economicinstability; and

·                  potentiallyadverse tax consequences, including those resulting from unexpected changes intax laws.

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We have limited experience operating outside theUnited States and with marketing our services globally. Our presence in globalmarkets may require significant management attention and financial resourceswhich may adversely affect our ability to effectively manage our business.

**Risk Relating to Our Common Stock**

**There has been noactive public market for our Common Stock, and prospective investors may not beable to resell their shares at or above the purchase price paid by suchinvestor, or at all.**

Our Common Stock is quoted on the OTC Bulletin Boardunder the symbol “FPTI.OB.”  The OTCBulletin Board tends to be illiquid, in part because there is no nationalquotation system by which potential investors can track the market price ofshares, except through information received or generated by a limited number ofbroker-dealers that make markets in particular stocks. There is a greaterchance of market volatility for securities that trade on the OTC Bulletin Boardas opposed to a national exchange or quotation system. This volatility may becaused by a variety of factors including:

·                  The lack ofreadily available price quotations;

·                  The absence ofconsistent administrative supervision of “bid” and “ask” quotations;

·                  Low number offreely tradable shares outstanding;

·                  Lower tradingvolume; and

·                  Marketconditions.

In addition, the value of our Common Stock could beaffected by:

·                  Actual oranticipated variations in our operating results;

·                  Changes in themarket valuations of other similarly situated companies developing similarsoftware products;

·                  Announcements byus or our competitors of significant acquisitions, strategic partnerships,joint ventures or capital commitments;

·                  Adoption of newaccounting standards affecting our industry;

·                  Additions ordepartures of key personnel;

·                  Introduction ofnew product or services by us or our competitors;

·                  Sales of CommonStock or other securities in the open market;

·                  Changes infinancial estimates by securities analysts;

·                  Conditions ortrends in the market in which we operate;

·                  Changes inearnings estimates and recommendations by financial analysts;

·                  Our failure tomeet financial analysts’ performance expectations; and

·                  Other events orfactors, many of which are beyond our control.

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In a volatile market, you may experience widefluctuations in the market price of our securities. These fluctuations may havean extremely negative effect on the market price of our securities and mayprevent you from obtaining a market price equal to your purchase price when youattempt to sell our securities in the open market. In these situations, you maybe required to either sell our securities at a market price which is lower thanyour purchase price, or to hold our securities for a longer period of time thanyou planned. An inactive market may also impair our ability to raise capital byselling shares of capital stock and may impair our ability to acquire othercompanies or technologies by using Common Stock as consideration.

**We cannot assureyou that our Common Stock will become listed on the American Stock Exchange,Nasdaq or any other securities exchange.**

We plan to seek listing of our Common Stock on theAmerican Stock Exchange or Nasdaq as soon as practicable.  However, wecannot assure you that we will be able to meet the initial listing standards ofeither of these or any other stock exchange, or that we will be able tomaintain a listing of the Common Stock on either of these or any other stockexchange. Pending listing, if any, our Common Stock is eligible to trade on theOTC Bulletin Board, where an investor may find it difficult to dispose ofshares or obtain accurate quotations as to the market value of the CommonStock.  In addition, we would be subject to an SEC rule that, if we failedto meet the criteria set forth in such rule, imposes various requirements onbroker-dealers who sell securities governed by the rule to persons other thanestablished customers and accredited investors.  Consequently, such rulemay deter broker-dealers from recommending or selling the Common Stock, whichmay further affect its liquidity.

**Securitiesanalysts may not initiate coverage or continue to cover our Common Stock andthis may have a negative impact on our Common Stock’s market price.**

The trading market for our Common Stock may depend significantlyon the research and reports that securities analysts publish about us or ourbusiness. We do not have any control over these analysts. There is no guaranteethat securities analysts will cover our Common Stock. If securities analysts donot cover our Common Stock, the lack of research coverage may adversely affectour Common Stock’s market price. If we are covered by securities analysts, andour stock is downgraded, our stock price would likely decline. If one or moreof these analysts ceases to cover us or fails to publish regular reports on us,we could lose visibility in the financial markets, which could cause our stockprice or trading volume to decline.

**If we are unableto cause a registration statement to become effective in a timely manner forcertain Common Stock and warrants issued by us pursuant to a private placementin August 2006, we will be required to pay liquidated damages, which couldmaterially affect our financial condition.**

In August 2006, we completed a PIPE Financing of 1,000,000Units at $7.00 per Unit, with each Unit consisting of one share of our CommonStock and a warrant to purchase one additional share of Common Stock at $7.00per share, exercisable for five years after issuance.  Pursuant to a Registration Rights Agreemententered into with investors in the offering, we are obligated toregister for resale on a registration statement to be filed within 45 daysafter August 31, 2006 the shares of Common Stock issued in the PIPE Financingas well as the shares of Common Stock issuable upon exercise of theWarrants.  In the event the registrationstatement is not filed or effective within the prescribed periods, or becomesunavailable for use by the investors for an extended period, we will berequired to pay liquidated damages for each month (adjusted proportionally forany portion thereof) in which we are not in compliance with our obligation tofile or make effective the registration statement.   There are many reasons, including those overwhich we have no control, which could delay the effectiveness of theregistration statement, including delays resulting from the SEC review processand comments raised by the SEC during that process.  Our financialcondition may be materially adversely affected if we are required to pay suchliquidated damages.

**Upon theeffectiveness of the registration statement, there will be a significant numberof shares of Common Stock eligible for sale, which could depress the marketprice of our stock.**

Following the effective date of the registrationstatement covering the shares of Common Stock issued in connection with the PIPEFinancing as well as the shares of Common Stock issuable upon exercise of the 

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warrants issued in connection therewith, a largenumber of shares of Common Stock would become available for sale in the publicmarket, which could harm the market price of the stock.  In addition, asignificant amount of Common Stock will be eligible for sale on the secondanniversary following our CAP Financing, which closed on March 29, 2006.  Further, shares may be offered from time totime in the open market pursuant to Rule 144, and these sales may have adepressive effect on the market for the Common Stock.  In general, aperson who has held restricted shares for a period of one year may, upon filingwith the SEC a notification on Form 144, sell into the market Common Stock inan amount equal to the greater of 1% of the outstanding shares or the averageweekly number of shares sold in the last four weeks prior to such sale.

**ITEM 2.  ****                                           ****PROPERTIES**

Wecurrently lease three commercial properties. Our business operations are headquartered in Mankato, Minnesota.  The address in Mankato is 11 Civic CenterPlaza, Suite 310, Mankato, MN 56001. This office occupies 7,491 square feet, and rent, including on-sitestorage, is $10,550 per month.  Commonarea charges are assessed on an annual basis. The lease expires on February 28, 2011.

We leaseour principal executive offices in Newton, Massachusetts.  This office occupies 1,322 square feet. Rentis $2,120 per month, and common area charges are assessed on an annualbasis.  The lease expires on March 31,2007.

We alsocurrently lease space in Beverly Hills, California.  The office occupies 1,800 square feet, andmonthly rent is $4,062.  The lease expireson December 31, 2009.

**ITEM 3****.  ****                                           ****LEGALPROCEEDINGS**

*IPO Litigation*

In August, 2001, our predecessor, Firepond, Inc., wasnamed as a defendant in a securities class action filed in United StatesDistrict Court for the Southern District of New York related to its initialpublic offering (“IPO”) in February, 2000. The lawsuit also named certain of the underwriters of the IPO, includingFleetBoston, Dain Rauscher, and SG Cowen, as well as officers and directors ofFirepond, Klaus P. Besier and Paul K. McDermott, as defendants.  Approximately 300 other issuers and theirunderwriters have had similar suits filed against them, all of which have beenincluded in a single coordinated proceeding in the Southern District of NewYork (the “IPO Litigations”).  The complaintsallege that the prospectus and the registration statement for the IPO failed todisclose that the underwriters allegedly solicited and received “excessive”commissions from investors and that some investors in the IPO allegedly agreedwith the underwriters to buy additional shares in the aftermarket in order toinflate the price of Firepond’s stock. An amended complaint was filed on April 19, 2002.  Firepond, Inc. and the officers and directorsidentified above were named in the suits pursuant to Section 11 of theSecurities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934(the “Exchange Act”), and other related provisions.  The complaints seek unspecified damages,attorney and expert fees, and other unspecified litigation costs.

In June 2003, a proposed settlement of this litigationwas structured between the plaintiffs, the issuer defendants in theconsolidated actions, the issuer officers and directors named as defendants,and the issuers’ insurance companies.  Onor about July 30, 2003, a committee of Firepond’s Board of Directorsconditionally approved the proposed partial settlement. The settlement wouldprovide, among other things, a release of Firepond and of the individualdefendants for the conduct alleged to be wrongful in the amendedcomplaint.  Firepond would agree toundertake other responsibilities under the partial settlement, includingagreeing to assign away, not assert, or release certain potential claims it mayhave against its underwriters.  Anydirect financial impact of the proposed settlement is expected to be borne byFirepond’s insurance carriers.

In October 2003, the action involving Firepond wasdesignated (along with several other actions) as a test or “focus” case forpurposes of class certification and merits discovery in the actions proceedingagainst the underwriter defendants.  Thefact that Firepond is a defendant in a “focus” case does not impact itsparticipation in the settlement. However, as a “focus” case defendant, Firepond may be subjected to additionaldiscovery and other involvement in the proceedings against the underwriterdefendants as compared to other issuer defendants.

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In June 2004, an agreement of settlement was submittedto the court for preliminary approval. The court granted the preliminary approval motion on February 15, 2005,subject to certain modifications.

On August 31, 2005, the court issued a preliminaryorder further approving the modifications to the settlement and certifying thesettlement classes. The court also appointed the Notice Administrator for thesettlement and ordered that notice of the settlement be distributed to allsettlement class members beginning on November 15, 2005.  The settlement fairness hearing was held onApril 24, 2006, and the court reserved decision.  If the court determines that the settlementis fair to the class members, the settlement will be approved.  There can be no assurance that this proposedsettlement will be approved and implemented in its current form, or at all.

Due to the inherent uncertainties of litigation andbecause the settlement approval process is at a preliminary stage, we cannotaccurately predict the ultimate outcome of the matter.

We may from time to time also be subject to variousother claims and legal actions arising in the ordinary course of business.  In the opinion of management, afterconsultation with legal counsel, the ultimate disposition of these matters isnot expected to have a material effect on our business, financial condition, orresults of operations.

**ITEM 4.                  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

Effective May 26,2006, our board of directors and stockholders holding an aggregate of 3,417,333shares of our Common Stock, representing approximately 67.0% of the totalshares of our Common Stock then outstanding, approved by written consent inlieu of a special meeting the Plan and Agreement of Merger between AFG and us,pursuant to which AFG merged with and into us, with us being the survivingcorporation.  In connection with theReorganization, the surviving corporation adopted the amended and restatedcertificate of incorporation and bylaws of FPT, and changed its corporate nameto “FP Technology, Inc.”  For furtherinformation regarding the Reorganization, please see the Definitive InformationStatement on Schedule 14C filed with the SEC on June 9, 2006.

Effective June 29,2006, our board of directors and holders of an aggregate of 3,991,939 shares ofour Common Stock, representing approximately 78.3% of the total shares of ourCommon Stock then outstanding, approved by written consent in lieu of a specialmeeting our 2006 Stock Incentive Plan (the “2006 Plan”).  The 2006 Plan will become effective upon thefiling and distribution of the information statement relating therewith to ourstockholders pursuant to applicable SEC rules and regulations.  The 2006 Plan will permit us to grant to ourkey employees, directors and consultants up to 1,766,000 shares of Common Stockpursuant to stock option awards, restricted stock grants, and other stock-basedaward.  No stock award has been issuedunder the 2006 Plan, and no award will be issued to our employees or directorsuntil after we have filed a definitive information statement relating to the2006 Plan with the SEC.  

**PART II**

**ITEM5. ****                                              ****MARKET FOR REGISTRANT’S COMMONEQUITY AND RELATED STOCKHOLDER MATTERS**

Our Common Stock is currently listed for trading onthe OTC Bulletin Board under the symbol “FPTI.OB.”  From on or about June 9, 2006 to onor about July 5, 2006 our Common Stock was quoted on the OTC Bulletin Boardunder the symbol “AFGU.”  From May 2003to on or about June 8, 2006 our Common Stock was quoted on The Pink Sheetsunder the symbol “AFGU.” The following table sets forth the high and low bidprice for our Common Stock for each quarter for the fiscal years ended June 30,2005 and 2006, as quoted on The Pink Sheets and the OTC Bulletin Board.  Such market quotations reflect inter-dealerprices, without retail mark-up, mark-down or commission and may not necessarilyrepresent actual transactions.
|                | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| **Period**     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $        | 0.0150     |     | $          | 0.0001 |   | $ | 0.0000 |   | $ | 0.0000 |   |
| Second Quarter |       | 0.0001   |       | 0.0001   |       | 0.0000 |   | 0.0000 |   |
| Third Quarter  |       | 0.0000   |       | 0.0000   |       | 0.0000 |   | 0.0000 |   |
| Fourth Quarter |       | 0.0000   |       | 0.0000   |       | 7.2500 |   | 7.2500 |   |
|                |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

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Therecurrently is a very limited public market for our Common Stock and no assurancecan be given that a large public market will develop in the future.  The trading market for our Common Stock isextremely thin.  In view of the lack ofan organized or established trading market for the Common Stock and the extremethinness of whatever trading market may exist, the prices reflected on thechart as reported on the Bulletin Board may not be indicative of the price atwhich any prior or future transactions were or may be effected in the CommonStock.  Stockholders are cautionedagainst drawing any conclusions from the data contained herein, as past resultsare not necessarily indicative of future stock performance.

As of September15, 2006, there were approximately 648 record holders of our Common Stock; thisnumber does not include an indeterminate number of stockholders whose sharesmay be held by brokers in street name.

We have not paidand do not expect to pay any dividends on our shares of Common Stock for theforeseeable future, as any earnings will be retained for use in the business.

On June 27, 2006,our Board of Directors and holders of a majority of the issued and outstandingshares of our Common Stock adopted and approved the 2006 Plan. The 2006 Planwas adopted to provide certain stock incentive awards to officers, directors,key-employees, and independent contractors that provide services to theCompany. A maximum of 1,766,000 shares of our Common Stock may be issuedpursuant to all awards (“Awards”) issuable under the 2006 Plan. The types ofAwards available for issuance under the 2006 Plan may consist of one or acombination of the following: stock options, stock appreciation rights,dividend equivalent right, restricted stock, and restricted stock unit. Currently,there have been no Awards issued under the 2006 Plan.

**ITEM 6.                 ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY**

*Thefollowing is a discussion and analysis of the financial condition and resultsof operations of Firepond, Inc. for the period December 2, 2003 through October31, 2004, and the consolidated  financialcondition and results of operations for Firepond, Inc. and FP TechnologyHoldings, Inc.  for the eight monthsended June 30, 2005 and the consolidated financial condition of Firepond, Inc.,AFG Enterprises, USA, Inc. (“AFG”) and FP Technology, Inc. for the  fiscal year ended June 30, 2006.  This discussion and analysis should be readin conjunction with the financial statements and notes thereto for the abovelisted periods.*

*Ourdiscussion includes forward-looking statements, which involve certain risks anduncertainties.  Certain statements in the“Management’s Discussion and Analysis of Financial Condition and Results ofOperations of the Company” are forward-looking statements that involve risksand uncertainties. Words such as anticipates, expects, intends, plans,believes, seeks, estimates, and similar expressions identify suchforward-looking statements. The forward-looking statements contained herein arebased on current expectations and entail various risks and uncertainties thatcould cause actual results to differ materially from these expressed in suchforward-looking statements. Factors that might cause such a difference include,among other things, those set forth under “Risk Factors”, “Overview”, and “Liquidityand Capital Resources” included in these sections and those appearing elsewherein this Form10-KSB. Readers are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s analysis only as of thedate hereof.  We assume no obligation toupdate these forward-looking statements to reflect actual results or changes infactors or assumptions affecting forward-looking statements.*

*Allreferences in this Form 10-KSB to “the Company” or “FPT” refer to FPTechnology, Inc., after giving effect to the Reorganization on June 29, 2006whereby AFG was merged into FP Technology Holdings, Inc. and was renamed FPTechnology, Inc., described in more detail elsewhere herein.*

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**Overview**

The Company is aleading provider of on-demand software that optimizes the process of convertingleads into accurate orders.  Our FirepondOnDemand sales configuration system guides sales people, channel partners andcustomers through the entire “lead-to-order” business process — deliveringlead management, needs analysis, product and pricing configuration, quote andproposal generation, and order management. We provide interactive selling software solutions that help companiesprofitably acquire and retain customers. The complementary configuration, pricing and guided selling solutionsare based on patented technology.  Oursolutions help drive new revenue streams, increase profitability, and managecustomer interactions across all channels throughout the sales cycle.

From the inceptionof our predecessor company, Firepond, in 1983 through 1997, we generatedrevenue primarily through providing custom development services.  These services consisted of the developmentof highly customized applications utilizing core software technology, andrelated software maintenance and data maintenance services.  In early fiscal 1997, Firepond undertook aplan to change its strategic focus from a custom development services companyto a software product company providing more standardized solutions.  Firepond’s first packaged software productwas introduced in May 1997.  Firepondreleased the Firepond Application Suite in October 1999, and renamed and repackagedthe Firepond Application Suite as the SalesPerformer Suite in December 2000.

In February 2000,Firepond completed its initial public offering. Soon thereafter, as a result of a global slowdown in informationtechnology spending, including in the Customer Relationship Management market,Firepond undertook a comprehensive restructuring of its operations. Firepond incurred substantial losses from 2000 through 2003.  Throughout this period Firepond invested heavilyin research and development.

On December 2,2003, Jaguar Technology Holdings, LLC acquired Firepond in exchange for cashequal to $3.16 per share, and Firepond became a private company.  On September 13, 2005, FP TechnologyHoldings, Inc. (“FPT Holdings”) acquired all of the operating assets, certainliabilities, and all of the employees of Firepond as part of a restructuringand new financing transaction.  Beforeand after this transaction, both Firepond and FPT Holdings were 100% owned bythe same entity.  On January 17, 2006,Firepond was liquidated, and a liquidating trust was created to liquidate theremaining assets of Firepond, enforce and pursue the causes of action ofFirepond, provide for a reserve against the payment of any contingentliabilities, and distribute the net proceeds to its stockholder.

On March 29, 2006, AFG Enterprises USA, Inc., a public shell company,acquired FPT Holdings pursuant to an Agreement and Plan of Merger.  In connection with this transaction, AFGchanged its fiscal year from December 31 to June 30 to conform to FPT’s fiscalyear end.  AFG issued an aggregate of3,991,939 shares of its common stock to the stockholders of FPT Holdings inthis transaction.

On June 29, 2006,AFG Enterprises USA, Inc., the 100% owner of FPT Holdings, merged with and intoFPT Holdings, with FPT Holdings as the surviving corporation.  On the same date, FPT Holdings changed itsname to “FP Technology, Inc.”

For the periodfrom December 2, 2003 through September 12, 2005, the financial statementspresented herein are those of Firepond, Inc. For the period from September 13, 2005 through January 17, 2006, thefinancial statements presented herein are the combined financial statements ofFirepond and FPT Holdings.  Pursuant toFIN 46(R), the financial statements presented herein for the fiscal year endedJune 30, 2006 include the consolidated financial statements of FPT, AFGEnterprises USA, Inc. (commencing March 29, 2006) and the Firepond liquidatingtrust.

Technologicalfeasibility of our software products occurs late in the development cycle andclose to general release of the products. The development costs incurredbetween the time technological feasibility is established and general releaseof the product are not material.  Assuch, we expense these costs as incurred to research and developmentexpense.  To enhance our product offeringand market position, we believe it is essential for us to continue to makesignificant investment in research and development.

We incurredstock-based compensation during the fiscal year ended June 30, 2006 of$77,051.  We anticipate that some stockbased compensation will be incurred in fiscal 2007 through restricted stockgrants and stock options to board members, executive management and employees.

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As of June 30,2006, we had available net operating losses of approximately $18 million, whichmay be available to reduce our future federal income taxes.  These loss carry-forwards will expirebeginning in fiscal 2022, and may be subject to review and possible adjustmentby the Internal Revenue Service.  ThroughDecember 3, 2003, on a tax basis, the Company has a $149,744,000 net operatingloss carryforward which will be limited by Section 382 of the Internal RevenueCode of 1986, as amended.  The Companyhas estimated the future limited net operating loss carryforward for thisperiod to be approximately $11,000,000.

**RecentFinancings**

***PIPE Financing***

In August 2006, we completed a PIPE Financing of1,000,000 Units at $7.00 per Unit, with each Unit consisting of one share ofour Common Stock and a warrant to purchase one additional share of Common Stockat $7.00 per share, exercisable for five years after issuance (the “PIPEWarrants”).  We conducted the PIPEFinancing through two closings which occurred on August 11 and August 31,2006.  The aggregate gross proceeds fromthe PIPE Financing totaled $7,000,000, not including fees and expenses of theoffering.  The proceeds from the offeringwill be used to finance possible future acquisitions by the Company, repaycertain indebtedness of the Company and provide working capital to theCompany.  Rodman & Renshaw, LLC andNational Securities Corporation acted as placement agent for the financing.

The Company isobligated to register for resale on a registration statement to be filedwithin 45 days after August 31, 2006 the shares of Common Stock issued in thePIPE Financing as well as the shares of Common Stock issuable uponexercise of the PIPE Warrants.  TheCompany will use its best efforts to cause the registration statement to becomeeffective within 90 days after filing or in the case that the registrationstatement is reviewed by the Securities and Exchange Commission, 120 daysafter filing. Failure to file a registration statement or for it to becomeeffective within the required timeframes will result in the payment ofliquidated damages to the purchasers.

***CAP Financing – Private Placement of Notes andWarrants***

On March 29, 2006,we (through our predecessor AFG) entered into a Securities Purchase Agreement(the “Purchase Agreement”) with certain institutional investors (the “Buyers”),pursuant to which the Buyers purchased (i) our Senior Secured NonconvertibleNotes due 2011 (the “Nonconvertible Notes”) in an aggregate principal amount of$50,000,000, which Nonconvertible Notes may be exchanged for Senior SecuredConvertible Notes due 2011 (the “Convertible Notes”, and together with theNonconvertible Notes, the “Notes”) or redeemed under certain circumstances, andwhich Convertible Notes are convertible into shares of our Common Stock (the“Conversion Shares”); and (ii) warrants (the “CAP Warrants”) to acquire in theaggregate up to 6,875,000 shares of our Common Stock (including warrantsgranted to the placement agent to acquire 625,000 shares of Common Stock) (the“CAP Warrant Shares”), exercisable from the earlier of six months afterissuance or the Threshold Acquisition Date (as such term is defined in theIndenture, described below) until March 29, 2011 at an exercise price equal tothe lower of $8.00 or 125% of the per share price of our common stock to be soldin the PIPE Financing.  The purchase andsale of the Notes and CAP Warrants was consummated on March 29, 2006. The Notesare subject to certain requirements which must be fulfilled or the Notes willbe callable within one year of issuance.

On March 29, 2006,we also entered into a Registration Rights Agreement with the Buyers, whereby we agreed to provide certain registrationrights in respect of the Conversion Shares and the CAP Warrant Shares under theSecurities Act of 1933 and the rules and regulations promulgated thereunder,and applicable state securities laws.

Pursuant to the terms of an Indenture dated as of March 29, 2006 (the “Indenture”)executed by us, as Issuer, and The Bank of New York, as Trustee (in suchcapacity, the “Trustee”), we issued the Nonconvertible Notes to theBuyers.  Under the terms of the Indentureand the Escrow Agreement dated as of March 29, 2006 (the “EscrowAgreement”) between us and the Trustee, ninety-five percent of the proceeds ofthe Nonconvertible Notes were paid into an interest-bearing account (the “EscrowAccount”) maintained by the Escrow Agent for the benefit of the holders of theNonconvertible Notes (the “Nonconvertible Holders”).

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While anyNonconvertible Notes are outstanding, we may propose to Consummate a Business CombinationTransaction in which we will acquire by merger, securities purchase, assetpurchase or otherwise, a majority of the assets or equity of another entity fora purchase price of at least $15,000,000, and each Nonconvertible Holders may voteto approve such transaction.  Approval ofa Business Combination Transaction requires the affirmative vote of holders ofat least 75% of the principal amount of outstanding Nonconvertible Notes. Theamount funded from the Escrow Account must be (i) at least 50% of the amountrequired for an approved Business Combination Transaction (including purchaseprice, fees and expenses of the transaction and our additional working capitalrequirements), unless the available amount from the Escrow Account at such timeis less than 50% of the amount required, in which case such amount shall equalthe available amount, and (ii) at least $15 million. A pro rata amount of theprincipal amount of the Nonconvertible Notes of each Nonconvertible Holdervoting in favor of such Business Combination Transaction will be exchanged forConvertible Notes, and an amount equal to the total principal amount of suchexchanged Nonconvertible Notes will be released from the Escrow Account andused to consummate such Business Combination Transaction.

The indebtednessevidenced by the Notes is senior secured indebtedness and ranks superior to ourother indebtedness. As security for our obligations under the Indenture, weexecuted (i) a Security Agreement dated as of March 29, 2006 (the “SecurityAgreement”), pursuant to which we granted a security interest in all of ourassets in favor of the Trustee, in its capacity as collateral agent for theNonconvertible Holders and the holders of the Convertible Notes under theIndenture (in such capacity, the “Collateral Agent”), and (ii) a PledgeAgreement dated as of March 29, 2006, pursuant to which our predecessor, AFGpledged its interest in FPT Holdings in favor of the Collateral Agent. FPTHoldings executed a separate Guaranty dated as of March 29, 2006 in favor ofthe Collateral Agent.

We recorded debtissuance costs of $3,267,669 in connection with the CAP Warrants issued in theCAP transaction.

On August 18,2006, we deposited $2,500,000 to the escrow account making the aggregate fundsin the escrow account equal to $50,000,000.

***TridentFinancing***

On September 13,2005, Trident Growth Fund, L.P. (“Trident”) loaned FPT Holdings $2,000,000,with interest accruing at 12% per annum. Interest is payable monthly and principal due on the earlier of September30, 2006 or on consummation of a change in control transaction.  The Note was originally convertible intoshares of Common Stock based upon a fixed ratio.  On or about November 25, 2005, FPT Holdingsclosed an additional $500,000 note with Trident Growth Fund on the same termsand conditions as the note issued in September 2005.  The funds received pursuant to these Noteswere used for working capital.

In connection withthe acquisition of FP Technology Holdings, Inc. by our predecessor, AFG EnterprisesUSA, Inc., and the CAP Financing, on March 29, 2006, AFG entered into a MasterAmendment with Trident, which amended the operative documents entered into byFPT Holdings and Trident in September and November 2005, and added AFG as aparty to certain of these agreements. Under the Master Amendment, the Notes issued to Trident were amended tobe convertible into our stock at a price of $6.40 per share, subject to thesame anti-dilution adjustments applicable to the Notes issued in the CAPFinancing.  In addition, the Warrantsissued to Trident were amended to be exercisable for our stock and to reflectan exercise price of $4.00 per share, and the amount of shares issuable underthe Trident Warrants was changed to 390,625 shares of Common Stock.  In addition, the financial covenants underthe agreements with Trident were amended to match the financial covenantscontained in the CAP Financing.

In addition, onMarch 29, 2006, AFG entered into an Intercreditor and Subordination Agreementwith FPT Holdings and Trident (the “Subordination Agreement”), pursuant towhich Trident agreed to subordinate its rights to those of the investors in theCAP Financing.

On August 18,2006, we repaid $500,000 of the Trident debt.

The remaining$2,000,000 Trident debt was amended as of September 13, 2006, extending thematurity date to August 31, 2008 and providing for ratable monthly payments ofprincipal plus accrued interest beginning September 30, 2006.

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***Private Placement of Common Stock***

AFG was a party toa certain Credit Agreement between Acclaim Financial Group Venture II, LLC(“AFGV”) and AFG dated July 15, 2003 (the “Credit Agreement”), pursuant towhich AFG was indebted to AFGV in the amount of approximately $313,421.44 (the“Claim”). On March 29, 2006, AFGV sold its rights to the Claim to BenchmarkEquity Group, Inc. (“BMEG”), which agreed with AFG to cancel the Claim in fullin exchange for 1,008,062 shares of common stock of AFG to be issued to BMEG orits designees, pursuant to an Exchange Agreement between AFG and BMEG (the“Exchange Agreement”). On March 29, 2006, we issued 1,008,062 shares of CommonStock to BMEG and its designees pursuant to the Exchange Agreement in fullsatisfaction of the Claim.

**Critical Accounting Policies**

We haveestablished various accounting policies in the preparation of our financialstatements. Our significant accounting policies are described in Note 2 ofNotes to Consolidated Financial Statements appearing elsewhere in this Form10-KSB.  Certain accounting policiesrequire us to make significant estimates and assumptions, which could have amaterial impact on the carrying value of certain assets and liabilities and thereported amounts of revenues and expenses during the reporting period.  We consider these to be critical accounting policies.  The estimates and assumptions we use arebased on historical experience and other factors, which we believe to bereasonable under the circumstances. Actual results could differ significantly from these estimates andassumptions, which could have a material impact on the carrying value of assetsand liabilities at the balance sheet dates and our results of operations forthe reporting periods.  We believe thefollowing are critical accounting policies that require the most significantestimates and assumptions:

***Enterprise Software Revenue Recognition***

Enterprise software revenue or license revenue isgenerated from licensing the rights to the use of the Company’s packagedsoftware products.  The Company recognizes enterprise softwarerevenue based on the provisions of the American Institute of Certified PubicAccountants (AICPA) Statement of Position, No. 97-2, “*SoftwareRevenue Recognition*” (“SOP 97-2”), as amended, and Statement ofPosition No. 81-1, “*Accounting for Performanceof Construction-Type and Certain Production-Type Contracts*” (“SOP 81-1”).

The Company generatesenterprise software revenue from licenses and services.  License revenue is generated from licensingthe rights to the use of the Company’s packaged software products.  Service revenue is generated from sales ofmaintenance, consulting and training services performed for customers thatlicense the Company’s packaged software products.

The Company has concluded that generally, where the Company isresponsible for implementation services for the SalesPerformer product suiteand their components, the implementation services are essential to thecustomer’s use of the products.  In sucharrangements, the Company recognizes revenue following the percentage-of-completionmethod over the implementation period. Percentage of completion is computed on the basis of the number ofimplementation hours incurred to date compared to estimated totalimplementation hours.  This method isused because management has determined that past experience has evidencedexpended hours to be the best measure of progress with respect to these typesof arrangements.  In those instanceswhere the estimate of total contract revenue and total contract cost indicatethat a loss will be realized with respect to a particular arrangement, aprovision for the entire loss on the contract is recorded in the period ofdetermination.

In situations where the Company is not responsible for implementationservices for the SalesPerformer product suite, the Company recognizes revenueon delivery of the packaged software provided (i) there is persuasive evidenceof an arrangement, (ii) collection is probable and (iii) the fee is fixed ordeterminable.  In situations where theCompany is not responsible for implementation services for the SalesPerformerproduct suite, but is obligated to provide unspecified additional softwareproducts in the future, the Company recognizes revenue as a subscription overthe term of the commitment period.

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For product sales that arerecognized on delivery, the Company will execute contracts that govern theterms and conditions of each software license, as well as maintenancearrangements and other services arrangements. If an arrangement includes an acceptance provision, acceptance occursupon the earlier of receipt of a written customer acceptance or expiration ofthe acceptance period.

Revenue under multipleelement arrangements (which may include several different software products andservices sold together) is allocated to each element based on the residualmethod in accordance with Statement of Position, No. 98-9, “*Software Revenue Recognition with Respect to Certain Arrangements*”(“SOP 98-9”).  The Company uses theresidual method when vendor-specific objective evidence of fair value does notexist for one of the delivered elements in the arrangement.  Under the residual method, the fair value ofthe undelivered elements is deferred and subsequently recognized.  The Company has established sufficientvendor-specific objective evidence for professional services, training andmaintenance and support services based on the price charged when these elementsare sold separately.  Accordingly,packaged software license revenue is recognized under the residual method inarrangements in which software is licensed with professional services,training, and maintenance and support services.

Revenue from maintenanceservices is recognized ratably over the term of the contract, typically oneyear.  Consulting revenue is primarilyrelated to implementation services performed on a time-and-materials basisunder separate service arrangements. Revenue from consulting and training services is recognized as servicesare performed.

***OnDemand Hosted License Revenue***

Firepond OnDemandis an application that enables a company’s sales force and supportingorganizations to configure complex products, and accurately price thoseproducts.  For Firepond OnDemand contracts, the Companydoes not actually deliver a software product to a customer for installation onthe customer’s in-house systems but rather makes the software available to thecustomer through a Company hosting arrangement. In this case the Companyinstalls and runs the software application either on its own or a third-party’sserver giving customers access to the application via the Internet or adedicated line.  Accordingly, the Companyevaluates its revenue recognition in consideration of SOP 97-2 or whether suchactivity falls outside of such guidance.

An Emerging Issues TaskForce was tasked with assessing the applicability of SOP 97-2 to such hostingarrangements and considering how a vendor’s hosting obligation would impactrevenue recognition. This discussion resulted in the issuance of EmergingIssues Task Force 00-03, “*Application of AICPAStatement of Position 97-2 to Arrangements That Include the Right to UseSoftware Stored on Another Entity’s Hardware” (“EITF 00-03”)*.  Under EITF 00-03, the Task Force reached aconsensus that a hosting arrangement is within the scope of SOP 97-2 if:

·                  the customer has the contractual right totake possession of the software at any time during the hosting period withoutsignificant penalty; and

·                  it is feasible for the customer to either runthe software on its own hardware or contract with another party unrelated tothe vendor to host the software without significant penalty.

This allows the Company theability to recognize that portion of the fee attributable to the license ondelivery, while that portion of the fee related to the hosting element would berecognized ratably as the service is provided, assuming all other revenuerecognition criteria have been met.   Ifa hosting arrangement fails to meet the requirements of EITF 00-03 then thearrangement is not considered to have a software element and therefore isoutside of the scope of SOP 97-2. The hosting arrangement, which would follow aservices accounting model, would then likely be accounted for in accordancewith the guidance contained in the Securities and Exchange Commission’s StaffAccounting Bulletin No. 101, “*Revenue Recognition inFinancial Statements*” (“SAB 101”). SAB 101 contains the same four basic criteria for revenue recognition asSOP 97-2:

·                  Persuasive evidence of an arrangement exists;

·                  Delivery has occurred or services have beenrendered;

·                  The vendor’s price to the buyer is fixed ordeterminable; and

·                  Collectibility is reasonably assured.

Once these conditions havebeen met, revenue can be recognized.  SAB101 was amended by Securities and Exchange Commission’s Staff AccountingBulletin No. 104 (“*Revenue Recognition,corrected copy*” (“*SAB 104*”),which codified current and existing revenue recognition issues.    In consideration of the above criteria, ingeneral terms, revenue from product-related hosted solution is recognizedratably over the term of the contract after payment has been received.  Hosted solution includes unspecifiedupgrades, end user support up to two primary contacts and hosted serversupport.

The Company has recorded deferred revenue on amounts billed orcollected by the Company before satisfying the above revenue recognitioncriteria.  Deferred revenue at June 30,2005 and 2006 consisted of the following:

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|                                       | ** ** | **Period Ended**       | ** ** | **Period Ended**       | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **June 30, 2005** | ** ** | **June 30, 2006** | ** ** |
| OnDemand revenue                      |       | $                           | 0          |                        | $          | 440,647 |   |
| Product license  and related services |       | 80,337                      |       | 76,636                      |       |
| Product-related  maintenance          |       | 1,107,950                   |       | 1,092,374                   |       |
|                                  |       | $                           | 1,188,287  |                        | $          | 1,609,657 |   |

 

***Cost of Goods Sold***

Cost of licenses includesroyalties, media, product packaging, documentation, other production costs.

Cost of product-relatedservices and maintenance and cost of custom development services revenue consistprimarily of salaries, related costs for development, consulting, training andcustomer support personnel, including cost of services provided by third-partyconsultants engaged by the Company.

***Property and Equipment***

Property and equipment arestated at cost. Depreciation is computed using the straight-line method overthe estimated useful lives of the assets, as follows:
| Computer equipment and software |   | 2 to 5 years |
|---------------------------------|--------|--------------|
| Furniture and fixtures          |   | 5 years      |
| Leasehold improvements          |   | 5 years      |

 

The cost of assets retiredor disposed of and the accumulated depreciation thereon is removed from theaccounts with any gain or loss realized upon sale or disposal credited orcharged to operations, respectively.

***Goodwill***

Prior to the January 1, 2002implementation of Statement of Financial Accounting Standards No. 142, “*Goodwill and Other Intangible Assets*” (“*SFAS 142*”),goodwill was amortized on a straight-line basis over 5-20 years.  Since that date, goodwill has been subject toperiodic impairment tests in accordance with SFAS 142.

The Company identifies andrecords impairment losses on long-lived assets, including goodwill that is notidentified with an impaired asset, when events and circumstances indicate thatan asset might be impaired.  Events andcircumstances that may indicate that an asset is impaired include significantdecreases in the market value of an asset, a change in the operating model orstrategy and competitive forces.

If events and circumstancesindicate that the carrying amount of an asset may not be recoverable and theexpected undiscounted future cash flow attributable to the asset is less thanthe carrying amount of the asset, an impairment loss equal to the excess of theasset’s carrying value over its fair value is recorded.  Fair value is determined based on the presentvalue of estimated expected future cash flows using a discount ratecommensurate with the risk involved, quoted market prices or appraised values,depending on the nature of the assets. To date no such impairment has been recorded.

***Computer SoftwareDevelopment Costs and Research and Development Expenses***

The Company incurs softwaredevelopment costs associated with its licensed products as well as newproducts.  Since June 1997, the Companydetermined that technological feasibility occurs upon the successfuldevelopment of a working model, which happens late in the development cycle andclose to general release of the products. Because the development costs incurred between the time technologicalfeasibility is established and general release of the product are not material,the Company expenses these costs as incurred.

**Changesin Fiscal Year End**

OnMarch 29, 2006, our predecessor, AFG Enterprises USA, Inc., changed from aDecember 31 to a June 30 fiscal year end due to its acquisition of FPTechnology Holdings, Inc. on that date. The change was made to (1) reflect business cycles of the Company, (2)conform AFG’s fiscal year to FPT Holdings’ fiscal year end of June 30, and (3)permit engagement of independent public accountants that may not be possiblehad a December 31 fiscal year end been maintained.

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Priorto September 13, 2005, the business of the Company was conducted by Firepond,Inc., which maintained a fiscal year end of October 31.  In connection with the transaction onSeptember 13, 2005, by which FPT Holdings acquired all of the operating assets,certain liabilities, and all of the employees of Firepond as part of arestructuring and new financing transaction, the fiscal year end of theCompany became June 30, the fiscal year end of FPT Holdings.

**Results of Operations**

The discussionbelow compares the fiscal year ended June 30, 2005, an eight month period, andthe fiscal year ended June 30, 2006, a twelve month period.  As discussed elsewhere herein, Firepond, Inc.had an October 31 year end and FPT Holdings has a June 30 year end.  The presentation is made to allowcomparability in future periods for the Company.

***Comparisonof fiscal periods ended June 30, 2005 (eight months) and June 30, 2006 (twelvemonths)***

**Revenues**

The Company generates revenue from its new OnDemand subscription basedsoftware as well as legacy license and service revenue.  The OnDemand product was launched incommercial form in August 2005.   Licenserevenue is generated from licensing the rights to the use of Company’s packagedsoftware products.  Service revenue isgenerated from sales of maintenance, consulting and training services performedfor customers that license the Company’s products.

In the fiscalyears ended June 30, 2005 and June 30, 2006, the following revenues weregenerated:
|            | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** ** | ** ** | **June 30, 2005**     | ** ** | **June 30, 2006**     | ** ** |
| Revenues   |       | $                               | 2,841,394  |                            | $          | 3,761,594 |   |
|            |            |                                 |            |                                 |            |  |  |

 

The increase inrevenues in the fiscal year ended June 30, 2006 is primarily attributable tothe substantially longer period presented for fiscal year June 30, 2006.  Additionally, the Company shifted its primaryfocus to developing the OnDemand component of its business.

**Cost ofGoods Sold**

In the fiscalyears ended June 30, 2005 and June 30, 2006, the following costs of goods soldwere incurred:
|                     | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **          | ** ** | **June 30, 2005**     | ** ** | **June 30, 2006**     | ** ** |
| Cost of Goods  Sold |       | $                               | 1,269,357  |                            | $          | 1,944,650 |   |
|                     |            |                                 |            |                                 |            |  |  |

 

Total cost ofgoods sold increased $0.7 million, or 53.2%, to $1.9 million for the fiscalyear ended June 30, 2006 from $1.3 million in the fiscal year ended June 30,2005. Total cost of goods sold as a percentage of total revenues increased to51.7% in the fiscal year ended June 30, 2006 from 44.7% in fiscal year endedJune 30, 2005. The increase in cost of goods sold in 2006 is primarilyattributable to the efforts required to launch our OnDemand product.

**Componentsof Operating Expenses and Other Items**

*Sales,General and Administrative*

In the fiscalyears ended June 30, 2005 and June 30, 2006, the following sales, general andadministrative expenses were incurred:

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** **
|              | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|--------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **   | ** ** | **June 30, 2005**     | ** ** | **June 30, 2006**     | ** ** |
| S, G & A |       | $                               | 1,343,750  |                            | $          | 3,165,398 |   |
|              |            |                                 |            |                                 |            |  |  |

 

Sales expensesconsist primarily of salaries, commissions and bonuses for sales and marketingpersonnel and promotional expenses. General and administrative expenses consistprimarily of salaries and other personnel-related cost for executive,financial, human resource, information services, and other administrativefunctions, as well as legal and accounting costs. Sales and general andadministrative expenses increased $1,821,648 or 135.6% in the fiscal year endedJune 30, 2006. Due in part to the difference in the length of periodspresented, sales and general and administrative expenses as a percentage oftotal revenue increased to 84.2% the fiscal year ended June 30, 2006 from 47.3%for the fiscal year ended June 30, 2005. Sales, general and administrative expenses increased in absolute dollarsand as a percentage of total revenue primarily due to the Company incurringincreased spending in accounting, banking and legal fees associated with thefinancing and merger transactions described above.  Additionally, the Company hired seniormanagement personnel: one in Sales and Marketing and one in Operations as partof its strategic plan to advance its OnDemand business.

*Researchand Development Expenses*

In the fiscalyears ended June 30, 2005 and June 30, 2006, the following research anddevelopment expenses were incurred:
|                           | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **June 30, 2005**     | ** ** | **June 30, 2006**     | ** ** |
| Research and  Development |       | $                               | 1,118,141  |                            | $          | 1,835,176 |   |
|                           |            |                                 |            |                                 |            |  |  |

 

Research anddevelopment expenses consist primarily of salaries and personnel-related costsand the costs of contractors associated with the development of new products,the enhancement of existing products, and the performance of quality assuranceand documentation activities. Research and development expenses increased $0.7million, or 64.1% for the fiscal year ended June 30, 2006. Research anddevelopment expenses as a percentage of total revenue increased to 48.8% in thefiscal year ended June 30, 2006 from 39.4% in fiscal year ended June 30, 2005.These expenses increased in absolute dollars as a result of our developmentefforts associated with the OnDemand component of the business as well as thecomparable longer period.

*Restructuringand other Special Charges Expense*

In the fiscalyears ended June 30, 2005 and June 30, 2006, the following restructuringcharges were incurred:
|                        | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **June 30, 2005**     | ** ** | **June 30, 2006**     | ** ** |
| Restructuring  Charges |       | $                               | 176,578    |                            | $          | (16,170 | ) |
|                        |            |                                 |            |                                 |            |  |  |

 

During the fiscalyear ended October 31, 2003 and continuing into fiscal year 2005, Firepondundertook plans to restructure its operations as a result of a prolongedslowdown of global information technology spending, specifically within theenterprise software marketplace. Firepond reduced its headcount and facilitiesas well as wrote-off excess equipment and terminated and restructured certaincontractual relationships. During the fiscal year ended June 30, 2005 theCompany had substantially completed its restructuring efforts. Therestructuring and other special charges for the fiscal years ended June 30,2005 and 2006 totaled $176,578 and $(16,170) respectively. The majority ofthese costs in fiscal year end June 30, 2005 were excess contractualcommitments and termination fees related to legal fees and consulting fees forthe acquisition of Firepond by Jaguar Technology Holdings LLC. The credit in2006 arose from the settlement of a lease obligation. As of the date of thisfiling, the Company believes restructuring efforts are ended.

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*Settlementof Claim*

In the fiscalyears ended June 30, 2005 and June 30, 2006, settlements of claims wereincurred as follows:
|                      | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|----------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **           | ** ** | **June, 2005**             | ** ** | **June 30, 2006**     | ** ** |
| Settlement of  Claim |       | $                               | (646,863   | )                               | $          | (1,712,500 | ) |
|                      |            |                                 |            |                                 |            |  |  |

 

On April 8, 2004,Firepond entered in an agreement with General Motors Corporation settling allmatters between the companies arising under prior management for the sum of $7million. Firepond executed a note payable to GM as part of the settlement. OnSeptember 13, 2005, Firepond, FPT Holdings and General Motors entered into aletter agreement whereby General Motors accepted $1,250,000 in cash from FPT Holdings,received a $250,000 unsecured note from FPT Holdings, cancelled the $3,500,000note due from Firepond and released its security interest in Firepond assets.The settlement of claim at June 30, 2005 represents non-cash principalreduction of $450,000 and a non-cash principal reduction of $1,500,000 at June30, 2006 plus the interest forgone by General Motors.

*OtherIncome (Expense) Net*

In the fiscalyears ended June 30, 2005 and June 30, 2006, the following other income andexpenses were incurred:
|                              | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **June 30, 2005**     | ** ** | **June 30, 2006**     | ** ** |
| Interest Income              |       | $                               | 0          |                            | $          | 522,045 |   |
| Interest Expense             |       | $                               | (128,333   | )                               | $          | (3,068,063 | ) |
| Other income and  (expenses) |       | $                               | 28,209     |                            | $          | (18,951 | ) |

 

Other income(expense), net primarily consists of interest income, interest expense, bankfees, certain state and local taxes and foreign currency transactiongains/losses.  As a result of the CAPFinancing in March 2006 previously discussed, the Company has restricted cashof $47,500,000 which resulted in interest income for the year ended June 30,2006 as compared to none in the previous period.

During the fiscalyear ended June 30, 2006, the Company recorded interest expense of$3,068,063.  Included in that amount isamortization of debt issuance costs related to the CAP financing which amountedto $1,633,835 which is classified as interest expense.  The interest expense net of the amortizationof $1,434,228 is attributable to the note obligations to GM, Trident and theCAP Notes.  The amount of interest in thefiscal year ended June 30, 2006 increased substantially from the prior periodas the period for computing interest is longer and the principal obligations weresignificantly higher as a result of the Trident and CAP financings andamortization of CAP Financing related debt issuance expenses.

*Income(Loss) from Continuing Operations:*

The above resultedin a loss from continuing operations of $519,693 for the eight months endedJune 30, 2005 and a loss of $4,019,929 for the fiscal year ended June 30, 2006.

*Income(Loss) from Discontinued Operations:*

In the fiscalyears ended June 30, 2005 and June 30, 20065, the following Income (loss) fromdiscontinued operations was recorded:
|                             | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|-----------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **June 30, 2005**     | ** ** | **June 30, 2006**     | ** ** |
| Income (Loss)  Discontinued |       | $                               | 0          |                            | $          | (763,252 | ) |
|                             |            |                                 |            |                                 |            |  |  |

 

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The loss in fiscalyear 2006 was a result of the liquidation and write-off of all remainingforeign operations as part of the Company’s restructuring efforts begun in2003.

*Gain onDisposal of Discontinued Operations*

In the fiscalyears ended June 30, 2005 and June 30, 2006, the following gain on disposal ofdiscontinued operations was recorded:
|                                       | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **June 30, 2005**     | ** ** | **June 30, 2006**     | ** ** |
| Gain on Disposal  of Discontinued Ops |       | $                               | 2,560,885  |                            | $          | 0 |   |
|                                       |            |                                 |            |                                 |            |  |  |

 

In August 2003Firepond decided to terminate operations of all foreign subsidiaries. Duringthe fiscal year ended June 30, 2005, Firepond recorded the elimination of theliabilities associated with its foreign discontinued operations except forGermany and Switzerland which at the time were still in the process ofliquidation. This elimination resulted in Firepond recording approximately $2.6million in income on disposal of discontinued operations during the fiscal yearended June 30, 2005 and as compared to the loss in fiscal year ended June 30,2006.

***Comparisonof fiscal periods ended October 31, 2004 (eleven months) and June 30, 2005 (eightmonths)***

The discussion below compares the fiscalyears ended October 31, 2004 and June 30, 2005.

In reviewing the financial statements forthese periods, the following factors bear on the reported results:

(1)  OnSeptember 13, 2005, FPT Holdings acquired all of the operating assets, certainliabilities, and all of the employees of Firepond as part of a restructuringand new financing transaction. While this transaction created a new legalentity going forward, for accounting purposes, the two companies are treated asone.

(2)  Atthe time of the acquisition, Firepond had an October 31 fiscal year end while FPTHoldings had a June 30 fiscal year end. Thus, the audited statements for thefiscal year ended June 30, 2005 are for only an eight month period.

(3) The audited statements for fiscal year end October 31, 2004 are for onlyan eleven month period. While Firepond did not change its fiscal year duringthis reporting period, Firepond was acquired by Jaguar Technology Holdings, LLCin December 2003. This acquisition required application of purchase accountingrules, treating Firepond after the acquisition as a new company for accountingpurposes.  Firepond’s results ofoperations for the twelve month period ended October 31, 2004 are reported inFootnote 1 of those audited financial statements.

(4)  Throughoutthe periods presented, Firepond was undergoing extensive restructuring due tothe down turn in technology spending and the acquisition of Firepond by JaguarTechnology Holdings, LLC.

**Revenues**

In the fiscalyears ended October 31, 2004 and June 30, 2005, the following revenues weregenerated:
|            | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** ** | ** ** | **October 31, 2004**  | ** ** | **June 30, 2005**     | ** ** |
| Revenues   |       | $                               | 8,950,055  |                            | $          | 2,841,394 |   |
|            |            |                                 |            |                                 |            |  |  |

 

The decrease in revenuesin the fiscal year ended June 30, 2005 is primarily attributable to thesubstantially shorter period presented and to the renewal of a license with alegacy client at the end of the fiscal year ended 

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October 31, 2004. Thisrenewal changed a periodic license to a permanent license and made up 34.6% ofrevenues in the period.

**Cost ofGoods Sold**

In the fiscalyears ended October 31, 2004 and June 30, 2005, the following costs of goodssold were incurred:
|                     | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **          | ** ** | **October 31, 2004**  | ** ** | **June 30, 2005**     | ** ** |
| Cost of Goods  Sold |       | $                               | 2,087,776  |                            | $          | 1,269,357 |   |
|                     |            |                                 |            |                                 |            |  |  |

 

Total cost ofgoods sold decreased $0.8 million, or 39.2%, to $1.3 million for the fiscalyear ended June 30, 2005 from $2.1 million in fiscal year ended October 31,2004. Total cost of goods sold as a percentage of total revenues increased to44.7% in the fiscal year ended June 30, 2005 from 23.3% in fiscal year endedOctober 31, 2004. This decrease is primarily attributable to the substantiallyshorter period presented, offset in part by the cost of our launch of ourOnDemand product along with a large license sale that was recorded in October2004. This latter factor is reflected in the increase in the cost of goods soldas a percentage of total revenues in the fiscal year ended June 30, 2005.

**Componentsof Operating Expenses and Other Items**

*Sales,General and Administrative*

In the fiscalyears ended October 31, 2004 and June 30, 2005, the following sales, generaland administrative expenses were incurred:
|              | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|--------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **   | ** ** | **October 31, 2004**  | ** ** | **June 30, 2005**     | ** ** |
| S, G & A |       | $                               | 1,330,110  |                            | $          | 1,343,750 |   |
|              |            |                                 |            |                                 |            |  |  |

 

Sales expensesconsist primarily of salaries, commissions and bonuses for sales and marketingpersonnel and promotional expenses. General and administrative expenses consistprimarily of salaries and other personnel-related cost for executive,financial, human resource, information services, and other administrativefunctions, as well as legal and accounting costs. Sales and general andadministrative expenses increased $13,640, or 1.0% in the fiscal year endedJune 30, 2005. Sales and general and administrative expenses as a percentage oftotal revenue increased to 47.3% for the fiscal year ended June 30, 2005 from14.9% for the fiscal year ended October 31, 2004. Sales and general andadministrative expenses increased in absolute dollars and as a percentage oftotal revenue primarily due to a large decrease in 2004 in the allowance fordoubtful accounts, and in 2005 a reduction in accounting fees and decrease insales.

*Researchand Development Expenses*

In the fiscalyears ended October 31, 2004 and June 30, 2005, the following research anddevelopment expenses were incurred:
|                           | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **October 31, 2004**  | ** ** | **June 30, 2005**     | ** ** |
| Research and  Development |       | $                               | 1,953,895  |                            | $          | 1,118,141 |   |
|                           |            |                                 |            |                                 |            |  |  |

 

Research anddevelopment expenses consist primarily of salaries and personnel-related costsand the costs of contractors associated with the development of new products,the enhancement of existing products, and the performance of quality assuranceand documentation activities. Research and development expenses decreased $0.8 

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million, or 42.8% for thefiscal year ended June 30, 2005. Research and development expenses as apercentage of total revenue increased to 39.4% in the fiscal year ended June30, 2005 from 21.8% in fiscal year ended October 31, 2004. These expensesdecreased in absolute dollars as a result of our restructuring efforts, includingthe reduction in headcount and decreased utilization of engineering and productdevelopment contractors as well as the comparable shorter period. Research anddevelopment expenses increased as a percentage of total revenue primarily dueto a combination of decreased revenue for the shortened period and research anddevelopment expenses not decreasing proportionally.

*Restructuringand other Special Charges Expense*

In the fiscalyears ended October 31, 2004 and June 30, 2005, the following restructuring chargeswere incurred:
|                        | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **October 31, 2004**  | ** ** | **June 30, 2005**     | ** ** |
| Restructuring  Charges |       | $                               | 3,447,293  |                            | $          | 176,578 |   |
|                        |            |                                 |            |                                 |            |  |  |

 

During the fiscalyear ended October 31, 2003 and continuing into fiscal year 2005, Firepondundertook plans to restructure its operations as a result of a prolongedslowdown of global information technology spending, specifically within theenterprise software marketplace. Firepond reduced its headcount and facilitiesas well as wrote-off excess equipment and terminated and restructured certaincontractual relationships. During the fiscal year ended October 31, 2004 andJune 30, 2005 Firepond terminated several employees. The restructuring andother special charges for the fiscal years ended October 31, 2004 and June 30,2005 totaled $3,447,293 and $176,578, respectively. The majority of these costsin fiscal year end October 31, 2004 were excess contractual commitments andtermination fees related to legal fees and consulting fees for the JaguarTechnology Holdings acquisition of Firepond. As of the date of this filing, theCompany believes restructuring efforts are ended.

*Settlementof Claim*

In the fiscalyears ended October 31, 2004 and June 30, 2005, a settlement of claim wasincurred as follows:
|                      | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|----------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **           | ** ** | **October 31, 2004**  | ** ** | **June 30, 2005**     | ** ** |
| Settlement of  Claim |       | $                               | 0          |                            | $          | (646,863 | ) |
|                      |            |                                 |            |                                 |            |  |  |

 

On April 8, 2004Firepond entered in an agreement with General Motors Corporation settling allmatters between the companies arising under prior management for the sum of $7million. Firepond executed a note payable to GM as part of the settlement. OnSeptember 13, 2005, Firepond, FPT Holdings and General Motors entered into aletter agreement whereby General Motors accepted $1,250,000 in cash from FPTHoldings, received a $250,000 unsecured note from FPT Holdings, cancelled thenote due from Firepond and released its security interest in Firepond assets.The settlement of claim at June 30, 2005 represents a non-cash principalreduction of $450,000 and the interest forgone by General Motors.

*OtherIncome (Expense) Net*

In the fiscalyears ended October 31, 2004 and June 30, 2005 the following other income(expense), net were incurred:
|                              | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **October 31, 2004**  | ** ** | **June 30, 2005**     | ** ** |
| Other Income  (Expense), Net |       | $                               | (82,179    | )                               | $          | (100,124 | ) |
|                              |            |                                 |            |                                 |            |  |  |

 

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Other income(expense), net primarily consists of interest expense, bank fees, certain stateand local taxes and foreign currency transaction gains/losses.  Other income (expense), net increased $0.02million in the fiscal year ended June 30, 2005 from the fiscal year end October31, 2004. Other Income (Expense), Net in the fiscal year ended June 30, 2005was due to a decrease in Firepond’s D&O insurance. Other Income in fiscalyear end October 31, 2004 included accrued interest of approximately $17,000 ona loan receivable which interest was subsequently written off, offset by acharge resulting from the impairment of a legacy software system.

Interest expensein the fiscal year ended October 31, 2004 and June 30, 2005 is accrued intereston the note payable to General Motors Corporation. The amount in the fiscalyear ended June 30, 2005 decreased from the comparable period as the period forcomputing interest is shorter and the principal amount of the obligation waslower.

*Income(Loss) from Continuing Operations:*

The above resultedin an income from continuing operations of $48,802 in the fiscal year endedOctober 31, 2004 and a loss from continuing operations of $519,693 for theeight months ended June 30, 2005.

*Income(Loss) from Discontinued Operations:*

In the fiscalyears ended October 31, 2004 and June 30, 2005, the following Income (loss)from discontinued operations were incurred:
|                             | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|-----------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **October 31, 2004**  | ** ** | **June 30, 2005**     | ** ** |
| Income (Loss)  Discontinued |       | $                               | (118,005   | )                               | $          | 0 |   |
|                             |            |                                 |            |                                 |            |  |  |

 

*Gain onDisposal of Discontinued Operations*

In the fiscal yearsended October 31, 2004 and June 30, 2005, following gain on disposal ofdiscontinued operations were incurred:
|                                       | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **October 31, 2004**  | ** ** | **June 30, 2005**     | ** ** |
| Gain on Disposal  of Discontinued Ops |       | $                               | 0          |                            | $          | 2,560,885 |   |
|                                       |            |                                 |            |                                 |            |  |  |

 

In August 2003Firepond decided to terminate operations of all foreign subsidiaries. Duringthe fiscal year ended June 30, 2005, Firepond recorded the elimination of theliabilities associated with its foreign discontinued operations except forGermany and Switzerland which at the time were still in the process ofliquidation. This elimination resulted in Firepond recording approximately $2.6million in income gain on disposal of discontinued operations.

**Liquidity and Capital Resources**

As of June 30,2006, cash and cash equivalents were $831,184 and restricted cash was$47,500,000 as compared with $24,379 of cash and cash equivalents and norestricted cash as of June 30, 2005.  Ourworking capital at June 30, 2006 was ($6,129,856) compared to a working capitalof ($2,813,744) at June 30, 2005.

Net cash used inoperating activities was $1,581,234 in the twelve months ended June 30, 2006,compared with net cash used in operating activities of $1,113,319 in the eightmonths ended June 30, 2005. Cash used in operating activities in the twelvemonths ended June 30, 2006 was primarily attributable to the focus on theOnDemand business segment and the merger and financing activities previouslydiscussed.

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Net cash used ininvesting activities was $47,564,292 in the twelve months ended June 30, 2006compared with net cash provided by investing activities of $9,970 in the eightmonths ended June 30, 2005.  Net cashused in investing activities in the twelve months ended June 30, 2006 wasprimarily attributable to the investment of the restricted cash from the CAPfinancing.

We leasefacilities under non-cancelable operating leases which have various expirationdates ranging from 2007 to 2011. At June 30, 2006, future minimum annual leasepayments amounted to approximately $662,000 under these leases.

On September 13,2005, FPT Holdings acquired all of the operating assets, certain liabilities,and all of the employees of Firepond as part of a restructuring and newfinancing transaction.  TridentGrowth Fund, LLC lent FPT Holdings $2,000,000 in the form of convertible debtwith attached warrants. Interest accrues on the associated secured note (“SeptemberNote”) at 12% per annum. Interest is payable monthly. Principal is dueSeptember 30, 2006.

On November 25,2005, FPT Holdings closed an additional $500,000 convertible note with warrants(the “November Note”) with Trident Growth Fund on the same terms and conditionsas the September Note. The funds received pursuant to the September Note andthe November Note have been used for working capital required as the Companytransitions from its legacy enterprise software business to its OnDemandrevenue model.

On March 29, 2006,we completed the issuance of senior secured notes in an aggregate principalamount of $50.0 million together with warrants to acquire up to 6,875,000shares of our Common Stock.  The proceedsof the CAP Financing are intended to be used for possible Business Combination Transactions.  Further details of the CAP Financing aredescribed above under “Item 6.—Management’s Discussion and Analysis ofFinancial Condition and Results of Operations of the Company—Recent Financings”.

In August 2006, wecompleted a PIPE Financing of 1,000,000 Units at $7.00 per Unit, with each Unitconsisting of one share of our Common Stock and a warrant to purchase oneadditional share of Common Stock at $7.00 per share, exercisable for five yearsafter issuance.  We conducted the PIPEFinancing through two closings which occurred on August 11 and August 31,2006.  The aggregate gross proceeds fromthe PIPE Financing totaled $7,000,000, not including fees and expenses of theoffering.  We are obligated toregister for resale the shares of Common Stock issued in the PIPEFinancing as well as the shares of Common Stock issuable upon exercise ofthe warrants.

We anticipatecontinued spending on capital expenditures consistent with anticipatedrequirements for operations, infrastructure and personnel. We believe that our currentcash, together with cash flow expected to be generated from operations, will besufficient to meet our anticipated cash needs for working capital and capitalexpenditures for at least the next 12 months. However, we will likely seek torenegotiate existing debt repayment terms, or raise additional funds in thenext 12 months or in the future to support expansion of our sales force, repaydebt, develop new or enhanced products or services, respond to competitivepressures, acquire complementary businesses or technologies or respond tounanticipated requirements. We may not be able to obtain additional funds onterms which are favorable or acceptable to us. Business Combination TransactionProposals that we present to the Note Holders may not be approved. If we raiseadditional funds through the issuance of equity securities, the percentageownership of our existing stockholders would be reduced. Furthermore, thesesecurities may have rights, preferences or privileges senior to our Common Stock.

**RecentlyIssued Accounting Pronouncements**

In December 2004, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 153, “*Exchanges of Nonmonetary Assets*,” (“*SFAS No. 153*”)an amendment to Accounting Principles Board (“APB”) Opinion No. 29 (“OpinionNo. 29”), “*Accounting for Nonmonetary**Transactions*”.Statement No. 153 eliminates certain differences in the guidance in Opinion No.29 as compared to the guidance contained in standards issued by theInternational Accounting Standards Board. The amendment to Opinion No. 29 eliminates the fair value exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance. Such an exchange has commercial substance if the futurecash flows of the entity are expected to change significantly as a result ofthe exchange. SFAS No. 153 is effective for nonmonetary asset exchangesoccurring in periods beginning after June 15, 2005.  Earlier application is permitted fornonmonetary asset exchanges occurring in periods beginning after December 16,2004.  The adoption of SFAS No. 153 didnot have a material impact on the Company’s financial statements.

In May 2005, the FASB issued SFAS No. 154, *“AccountingChanges and Error Corrections - a replacement of APB Opinion No. 20 and FASBStatement No. 3.”* SFAS No. 154 replaces APB Opinion (“APB”) No. 20, *“Accounting Changes”*, and SFAS No. 3, *“ReportingAccounting Changes in Interim Financial Statements,”* and changes therequirements for the accounting for and reporting of a change in accountingprinciple. SFAS No. 154 will apply to all voluntary changes in accountingprinciple as well as to changes required by an accounting pronouncement in theunusual instance that the pronouncement does not include specific transitionprovisions. APB No. 20 previously required that most voluntary changes inaccounting principle be recognized by including in net income of the period ofthe change the cumulative effect of changing to the new accounting principle.

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SFAS No. 154 requiresretrospective application to prior periods’ financial statements of changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. When it isimpracticable to determine the period-specific effects of an accounting changeon one or more individual prior periods presented, SFAS No. 154 requires thatthe new accounting principle be applied to the balances of assets andliabilities as of the beginning of the earliest period for which retrospectiveapplication is practicable and that a corresponding adjustment be made to theopening balance of retained earnings (or other appropriate components of equityor net assets in the statement of financial position) for that period ratherthan being reported in an income statement. When it is impracticable todetermine the cumulative effect of applying a change in accounting principle toall prior periods, SFAS No. 154 requires that the new accounting principle beapplied as if it were adopted prospectively from the earliest date practicable.SFAS No. 154 carries forward without change the guidance contained in APBOpinion No. 20 for reporting the correction of an error in previously issuedfinancial statements and a change in accounting estimate, and also the guidancein APB No. 20 requiring justification of a change in accounting principle onthe basis of preferability. SFAS No. 154 is effective for accounting changesand corrections of errors made in fiscal years beginning after December 15,2005. Early adoption is permitted for accounting changes and corrections oferrors made in fiscal years beginning after the date SFAS No. 154 was issued.The Company presently does not believe that the adoption of the provisions ofSFAS No. 154 will have a material affect on its financial statements.

In December 2004, theFASB issued SFAS No. 123 (Revised 2004), “*Share BasedPayment*,” (“*SFAS No. 123 (R)”)*which eliminates the use of APB Opinion No. 25 and will require theCompany to measure the cost of employee services received in exchange for anaward of equity instruments based on the grant-date fair value of the award.That cost will be recognized over the period during which an employee isrequired to provide service in exchange for the reward (the requisite service period).No compensation cost is recognized for equity instruments for which employeesdo not render the requisite service. The grant-date fair value ofdirector/employee share options; share grants and similar instruments will be estimated using option-pricing modelsadjusted for the unique characteristics of those instruments.  SFAS No. 123 (R) must be applied to allshares and options granted or modified after its effective date and also torecognize the cost associated with the portion of any share or option awardsmade before its effective date for with the associated service has not beenrendered as of its effective date.

OnApril 14, 2005, the U.S. Securities and Exchange Commission announced thatthe effective date of SFAS No. 123(R) is deferred for calendar year companiesuntil the beginning of 2006. On January 1, 2006, the Company elected to adoptSFAS No. 123(R) early.

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “*Accounting for Conditional Asset Retirement Obligations*” (“*FIN No. 47*”).  FIN No.47 clarifies that the term conditional asset retirement obligation asused in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,”refers to a legal obligation to perform an asset retirement activity in whichthe timing and (or) method of settlement are conditional on a future event thatmay or may not be within the control of the entity.  The obligation toperform the asset retirement activity is unconditional even though uncertaintyexists

 

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about the timing and (or) method ofsettlement.  Uncertainty about the timing and/or method of settlement of aconditional asset retirement obligation should be factored into the measurementof the liability when sufficient information exists.  Thisinterpretation also clarifies when an entity would have sufficientinformation to reasonably estimate the fair value of an asset retirementobligation.  Fin No. 47 is effective no laterthan the end of fiscal years ending after December 15, 2005 (December 31, 2005for calendar-year companies). Retrospective application of interim financial information is permittedbut is not required.  Management does notexpect adoption of FIN No. 47 to have a material impact on the Company’sfinancial statements.

SFAS 155, “*Accounting for Certain Hybrid Financial Instruments—an amendment ofFASB Statements No. 133 and 140*” (‘SFAS No. 155”). This Statementshall be effective for all financial instruments acquired, issued, or subjectto a remeasurement (new basis) event occurring after the beginning of anentity’s first fiscal year that begins after September 15, 2006. The fair valueelection provided for in paragraph 4(c) of this Statement may also be appliedupon adoption of this Statement for hybrid financial instruments that had beenbifurcated under paragraph 12 of Statement 133 prior to the adoption of thisStatement. Earlier adoption is permitted as of the beginning of an entity’sfiscal year, provided the entity has not yet issued financial statements,including financial statements for any interim period, for that fiscal year.Management does not expect adoption of SFAS No. 155 to have a material impacton the Company’s financial statements.

SFAS 157, “*Fair Value Measurements*”, defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles(GAAP), and expands disclosures about fair value measurements. This Statementapplies under other accounting pronouncements that require or permit fair valuemeasurements, the Board having previously concluded in those accountingpronouncements that fair value is the relevant measurement attribute.Accordingly, this Statement does not require any new fair value measurements.However, for some entities, the application of this Statement will changecurrent practice. Management has not evaluated the impact of this statement.

InJune 2005, the Emerging Issues Task Force reached a consensus on IssueNo. 05-6 (“EITF No. 05-6”), *“Determining theAmortization Period for Leasehold Improvements Purchased after Lease Inceptionor Acquired in a Business Combination.”*   EITF No. 05-6 clarifies that theamortization period for leasehold improvements acquired in a businesscombination or placed in service significantly after and not contemplated at ornear the beginning of the lease term should be amortized over the shorter ofthe useful life of the assets or a term that includes the required leaseperiods and renewals that are reasonably assured of exercise at the time of theacquisition. EITF No. 05-6 is to be applied prospectively to leaseholdimprovements purchased or acquired in reporting periods beginning afterJune 29, 2005. The adoption of EITF No. 05-6 did not have a material impacton the Company’s consolidated financial statements.

**ITEM 7.                  FINANCIAL STATEMENTS**

Thefollowing financial statements are filed as a part of this report beginning onpage F-1:  
| Page | ** ** | **Description**                                                                                                |
|------|------------|----------------------------------------------------------------------------------------------------------------|
| F-2  |       | Reports of Independent  Registered Public Accounting Firms                                                     |
| F-4  |       | Consolidated Balance  Sheet as of June 30, 2005 and 2006                                                       |
| F-5  |       | Consolidated Statement  of Operations for the periods ended October 31, 2004, June 30, 2005 and June  30, 2006 |
| F-6  |       | Consolidated Statement  of Stockholders’ Equity (Deficit) for the fiscal year ended June 30, 2006         |
| F-7  |       | Consolidated Statement  of Cash Flow for the periods ended October 31, 2004, June 30, 2005 and June  30, 2006  |
| F-8  |       | Notes to Consolidated Financial  Statements.                                                                   |

 

**ITEM 8.                  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

Not applicable.

**ITEM 8A.               CONTROLS AND PROCEDURES**

TheCompany maintains disclosure controls and procedures that are designed toensure that information required to be disclosed in the Company’s Exchange Actreports is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and that such information isaccumulated and communicated to the Company’s management, including its ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure based closely on the definition of “disclosurecontrols and procedures” in Rule 15d-15(e).  The Company’s disclosure controls andprocedures are designed to provide a reasonable level of assurance of reachingthe Company’s desired disclosure control objectives.  In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.  The Company’s certifying officers haveconcluded that the Company’s disclosure controls and procedures are effectivein reaching that level of assurance.

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As ofthe end of the period of this report, the Company carried out an evaluation,under the supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and the Company’s ChiefFinancial Officer, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures were effective.

Therehave been no significant changes in the Company’s internal controls or in otherfactors that could significantly affect the internal controls subsequent to thedate the Company completed its evaluation.

**ITEM 8B.               OTHER INFORMATION**

Not applicable.

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**PART III**

**ITEM 9.****                                                    ****DIRECTORS, EXECUTIVE OFFICERS,PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITHSECTION 16(a) OF THE EXCHANGE****ACT.**

**Executive Officers andDirectors**

Thefollowing table sets forth the name, age and position of each of our directors,executive officers and significant employees at September 15, 2006:

| Name            | ** ** | **Age** | ** ** | **Position(s)**                    |
|-----------------|------------|---------|------------|------------------------------------|
| Douglas Croxall |       | 37      |       | Chairman of the Board              |
| William Santo   |       | 51      |       | Chief Executive Officer, Director  |
| Stephen Peary   |       | 57      |       | Chief Financial Officer, Secretary |
| Jerry Keefe     |       | 44      |       | Vice President of Operations       |
| Carol Ferrari   |       | 41      |       | Vice President of Marketing        |
| Mark Campion    |       | 50      |       | Director                           |

*** ***

***Douglas Croxall*** has served as the Chairman of ourBoard of Directors since December 3, 2003, and was the Chief Executive Officerof Firepond and FPT from December 2003 until May 2005.  Mr. Croxall is the managing member of JaguarTechnology Holdings, LLC.  Since December2001, Mr. Croxall has served as the managing member of Riverland EnterprisesLLC, a privately-held company which holds investments and provides strategicadvisory services. Since August 2001, Mr. Croxall has served as an officer ofAcclaim Financial Group Venture III, LLC, which provides strategic advisoryservices. From September 1999 until May 2001, Mr. Croxall served as the ChiefFinancial Officer of Load Media Network, Inc., an Internet and software companybased in Hollywood, California. From August 1995 until September 1999, Mr.Croxall served as a Manager for KPMG in the Strategic Transaction ServicesGroup. Mr. Croxall received his Bachelor of Arts degree in Political Sciencefrom Purdue University and his Master Degree in Finance from PepperdineUniversity.

***William Santo***serves as our Chief Executive Officer and a director, and served as the ChiefExecutive Officer of Firepond and FPT since June 1, 2005.  Prior to joining us, Mr. Santo was a ManagingDirector at Sanders Morris Harris, a publicly traded diversified financialservices firm (“SMH”), from October 2004 to May 2005. Prior to joining SMH, Mr.Santo was a successful entrepreneur involved in numerous start-upopportunities, primarily in the software industry. Most recently, Mr. Santoco-founded Magnetic Alliance, an online marketplace, facilitating co-marketingand co-branding opportunities between consumer brands and entertainment contentproducers. Before that Mr. Santo co-founded the Web acceleration firm,wwWhoosh, Inc., and served as its Chief Executive Officer from 1999 through 2002.Prior to wwWhoosh, he founded and was Chief Executive Officer of InfoCellular,a company that developed customer acquisition software for the wirelesscommunications industry.  InfoCellular was founded in 1993 with fouremployees, and within five years 26 wireless carriers in five countries usedits products. Mr. Santo graduated from the University of Massachusetts, Amherstwith a B.A. in Political Science. He also holds a Juris Doctor degree fromNew England School of Law.

***Stephen Peary***serves as our Chief Financial Officer and Secretary, and served as the ChiefFinancial Officer of FPT since April 28, 2005. He has been consulting with FPT regarding restructuring operations,finance, audit and insurance matters since September 2004.  From 2001 to 2005, Mr. Peary was ManagingDirector of Stinson Capital Management, Ltd., a Bermuda corporation, and itsaffiliates managing investment portfolios and financing marine and energyrelated assets.  From 1997 to 2001 he wasManaging Director of Liverpool & London Protection and IndemnityAssociation, a mutual manager of marine assets and liability risks located inLiverpool, England.  From 1987 to 1997,Mr. Peary was Senior Vice President at PLM International, Inc. (AMEX:PLM), managerof diversified investment portfolios focused on transportation relatedequipment, including ships, commercial aircraft, marine containers, and oildrilling rigs.  He is a graduate of theUniversity of Illinois (BA, Economics), Georgetown University Law School (J.D.)and Boston University (LLM – Taxation).

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***JerryKeefe*** has served as Vice President of Operations sinceApril 24, 2006.  Prior to joining us, Mr.Keefe was the Director of Sales and Business Development at Videolink, aprovider of webcasts and video productions since 2005.  Prior to joining Videolink, he was a businessoperations consultant at Integrated Systems Group (“ISG”) from May 2004 toApril 2005.  Prior to ISG, Mr. Keefe wasthe CEO of Lexys Technology, a provider of on demand retail transactionmanagement software. He held this position for two years, from 2001-2003. Priorto 2001, Mr. Keefe held positions at InfoCellular, Inc. and LHS Group, whichlater became Sema InfoCell (being purchased by Sema Group), as General Manager,Vice President of Technology, and Director of Quality and Operations spanning1994-2001. Mr. Keefe began his career at Digital Equipment Corporation as amanager and program analyst from 1986-1994. Mr. Keefe holds a Master of Arts in Business Administration fromFramingham State College, and a Bachelor of Science in Computer Science fromNorth Adams State College.

***Carol Ferrari***has served as Vice President of Marketing since April 24, 2006.  Prior to joining us, Ms. Ferrari held thepositions of Vice President of Business Development and Vice President ofMarketing for SoundBite Communications, an on demand provider of voicemessaging products from 2004 to 2006. Prior to SoundBite, Ms. Ferrari was the Vice President of Marketing forConcerto Software, a provider of contact center software products.  She held that position from 2002 to2004.  Prior to Concerto, Ms. Ferrari wasDirector and then Vice President of Marketing for InfoCellular, Inc. and LHSGroup, which later became Sema Group from 1996-2000.  Prior to 1996, Ms. Ferrari was the Telecommunications Marketing Manager at Gensym Corp. from 1995-1996. Before that sheheld a Senior Associate position at the Yankee Group for the year prior, and aproduct planning manager role at Motorola Inc. from 1986-1994.  Ms. Ferrari holds a Master of BusinessAdministration from Illinois Institute of Technology and a Bachelor of Science in Marketing fromRochester Institute of Technology.

***Mark Campion***has served as a member of our Board of Directors since March 2006. Mr. Campionjoined PolyFuel, Inc., a publicly held company, as Chief Financial Officer inApril 2003.  Mr. Campion is also adirector and Corporate Secretary of Polyfuel. Mr. Campion personally led PolyFuel’s equity raise and listing on theLondon Stock Exchange Alternative Investment Market in July 2005.  Prior to joining PolyFuel, Mr. Campion was aprincipal with MCC Consulting from 2001 through 2003.  Mr. Campion has more than 20 years ofexperience across a broad range of financial and operational disciplines,including public and private financing, treasury, corporate operations,information technology, planning and budgeting, credit and risk management,accounting and taxation, human resources and corporate administration. He hasheld senior-level positions with a number of public and private companies,including Atomic Tangerine, Trans Ocean, GRI International, Activision, andKPMG. Mr. Campion received a Bachelor of Science in business from theUniversity of California, Berkeley and is a graduate of the Harvard BusinessSchool’s Advanced Executive Management Program. He is a Certified PublicAccountant.

We may add other directors to the Board of Directorsin the future, as qualified candidates become available.

**Election of Directors andOfficers**

Holders of our Common Stock areentitled to one (1) vote for each share held on all matters submitted to a voteof the stockholders, including the election of directors. Cumulative votingwith respect to the election of directors is not permitted by our Certificateof Incorporation. The Board of Directorsshall be elected at the annual meeting of the stockholders or at a specialmeeting called for that purpose.  Eachdirector shall hold office until the next annual meeting of stockholders anduntil the director’s successor is elected and qualified.  If a vacancy occurs on the Board ofDirectors, including a vacancy resulting from an increase in the number ofdirectors, then the stockholders may fill the vacancy at the next annualmeeting or at a special meeting called for the purpose, or the Board ofDirectors may fill such vacancy.   Atthis time, only one of our board members is “independent” as determined inaccordance with Nasdaq rules and regulations.  If we proceed with the planned listing of our Common Stock on Nasdaq orthe American Stock Exchange, we intend to satisfy the “independence”requirements with respect to our board of directors as set forth in theapplicable rules of Nasdaq or the American Stock Exchange.

**Board Committees**

Given our limited operating history as a combinedcompany, our Board of Directors has not yet formed any Committees.  However, our Board of Directors has resolvedto form certain Committees including Compensation, 

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Audit and Nominating and Governance Committees as soonas our Board of Directors satisfies the Nasdaq or American Stock Exchange “independence”requirements.  If we proceed with thelisting of our Common Stock on Nasdaq or the American Stock Exchange, eachmember of the Compensation, Audit and Nominating and Governance Committees willbe required to be “independent” within the meaning of NasdaqRule 4200(a)(15) or American Stock Exchange Rule 121A, as applicable.  In addition, each member of the Audit Committeewill be “independent” within the meaning of applicable rules and regulations ofthe Securities and Exchange Commission regarding the independence of auditcommittee members.

**Compensation Committee**.  The Compensation Committee will be chargedwith recommending to the Board the compensation for our executives andadministering our stock incentive and benefit plans.

**Audit Committee**.  The Audit Committee will be charged with,among other things, the appointment of our independent auditors, as well asdiscussing and reviewing with the independent auditors the scope of the annualaudit and results thereof, pre-approving the engagement of the independentauditors for all audit-related services and permissible non-audit relatedservices, and reviewing and approving all related-party transactions. The AuditCommittee will also review interim financial statements included in ourquarterly reports and will review documents filed with the SEC.  We anticipate that Mr. Campion will beChairman of the Audit Committee.

**Nominating and Governance Committee**.  The Nominating and Governance Committee willbe charged with assisting the Board in its selection of individuals as nomineesfor election to the Board at annual meetings of our stockholders and to fillany vacancies or newly created directorships on the Board.

**Code of Business Conduct and Ethics**.  We intend to adopt a Code of Business Conductand Ethics applicable to our directors, officers (including our principalexecutive officer, principal financial officer, principal accounting officerand controller) and employees. We intend to satisfy the disclosure requirementunder Item 10 of Form 8-K relating to amendments or waivers from anyprovision of the Company’s Code of Business Conduct and Ethics applicable toour principal executive officer, principal financial officer, principalaccounting officer or controller by either filing a Form 8-K or postingthis information on our website at www.firepond.com within five days businessdays following the date of amendment or waiver.

**Section 16(a) Beneficial OwnershipReporting Compliance**

Section16(a) of the Exchange Act requires our officers and directors, and persons whoown more than 10% of a registered class of our equity securities, to filereports of ownership and changes in ownership with the SEC. Officers, directorsand greater than 10% stockholders are required by SEC regulation to furnish uswith copies of all Section 16(a) reports they file.

Basedsolely upon the copies of Section 16(a) reports which we received from suchpersons or written representations from them regarding their transactions inour Common Stock, we believe that, during the fiscal year ended June 30, 2006,all Section 16(a) filing requirements applicable to our officers, directors andgreater than 10% beneficial owners were met in a timely manner.

**ITEM 10.*              *EXECUTIVE COMPENSATION**

Thefollowing table sets forth summary information concerning compensation of ourchief executive officer and our chief financial officer as of the end of thefiscal years ended October 31, 2004, June 30, 2005 and June 30, 2006(collectively referred to as the “Named Executive Officers”).

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**SummaryCompensation Table**

|                        | ** ** | ** **              | ** ** | ** **    | ** ** | ** **   | ** ** | **Long-Term Compensation** | ** ** | ** **          |       |
|------------------------|------------|-------------------------|------------|---------------|------------|--------------|------------|----------------------------|------------|---------------------|------------|
| ** **             | ** ** | ** **              | ** ** | ** **    | ** ** | ** **   | ** ** | **Awards**                 | ** ** | **Payouts**         | ** ** | ** ** |   |
| ** **             | ** ** | ** **              | ** ** | ** **    | ** ** | ** **   | ** ** | **Restricted Stock**       | ** ** | **Securities**      | ** ** | **LTIP** | ** ** | **All Other** |   |
| **Name and**           | ** ** | **Annual Compensation** | ** ** | ** **    | ** ** | **Award(s)** | ** ** | **Underlying**             | ** ** | **Payouts**         | ** ** | **Compensation** |   |
| **Principal Position** | ** ** | **Year**                | ** ** | **Salary($)** | ** ** | **Bonus($)** | ** ** | **($)(4)**                 | ** ** | **Options/SARs(#)** | ** ** | **($)** | ** ** | **($)(5)** |   |
| William Santo(1)       |       | 2006                    |       | 225,000       |       | —       |       | $                          | 90,393     |                |       |   | — |   | — |   |
| Chief Executive        |       | 2005                    |       | 20,833        |       | —       |       | —                     |       | —              |       | — |   | — |   |
| Officer                |       | 2004                    |       | 0             |       | —       |       | —                     |       | —              |       | — |   | — |   |
| Stephen Peary(2)       |       | 2006                    |       | 190,000       |       | —       |       | $                          | 88,679     |                |       |   | — |   | — |   |
| Chief Financial        |       | 2005                    |       | 21,250        |       | —       |       | —                     |       | —              |       | — |   | 70,000 | (6) |
| Officer                |       | 2004                    |       | 0             |       | —       |       | —                     |       | —              |       | — |   | — |   |
| Douglas Croxall(3)     |       | 2006                    |       | 4,000         |       | —       |       | $                          | 170,500    |                | —     |   | — |   | — |   |
| Former Chief           |       | 2005                    |       | 3,392         |       | —       |       | —                     |       | —              |       | — |   | — |   |
| Executive Officer      |       | 2004                    |       | 44,952        |       | —       |       | —                     |       | —              |       | — |   | — |   |
|                        |            |                         |            |               |            |              |            |                            |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 

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(1)           William Santo was appointed ChiefExecutive Officer on June 1, 2005.

(2)           Stephen Peary was appointed ChiefFinancial Officer on April 28, 2005. Prior to that time Mr. Peary served as anindependent consultant to us.

(3)           Amounts represent medicalreimbursements in 2005 and 2006. Beginning April 1, 2006, Mr. Croxall was reimbursed medical expenses aspart of his compensation as a member of the Board of Directors.  For the fiscal year ended June 30, 2006, themedical reimbursements representing Board fees equaled $1,306.

(4)           Mr. Santo received shares of CommonStock on January 9, 2006 pursuant to the provisions of his employment agreementhaving a fair market value at the time equal to $5,143.  Mr. Peary received shares of Common Stock onJanuary 5, 2006 pursuant to the provisions of his employment contract having afair market value at the time equal to $3,429. The shares granted to Mr. Santo and Mr. Peary pursuant to theiremployment contracts are restricted and vest on January 5, 2009.  In connection with the CAP Financing, Mr.Santo and Mr. Peary each received grants of restricted Common Stock having afair market value at the time equal to $85,250. Mr. Croxall received a grant of restricted Common Stock in connectionwith the CAP Financing having a fair market value at the time equal to$170,500.   The shares granted to Mr.Santo, Mr. Peary and Mr. Croxall in connection with the CAP Financing arerestricted and vest on March 29, 2008.

(5)           Amounts represent our Profit Sharingand 401(k) Plan contributions, payments of term life insurance premiums andmedical cost reimbursement. In the fiscal years ended October 31, 2004, June30, 2005 and June 30, 2006, we did not make any contributions to our ProfitSharing and 401(k) Plan.  We did not payany life insurance premiums on behalf of listed executives in the fiscal yearended October 31, 2004.  In the fiscalyears ended October 31, 2004, medical reimbursements were $******6,936 for Mr.Croxall.  In the fiscal year endedOctober 31, 2006, life insurance premium payments by the Company were $420 forMr. Croxall.  In the fiscal year endedJune 30, 2005, life insurance premium payments by the Company were $******52 and $ 44 forMessrs. Santo and Peary, respectively. In the fiscal year ended June 30, 2005, medical reimbursements for Mr.Santo, Mr. Peary and Mr. Croxall were $ 783, $ 294 and $ 5,482, respectively.  In the fiscal year ended June 30, 2006,medical reimbursements were $ 9,400, $ 9,400, $ 9,400, $ 1,566 and $ 1,566, forMessrs. Santo, Peary, Croxall, Ferrari and Keefe respectively.  In the fiscal year ended June 30, 2006, lifeinsurance premiums for Messrs. Santo, Peary, Ferrari and Keefe were $ 624, $530, $ 94 and $ 78, respectively.

 (6)          Mr.Peary received $70,000 for services rendered to us as a consultant prior to Mr.Peary’s appointment as Chief Financial Officer.

**EmploymentAgreements of Named Executive Officers**

We have enteredinto an employment agreement with William Santo, our chief executive officer,effective May 15, 2005. The employment agreement has a three year term andprovides for an initial base salary of $200,000 per year, with bonus amounts tobe determined by our Board of Directors. In connection with his employment, we also issued 302,419 shares ofrestricted Common Stock to Mr. Santo, all of which will vest on the thirdanniversary of the date of grant, or January 5, 2009.  Other benefits include three weeks of paidvacations annually and medical and dental coverage.  If the Company terminates Mr. Santo’semployment for Cause, death or disability or if Mr. Santo resigns without GoodReason, he will not be entitled to any additional compensation or benefits fromthe Company, and the Company shall only be obligated to pay him that portion ofhis base salary, bonus and benefits that he earned prior to the effective dateof the termination of his employment with the Company.  If the Company terminates Mr. Santo’semployment without Cause, or if Mr. Santo departs or resigns for Good Reason,he shall be 

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entitled to the balanceof his existing base salary plus any earned bonus and other earned benefits fora period of twelve (12) months paid in equal monthly installments beginning onthe date of termination.

We have alsoentered into an employment agreement with Stephen Peary, our chief financialofficer, effective May 15, 2005. The employment agreement has a three year termand provides for an initial base salary of $170,000 per year, with bonusamounts to be determined by our Board of Directors.  In connection with his employment, we alsoissued 201,622 shares of restricted Common Stock to Mr. Peary, all of whichwill vest on the third anniversary of the date of grant, or January 5,2009.  Other benefits include three weeksof paid vacations annually and medical and dental coverage.  If the Company terminates Mr. Peary’semployment for Cause, death or disability or if Mr. Peary resigns without GoodReason, he will not be entitled to any additional compensation or benefits fromthe Company, and the Company shall only be obligated to pay him that portion ofhis base salary, bonus and benefits that he earned prior to the effective dateof the termination of his employment with the Company.  If the Company terminates Mr. Peary’semployment without Cause, or if Mr. Peary departs or resigns for Good Reason,he shall be entitled to the balance of his existing base salary plus any earnedbonus and other earned benefits for a period of twelve (12) months paid inequal monthly installments beginning on the date of termination.

The employmentcontracts with Messrs. Santo and Peary define “Cause” as any of the following(i) gross negligence, gross misconduct or any material breach by such executiveofficer of his fiduciary duties to the Company; (ii) the conviction orindictment of such executive officer for a felony; or (iii) such executiveofficer’s engagement in acts of embezzlement, fraud or dishonesty or other actsthat are injurious to the Company.  “GoodReason” shall mean such executive officer’s resignation or departure by reasonof the following events: (i) an unreasonable change in such executive officer’sposition with the Company with respect to such executive officer’sresponsibilities, duties or title; or (ii) an involuntary termination of suchexecutive officer’s employment with the Company or its successor following achange in control of the Company.

The employment contracts with Messrs. Santo and Pearywere re-executed in March 2006.  Pursuantto these re-executed agreements, the current base salaries of Messrs. Santo andPeary are now $300,000 and $250,000 per year, respectively.

**Compensation of Directors**

Each member of our Board of Directors who is not anemployee (each a “non-employee director”) will receive an annual retainer of$10,000 and will receive $1,000 for each meeting of our Board of Directorsattended either in person or telephonically. Non-employee directors will receive $500 for each committee meetingattended either in person or telephonically, unless such committee meetingshall last more than one hour.  In suchcase the committee meeting fee will be $1,000. Non-employee directors may also receive additional compensation forattending special meetings of the Board of Directors and such additionalcompensation may not be equal among the individual non-employee directors.  Such additional compensation is intended toreflect special efforts of such board members. Board members will be reimbursed for reasonable travel expensesassociated with attending any meetings of the Board of Directors or committeesof the Board of Directors.

A majority of our stockholders and our Board ofDirectors have adopted a Stock Incentive Plan designed to assist us inrecruiting and retaining key employees, directors and consultants.  The plan will become effective upon thefiling and distribution of the information statement relating therewith to our stockholderspursuant to applicable SEC rules and regulations.  The plan will permit us to grant to our keyemployees, directors and consultants up to 1,766,000 shares of Common Stockpursuant to stock option awards, restricted stock grants and other stock-basedawards.  In connection with this plan, weintend to grant to our non-employee directors an option to purchase 5,000shares of our Common Stock annually on the day following our annual meeting of stockholders,with an exercise price per share equal to the fair market value of our CommonStock on such date.  We intend that thiswill increase to 7,500 shares of our Common Stock per annum after suchnon-employee director has been on the Board of Directors for more than threeyears.  Each such option will have a tenyear term and will vest on the date of the next annual meeting of stockholders.  In addition, each such option will becomefully vested upon a “change in control” (as defined in the plan) or suchdirector’s death.  In the event anon-employee director ceases to be a director for any reason (other thandeath), such director may exercise his or her then vested options for sixmonths.  In the event of death, his orher options shall remain exercisable for a period of twelve months.  In addition, upon becoming a 

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member of the Board of Directors, each director willreceive restricted stock grants ranging from 60,000 shares of Common Stock to101,000 shares.

In March 2006, we granted to director Mark Campionrestricted Common Stock of 60,484 shares, all of which will vest on March 31,2008 subject to Mr. Campion’s continuous service.

In March 2006, we granted to director Douglas Croxall625,000 shares of restricted Common Stock, all of which will vest on the secondanniversary of the CAP Financing, subject to Mr. Croxall’s continuous serviceand certain conditions of the CAP Financing.

Mr. Croxall, beginning April 1, 2006, is reimbursedmedical premiums on his health insurance as part of his boardcompensation.  Prior to April 1, 2006,these payments were considered salary to Mr. Croxall as chairman of theCompany.

Our employee directors do not receive any additionalcompensation for serving on our Board of Directors or any committee of ourBoard of Directors.  Our non-employeedirectors do not receive any compensation from us other than the retainer,attendance fees and stock option grants described above.

**ITEM 11.*****                                             *****SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT****AND RELATED STOCKHOLDERMATTERS**

The following table sets forth certain informationknown to us with respect to the beneficial ownership of Common Stock as ofSeptember 14, 2006 by (i) each person who is known by us to ownbeneficially more than 5% of our Common Stock, (ii) each of our directorsand Named Executive Officers and (iii) all of our executive officers anddirectors as a group.  Except asotherwise listed below, the address of each person is c/o FP Technology, Inc.,181 Wells Avenue, Suite 100, Newton, Massachusetts 02459. As of September 14,2006, there were 6,100,441 shares of our Common Stock outstanding.
| Name of Beneficial Owner                             | ** ** | **Amount and Nature of   Beneficial Ownership(1)** | ** ** | **Percent** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------|------------|
| *5% or Greater Stockholders:*                                       |       |                                                                        |       |        |       |
| Jaguar  Technology Holdings, LLC                                    |       | 2,177,414                                                                   |       | 35.7        | %          |
| Benchmark Equity  Group, Inc.                                       |       | 508,942                                                                     |       | 8.3         | %          |
| * *                                                            |       |                                                                        |       |        |       |
| *Directors and Executive  Officers:*                                |       |                                                                        |       |        |       |
| Douglas Croxall                                                     |       | 2,802,414                                                                   | (2)        | 45.9        | %          |
| William Santo                                                       |       | 614,919                                                                     | (3)        | 10.1        | %          |
| Stephen Peary                                                       |       | 514,122                                                                     | (4)        | 8.4         | %          |
| Mark Campion                                                        |       | 60,484                                                                      | (5)        | 1.0         | %          |
|                                                                |       |                                                                        |       |        |       |
| All current directors and executive officers as a group (4 persons) |       | 3,991,939                                                                   |       | 65.4        | %          |

 

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(1)  Beneficial ownership is determined in accordance with therules of the Securities and Exchange Commission and generally includes votingor investment power with respect to securities. Shares of Common Stock subject tooptions and warrants currently exercisable or convertible, or exercisable orconvertible within 60 days of August 31, 2006 are deemed outstanding forcomputing the percentage of the person holding such option or warrant, but arenot deemed outstanding for computing the percentage of any other person. Exceptas pursuant to applicable community property laws, the persons named in thetable have sole voting and investment power with respect to all shares ofCommon Stock beneficially owned.

(2)  Includes 2,177,414 shares held by Jaguar TechnologyHoldings, LLC.  Mr. Croxall is the solemember of Riverland Enterprises LLC, which is the sole member-manager of JaguarTechnology Holdings LLC.  Mr. Croxalldisclaims beneficial ownership, except to the extent of his pecuniary interesttherein, if any, of the shares held by Jaguar Technology Holdings LLC.  Also includes 625,000 shares of restrictedCommon Stock, all of which will vest on the second anniversary of our sale of$50 million in Senior Secured Convertible and Nonconvertible Notes Due 2011 andWarrants (the “CAP Financing”).  Vestingof the restricted Common Stock is contingent upon Mr. Croxall’s continuousservice with the Company and the meeting of certain conditions of the CAPFinancing.

(3)  Consists of (i) 302,419 shares of restricted Common Stock,all of which will vest on January 5, 2009, and (ii) 312,500 shares ofrestricted Common Stock, all of which will vest on the second anniversary ofthe CAP Financing, contingent upon (a) Mr. Santo’s continuous service with theCompany and (b) the meeting of certain conditions of the CAP Financing.

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(4)  Consists of (i) 201,622 shares of restricted Common Stock,all of which will vest on January 5, 2009, and (ii) 312,500 shares ofrestricted Common Stock, all of which will vest on the second anniversary ofthe CAP Financing contingent upon (a) Mr. Peary’s continuous service with theCompany and (b) the meeting of certain conditions of the CAP Financing.

(5) Consists of 60,484 sharesof restricted Common Stock, all of which will vest on March 31, 2008.

**ITEM 12.*              *CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

We have entered into employment agreements with ourchief executive officer, William Santo, and chief financial officer, StephenPeary, the material terms of which are described under “Item 10. EmploymentAgreements of Named Executive Officers.” Messrs. Santo and Peary also received restricted stock grants pursuantto the provisions of their respective employment agreement and as part of theCAP Financing, as further described under “Item 10. Summary Compensation Table.”

We have also provided compensation to directors, asfurther described under “Item 10. Compensation of Directors.”

Other than as described above, since June 30, 2004,there has not been, nor is there currently proposed, any transaction or seriesof similar transactions to which we were or are a party in which the amountinvolved exceeds $60,000 and in which any director, executive officer, nomineefor election as a director or beneficial owner of more than 5% of any class ofour voting securities or members of such person’s immediate family (includingspouse, parents, children, siblings, and in-laws) had or will have a direct orindirect material interest.

**ITEM 13.               EXHIBITS**

Exhibits required to be filed are listed below and except where incorporated byreference, immediately follow the Financial Statements.  Each management or compensation plan ismarked with an asterisk (*).   Each documentfiled with this report is marked with two asterisks (**).  
| EXHIBIT # | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                           |
|-----------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |       |                                                                                                                                                                                                                                                                                                                                      |
| 2.1(1)    |       | Plan and Agreement of Merger, dated June 29 2006, by  and among AFG Enterprises USA, Inc. and FP Technology, Inc.                                                                                                                                                                                                                         |
| 2.2(2)    |       | Agreement and Plan of Merger, dated March 29, 2006,  by and among AFG Enterprises USA, Inc., FP Merger Sub, Inc. and FP  Technology, Inc.                                                                                                                                                                                                 |
| 3.1(1)    |       | Amended and Restated Certificate of Incorporation of  the Registrant.                                                                                                                                                                                                                                                                     |
| 3.2(1)    |       | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                                                                                                                                            |
| 4.1(3)    |       | Specimen Stock Certificate                                                                                                                                                                                                                                                                                                                |
| 10.1(4)   |       | Securities Purchase Agreement, dated as of March 29,  2006, by and among AFG Enterprises USA, Inc. and the investors listed on the  Schedule of Buyers attached thereto.                                                                                                                                                                  |
| 10.2(4)   |       | Indenture, dated as of March 29, 2006, between AFG  Enterprises, Inc. and The Bank of New York.                                                                                                                                                                                                                                           |
| 10.3(4)   |       | Form of Global Senior Secured Nonconvertible Note  Due 2011, dated as of March 29, 2006.                                                                                                                                                                                                                                                  |
| 10.4(4)   |       | Form of Warrant, dated as of March 29, 2006.                                                                                                                                                                                                                                                                                              |
| 10.5.1(4) |       | Escrow Agreement, dated as of March 29, 2006, by and  between The Bank of New York, as Escrow Agent, The Bank of New York, as  Collateral Agent, The Bank of New York, as Trustee for the holders of certain  notes of the Registrant under the Indenture dated as of March 29, 2006 with  the Registrant, and the Registrant.            |
| 10.5.2**  |       | Amendment to Escrow Agreement, dated as of June 8,  2006, by and between The Bank of New York, as Escrow Agent, The Bank of New  York, as Collateral Agent, The Bank of New York, as Trustee for the holders of  certain notes of the Registrant under the Indenture dated as of March 29,  2006 with the Registrant, and the Registrant. |
| 10.6(4)   |       | Security Agreement, dated as of March 29, 2006, by  AFG Enterprises USA, Inc. and certain Guarantors in favor of The Bank of New  York in its capacity as collateral agent for the Holders                                                                                                                                                |
| 10.7(4)   |       | Pledge Agreement, dated as of March 29, 2006, made  by certain pledgors, in favor of The Bank of New York, in its capacity as  collateral agent                                                                                                                                                                                           |
| 10.8(4)   |       | Guaranty, dated as of March 29, 2006, made by FP  Technology Holdings, Inc. in favor of The Bank of New York, in its capacity  as collateral agent                                                                                                                                                                                        |
| 10.9(4)   |       | Registration Rights Agreement, dated as of March 29,  2006, of AFG Enterprises USA, Inc.                                                                                                                                                                                                                                                  |

 

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| 10.10(4)     |   | Account Control Agreement by and among AFG  Enterprises USA Inc. and The Bank of New York.                                                                                                                                                                                                                            |
|--------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.11(4)     |   | Master Amendment, dated as of March 29, 2006, by and  between FP Technology Holdings, Inc., Trident Growth Fund, L.P. and AFG  Enterprises USA, Inc.                                                                                                                                                                  |
| 10.12**      |   | First Amendment, dated September 13, 2006, by and  between FP Technology, Inc. and Trident Growth Fund, L.P.                                                                                                                                                                                                          |
| 10.13(4)     |   | Securities Purchase Agreement, dated as of September  12, 2005, by and among FP Technology Holdings, Inc. and Trident Growth Fund,  L.P.                                                                                                                                                                              |
| 10.14(4)     |   | Form of 12% Senior Secured Convertible Debenture of  FP Technology Holdings, Inc. issued in initial principal amounts of  $2,500,000.                                                                                                                                                                                 |
| 10.15(4)     |   | Form of Warrants issued to Trident Growth Fund, L.P.                                                                                                                                                                                                                                                                  |
| 10.16(4)     |   | Intercreditor and Subordination Agreement, dated as  of March 29, 2006, by Trident Growth Fund, L.P., AFG Enterprises USA, Inc.  and FP Technology Holdings, Inc., in favor of the holders of the Senior  Indebtedness and The Bank of New York, a New York corporation, as collateral  agent for the Senior Lenders. |
| 10.17(4)     |   | Security Agreement, dated as of September 13, 2005,  by and among FP Technology Holdings, Inc. and Trident Growth Fund, L.P., and  First Amendment thereto, dated as of November 15, 2005.                                                                                                                            |
| 10.18(5)     |   | Credit Agreement, dated as of July 15, 2003, by and  between AFG Enterprises USA, Inc. and Acclaim Financial Group Ventures II,  LLC.                                                                                                                                                                                 |
| 10.19(4)     |   | Exchange Agreement, made as of March 29, 2006, by  and between AFG Enterprises USA, Inc. and Benchmark Equity Group, Inc.                                                                                                                                                                                             |
| 10.20**      |   | Non-Exclusive Patent License Agreement, dated March  28, 2006, by and between Orion IP, LLC and FP Technology Holdings, Inc.                                                                                                                                                                                          |
| 10.21(2)*    |   | Employment Agreement, dated March 16, 2006, by and  between Firepond, Inc. and William Santo.                                                                                                                                                                                                                         |
| 10.22(2)*    |   | Employment Agreement, effective as of March 16,  2006, by and between Firepond, Inc. and Stephen Peary.                                                                                                                                                                                                               |
| 10.23(*)(**) |   | Employment Agreement, effective as of March 30, 2006,  by and between FP Technology, Inc. and Carol Ferrari.                                                                                                                                                                                                          |
| 10.24(*)(**) |   | Employment Agreement, effective as of March 30, 2006,  by and between FP Technology, Inc. and Jerry Keefe.                                                                                                                                                                                                            |
| 10.25(6)     |   | Form of Securities Purchase Agreement entered into  by the Registrant in connection with the PIPE Financing.                                                                                                                                                                                                          |
| 10.26(6)     |   | Form of Warrant issued by the Registrant in  connection with the PIPE Financing.                                                                                                                                                                                                                                      |
| 10.27(6)     |   | Registration Rights Agreement entered into by the  Registrant in connection with the PIPE Financing.                                                                                                                                                                                                                  |
| 10.28(*)(**) |   | Form of Restricted Stock Grants to William Santo,  Stephen Peary, Mark Campion and Douglas Croxall.                                                                                                                                                                                                                   |
| 24.1         |   | Power of Attorney (Included on the signature page).                                                                                                                                                                                                                                                                   |
| 31.1**       |   | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                   |
| 31.2**       |   | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                   |
| 32.1**       |   | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                   |
| 32.2**       |   | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                   |

 

----

(1)                                  Previously filed on Schedule 14C with the SECon June 9, 2006, and incorporated herein by reference.

(2)                                  Previously filed on Form 8-K with the SEC onApril 4, 2006 (reporting the Registrant’s change in shell company status) andincorporated herein by reference.

(3)                                  Previously filed on the Company’s RegistrationStatement on Form 10, as amended, filed with the SEC.

(4)                                  Previously filed on Form 8-K with the SEC onApril 4, 2006 (reporting completion of the Registrant’s CAP Financing) andincorporated herein by reference.

(5)                                  Previously filed on Form 10-K with the SEC onApril 20, 2005 and incorporated herein by reference.

50

----

(6)                                  Previously filed on Form 8-K with the SEC onSeptember 7, 2006 and incorporated herein by reference.

**ITEM 14.               PRINCIPALACCOUNTANT FEES AND SERVICES**

The following table sets forth the aggregate fees thatwe incurred for audit and non-audit services provided by Causey Demgen & Moore Inc. (“CDM”),which acted as our independent auditors for the year ended June 30, 2006 andperformed audit services for us during this period.  The audit fees include only fees that arecustomary under generally accepted auditing standards and are the aggregatefees that we incurred for professional services rendered for the audit of ourfinancial statements for the year ended June 30, 2006. 

| Nature of fees | ** ** | **June 30, 2006** | ** ** |
|--------------------------|------------|-----------------------------|------------|
| Audit Fees (Financial)   |       | $                           | 69,299     |   |
| Audit Related Fees       |       | $                           | 11,372     |   |
| Tax Fees                 |       | $                           | 0          |   |
| Other Fees               |       | $                           | 0          |   |

The full Board ofDirectors pre-approves all audit and permissible non-audit services to beperformed by the independent auditors.

51

----

**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|                           | FP TECHNOLOGY, INC.      |              |
|---------------------------|--------------------------|-------------------|
|                      |                     |              |   |
| Dated: September 28, 2006 | By:                 | /s/ William Santo |   |
|                      | William Santo            |
|                      | Chief Executive  Officer |
|                      |                     |
|                      | By:                 | /s/ Stephen Peary |   |
|                      | Stephen Peary            |
|                      | Chief Financial  Officer |

 

Pursuant to therequirements of the Exchange Act, this Report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on thedates indicated.

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, thateach person whose signature appears below constitutes and appoints WilliamSanto and Stephen Peary, and each of them, as his true and lawfulattorneys-in-fact and agents, with full power of substitution andresubstitution, for him and in his name, place and stead, in any and allcapacities, to sign any and all amendments (including post-effectiveamendments) to this Annual Report on Form 10-KSB and to file the same, with allexhibits thereto, and other documents in connection therewith, with the Securitiesand Exchange Commission, granting unto said attorneys-in-fact and agents, andeach of them, full power and authority to do and perform each and every act andthing requisite and necessary to be done in connection therewith and about thepremises, as fully to all intents and purposes as he might or could do inperson, hereby ratifying and confirming all that said attorneys-in-fact andagents, or any of them, or their or his substitute or substitutes, may lawfullydo or cause to be done by virtue hereof.
| SIGNATURE            | ** ** | **TITLE**                                     | ** ** | **DATE**                |
|----------------------|------------|-----------------------------------------------|------------|-------------------------|
|                 |       |                                          |       |                    |
| /S/ William  Santo   |       | Chief Executive Officer, Director             |       | September 28, 2006 |
| **William  Santo**   |       | (Principal  Executive Officer)                |       |                    |
|                 |       |                                          |       |                    |
| /S/ Stephen  Peary   |       | Chief Financial Officer                       |       | September 28, 2006 |
| **Stephen  Peary**   |       | (Principal  Financial and Accounting Officer) |       |                    |
|                 |       |                                          |       |                    |
| /S/ Douglas  Croxall |       | Chairman                                      |       | September 28, 2006 |
| **Douglas  Croxall** |       |                                          |       |                    |
|                 |       |                                          |       |                    |
| /s/ Mark Campion     |       | Director                                      |       | September 28, 2006 |
| **Mark  Campion**    |       |                                          |       |                    |
|                 |       |                                          |       |                    |

 

52

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**FP TECHNOLOGY INC.**

**CONTENTS**

**June 30, 2006**
|                                                                                                                | **Page** |
|----------------------------------------------------------------------------------------------------------------|----------|
| **REPORTS OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRMS**                                                 | F-2      |
| ** **                                                                                                     |     |
| **CONSOLIDATED FINANCIAL STATEMENTS**                                                                          |     |
| ** **                                                                                                     |     |
| Consolidated Balance Sheet as of June 30, 2005 and 2006                                                        | F-4      |
|                                                                                                           |     |
| Consolidated  Statement of Operations for the periods ended October 31, 2004, June 30, 2005  and June 30, 2006 | F-5      |
|                                                                                                           |     |
| Consolidated  Statement of Stockholders’ Equity (Deficit) for the fiscal year ended June  30, 2006        | F-6      |
|                                                                                                           |     |
| Consolidated  Statement of Cash Flow for the periods ended October 31, 2004, June 30, 2005  and June 30, 2006  | F-7      |
|                                                                                                           |     |
| Notes  to Consolidated Financial Statements                                                                    | F-8      |

 

F-1

----

 

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

Tothe Board of Directors and Stockholders

FPTechnology, Inc.

We have audited the accompanying consolidatedbalance sheet of FP Technology, Inc. as of June 30, 2005 and 2006 and therelated consolidated statements of operations, stockholders’ equity (deficit),and cash flows for the period from November 1, 2004 to June 30, 2005 and forthe year ended June 30, 2006.  Thesefinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of FP Technology, Inc. as of June 30, 2005 and 2006 and theresults of their operations and their cash flows for the period from November1, 2004 to June 30, 2005 and the year ended June 30, 2006 in conformity withaccounting principles generally accepted in the United States of America.
| Denver, Colorado                                                                      |   |   |   |                         |
|---------------------------------------------------------------------------------------|--------|--------|--------|------------------------------|
| August 18, 2006, except for note 13 as to which date  is September 27, 2006 |   |   |   | Causey Demgen and Moore Inc. |

 

F-2

----

**Report of Independent RegisteredPublic Accounting Firm**

To the Board ofDirectors and Stockholders

FP Technology, Inc. (formerly Firepond, Inc. a whollyowned subsidiary of Jaguar Holdings, LLC)

We have audited the consolidated statements of income,stockholder’s equity and cash flows of FP Technology, Inc. (formerly Firepond,Inc. a wholly owned subsidiary of Jaguar Holdings, LLC) for the period fromDecember 2, 2003 (Acquisition) to October 31, 2004.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provided areasonable basis for our opinion.

In our opinion, the consolidated financial statementsof FP Technology, Inc. (formerly Firepond, Inc. a wholly owned subsidiary ofJaguar Holdings, LLC) referred to above, present fairly, in all materialrespects, the results of its operations and its cash flows for the period fromDecember 2, 2003 (Acquisition) to October 31, 2004, in conformity withaccounting principles generally accepted in the United States.

SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles,California

April 25, 2005

F-3

----

**FP TECHNOLOGY, INC.**

**CONSOLIDATED BALANCE SHEET**

**June 30, 2005 and 2006**

 
| ** **                                                              | ** ** | **6/30/2005** | ** **    | **6/30/2006** | ** ** |
|-------------------------------------------------------------------------|------------|---------------|---------------|---------------|------------|
| **ASSETS**                                                              | ** ** | ** **    | ** **    | ** **    | ** ** |
| ** **                                                              | ** ** | ** **    | ** **    | ** **    | ** ** |
| **Current assets**                                                      | ** ** | ** **    | ** **    | ** **    | ** ** |
| Cash and cash  equivalents                                              |       | $             | 24,379        |          | $          | 831,184 |   |
| Restricted cash                                                         |       | —        |          | 47,500,000    |       |
| Accounts  receivable, net of allowance for doubtful accounts of $10,000 |       | 548,956       |          | 115,206       |       |
| Debt issuance  costs                                                    |       | —        |          | 1,633,835     |       |
| Unbilled revenue                                                        |       | 2,748         |          | —        |       |
| Assets to be  sold                                                      |       | 127,035       |          | —        |       |
| Other current  assets                                                   |       | 69,763        |          | 601,956       |       |
|                                                                    |       |          |          |          |       |
| Total current  assets                                                   |       | 772,881       |          | 50,682,181    |       |
|                                                                    |       |          |          |          |       |
| **Property and equipment, net**                                         |       | 304,610       |          | 191,081       |       |
| **Goodwill**                                                            |       | 4,772,413     |          | 4,772,413     |       |
| **Deferred offering costs**                                             |       | —        |          | 43,076        |       |
| **Deposits**                                                            |       | 32,942        |          | 12,140        |       |
|                                                                    |       |          |          |          |       |
| **Total  assets**                                                       | ** ** | **$**         | **5,882,846** | ** **    | **$**      | **55,700,891** | ** ** |
| ** **                                                              | ** ** | ** **    | ** **    | ** **    | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                          | ** ** | ** **    | ** **    | ** **    | ** ** |
|                                                                    |       |          |          |          |       |
| **Current liabilities**                                                 |       |          |          |          |       |
| Short-term notes  payable net of discount of $154,250 (2006)            |       | $             | 1,000,000     |          | $          | 52,595,750 |   |
| Accounts payable                                                        |       | 159,743       |          | 524,171       |       |
| Accrued  liabilities                                                    |       | 1,207,001     |          | 2,082,459     |       |
| Deferred revenue                                                        |       | 1,188,287     |          | 1,609,657     |       |
| Liabilities  associated with assets to be sold                          |       | 31,594        |          | —        |       |
|                                                                    |       |          |          |          |       |
| Total current  liabilities                                              |       | 3,586,625     |          | 56,812,037    |       |
|                                                                    |       |          |          |          |       |
| **Long-term notes payable**                                             |       | 2,000,000     |          | —        |       |
|                                                                    |       |          |          |          |       |
| **Commitments and contingencies**                                       | ** ** | ** **    | ** **    | ** **    | ** ** |
|                                                                    |       |          |          |          |       |
| **Stockholders’ equity (deficit)**                                 |       |          |          |          |       |
| Preferred stock,  par value $.001                                       |       |          |          |          |       |
| Authorized -  5,000,000 shares                                          |       |          |          |          |       |
| Issued and  outstanding - none                                          |       |          |          |          |       |
| Common stock,  par value $.001                                          |       |          |          |          |       |
| Authorized -  100,000,000 shares                                        | ** ** | ** **    | ** **    | ** **    | ** ** |
| Issued and  outstanding 2,177,414 shares at 2005                        | ** ** | ** **    | ** **    | ** **    | ** ** |
| Issued and  outstanding 5,100,441 shares at 2006                        |       | 2,177         |          | 5,100         |       |
| Additional paid  in capital (deficiency)                                |       | (997,167      | )             | 2,182,237     |       |
| Retained  earnings/accumulated deficit                                  |       | 1,971,989     |          | (2,811,192    | )          |
| Deferred  compensation                                                  |       | —        |          | (487,291      | )          |
| Accumulated  other comprehensive loss                                   |       | (680,778      | )             | —        |       |
|                                                                    |       |          |          |          |       |
| Total  stockholders’ equity (deficit)                              |       | 296,221       |          | (1,111,146    | )          |
|                                                                    |       |          |          |          |       |
| **Total liabilities and  stockholders’ equity**                    | ** ** | **$**         | **5,882,846** | ** **    | **$**      | **55,700,891** | ** ** |

 

The accompanying notes arean integral part of these financial statements.

F-4

----

**FP TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENT OFOPERATIONS**

**For the period December 2, 2003 through October 31, 2004 and for theeight months  ended June 30, 2005 and forthe year ended June 30, 2006**

 
| ** **                                                        | ** ** | **Period Ended** | ** **  | **Period Ended** | ** ** | **Period Ended** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **10/31/2004**        | ** **  | **6/30/2005**         | ** ** | **6/30/2006**         | ** ** |
| **Revenues**                                                      |       |                  |        |                  |       |                  |       |
| Enterprise  revenues                                              |       | 8,950,055             |        | 2,841,394             |       | 3,310,242             |       |
| OnDemand  revenues                                                |       | —                |        | —                |       | 451,352               |       |
|                                                              |       |                  |        |                  |       |                  |       |
| **Cost of goods sold**                                            |       |                  |        |                  |       |                  |       |
| Enterprise                                                        |       | 2,087,776             |        | 1,269,357             |       | 1,585,188             |       |
| OnDemand                                                          |       | —                |        | —                |       | 359,462               |       |
|                                                              |       |                  |        |                  |       |                  |       |
| **Gross profit**                                                  |       | 6,862,279             |        | 1,572,037             |       | 1,816,944             |       |
|                                                              |       |                  |        |                  |       |                  |       |
| **Operating expenses**                                            |       |                  |        |                  |       |                  |       |
| Sales, general  and administrative                                |       | 1,330,110             |        | 1,343,750             |       | 3,165,398             |       |
| Research and  development                                         |       | 1,953,895             |        | 1,118,141             |       | 1,835,176             |       |
| Restructuring  and other special charges                          |       | 3,447,293             |        | 176,578               |       | (16,170               | )          |
| Settlement of  claim                                              |       | —                |        | (646,863              | )          | (1,712,500            | )          |
|                                                              |       |                  |        |                  |       |                  |       |
| Total operating  expenses                                         |       | 6,731,298             |        | 1,991,606             |       | 3,271,904             |       |
|                                                              |       |                  |        |                  |       |                  |       |
| **Income (loss) from operations**                                 |       | 130,981               |        | (419,569              | )          | (1,454,960            | )          |
|                                                              |       |                  |        |                  |       |                  |       |
| **Other income (expense), net**                                   |       |                  |        |                  |       |                  |       |
| **Interest income**                                               |       | —                |        | —                |       | 522,045               |       |
| **Interest (expense)**                                            |       | (208,787              | )           | (128,333              | )          | (3,068,063            | )          |
| **Other income (expenses)**                                       |       | 126,608               |        | 28,209                |       | (18,951               | )          |
| **Total other income (expense),  net**                            |       | (82,179               | )           | (100,124              | )          | (2,564,969            | )          |
|                                                              |       |                  |        |                  |       |                  |       |
| **Net income (loss) from  continuing operations**                 |       | 48,802                |        | (519,693              | )          | (4,019,929            | )          |
|                                                              |       |                  |        |                  |       |                  |       |
| Loss from  discontinued operations                                |       | (118,005              | )           | —                |       | (763,252              | )          |
| Gain on disposal  of discontinued operations                      |       | —                |        | 2,560,885             |       | —                |       |
|                                                              |       |                  |        |                  |       |                  |       |
| **Net Income (loss)**                                             | ** ** | **$**                 | **(69,203** | **)**                 | **$**      | **2,041,192**         | ** ** | **$** | **(4,783,181** | **)** |
|                                                              |       |                  |        |                  |       |                  |       |
| **Net income (loss) per share -  basic and diluted**              |       |                  |        |                  |       |                  |       |
| Income (loss)  from continuing operations                         |       | $                     | 0.02        |                  | ($0.24     | )                     | ($1.64     | ) |
| Loss from  discontinued operations                                |       | ($0.05                | )           | —                |       | ($0.31                | )          |
| Gain on disposal  of discontinued operations                      |       | —                |        | $                     | 1.18       |                  | —     |   |
|                                                              |       |                  |        |                  |       |                  |       |
| **Basic  and diluted income (loss) per share**                    | ** ** | **($0.03**            | **)**       | **$**                 | **0.94**   | ** **            | **($1.95** | **)** |
| ** **                                                        | ** ** | ** **            | ** **  | ** **            | ** ** | ** **            | ** ** |
| **Basic and diluted weighted  average common shares outstanding** | ** ** | **2,177,414**         | ** **  | **2,177,414**         | ** ** | **2,454,540**         | ** ** |
|                                                                   |            |                       |             |                       |            |                       |            |  |  |  |

 

The accompanying notes arean integral part of these financial statements.

F-5

----

**FP Technology, Inc.**

**CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY (DEFICIT)**

**For the year ended June 30, 2006**

** **
| ** **                                                                                         | ** ** | **Firepond, Inc.** | ** ** | **FP Technology, Inc.** | ** ** | ** ** | ** ** | ** **         | ** ** | ** **               | ** ** | ** **                 | ** ** | ** **                        | ** ** | ** **             | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|------------|------------|--------------------|------------|--------------------------|------------|----------------------------|------------|-----------------------------------|------------|------------------------|------------|
| ** **                                                                                         | ** ** | **Common Stock**   | ** ** | **Common Stock**             | ** ** | ** ** | ** ** | **Retained**       | ** ** | ** **               | ** ** | **Accumulated Other** | ** ** | ** **                        | ** ** | ** **             | ** ** |
| ** **                                                                                         | ** ** | ** **              | ** ** | **$0.001**                        | ** ** | ** ** | ** ** | **$0.001**         | ** ** | **Additional Paid** | ** ** | **Earnings**               | ** ** | **Loan Receivable and** | ** ** | **Comprehensive**      | ** ** | **Stockholders’** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                                         | ** ** | **Shares**              | ** ** | **Par Value**                | ** ** | **Shares** | ** ** | **Par Value** | ** ** | **In Capital**      | ** ** | **(Deficit)**              | ** ** | **Deferred Compensation**    | ** ** | **Income (Loss)** | ** ** | **Equity (Deficit)** | ** ** | **Income (Loss)** | ** ** |
|                                                                                               |       |                    |       |                              |       |       |       |               |       |                     |       |                       |       |                              |       |                   |       |   |   |   |   |
| Balance, December 2,  2003 (Acquisition)                                                           |       | 22                      |       | $                                 | 1          |       | —     |               | $          | —                   |       | $                          | 9          |                              | $          | —                 |       | $ | — |   | $ | — |   | $ | 10 |   | $ | — |   |
|                                                                                               |       |                    |       |                              |       |       |       |               |       |                     |       |                       |       |                              |       |                   |       |   |   |   |   |
| Dividend of  shares issued to shareholders                                                         |       | 2,177,392               |       | 2,176                             |       | —     |       | —             |       | (2,176                   | )          | —                     |       | —                            |       | —                 |       | — |   | — |   |
| Loan receivable  to owner                                                                          |       | —                  |       | —                            |       | —     |       | —             |       | —                   |       | —                     |       | (1,175,000                        | )          | —                 |       | (1,175,000 | ) | — |   |
| Currency  translation adjustment                                                                   |       | —                  |       | —                            |       | —     |       | —             |       | —                   |       | —                     |       | —                            |       | (721,761               | )          | (721,761 | ) | (721,761 | ) |
| Net loss                                                                                           |       | —                  |       | —                            |       | —     |       | —             |       | —                   |       | (69,203                    | )          | —                            |       | —                 |       | (69,203 | ) | (69,203 | ) |
|                                                                                               |       |                    |       |                              |       |       |       |               |       |                     |       |                       |       |                              |       |                   |       |   |   |   |   |
| Balance, October 31,  2004                                                                         |       | 2,177,414               |       | 2,177                             |       | —     |       | —             |       | (2,167                   | )          | (69,203                    | )          | (1,175,000                        | )          | (721,761               | )          | (1,965,954 | ) | (790,964 | ) |
|                                                                                               |       |                    |       |                              |       |       |       |               |       |                     |       |                       |       |                              |       |                   |       |   |   |   |   |
| Debt forgiveness                                                                                   |       | —                  |       | —                            |       | —     |       | —             |       | (1,175,000               | )          | —                     |       | 1,175,000                         |       | —                 |       | — |   | — |   |
| Capital  contribution                                                                              |       | —                  |       | —                            |       | —     |       | —             |       | 180,000                  |       | —                     |       | —                            |       | —                 |       | 180,000 |   | — |   |
| Net income                                                                                         |       | —                  |       | —                            |       | —     |       | —             |       | —                   |       | 2,041,192                  |       | —                            |       | 40,983                 |       | 2,082,175 |   | 2,082,175 |   |
|                                                                                               |       |                    |       |                              |       |       |       |               |       |                     |       |                       |       |                              |       |                   |       |   |   |   |   |
| Balance, June 30, 2005                                                                             |       | 2,177,414               |       | 2,177                             |       | —     |       | —             |       | (997,167                 | )          | 1,971,989                  |       | —                            |       | (680,778               | )          | 296,221 |   | 1,291,211 |   |
| ** **                                                                                         | ** ** | ** **              | ** ** | ** **                        | ** ** | ** ** | ** ** | ** **         | ** ** | ** **               | ** ** | ** **                 | ** ** | ** **                        | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| FP Technology —  Common Stock                                                                 |       | —                  |       | —                            |       | 2,016,124  |       | 2,016              |       | 47,984                   |       | —                     |       | —                            |       | —                 |       | 50,000 |   | — |   |
| FP Technology —  Additional Paid in Capital                                                   |       | —                  |       | —                            |       | —     |       | —             |       | (50,000                  | )          | —                     |       | —                            |       | —                 |       | (50,000 | ) | — |   |
| Issuance of  convertible debt with warrants                                                        |       | —                  |       | —                            |       | —     |       | —             |       | 510,000                  |       | —                     |       | —                            |       | —                 |       | 510,000 |   | — |   |
| Issuance of  convertible debt with warrants                                                        |       | —                  |       |                              |       | —     |       | —             |       | 160,000                  |       | —                     |       | —                            |       | —                 |       | 160,000 |   | — |   |
| Issuance of  additional shares to 100% owner                                                       | ** ** | **—**              |       | —                            |       | 161,290    |       | 161                |       | (161                     | )          | —                     |       | —                            |       | —                 |       | — |   | — |   |
| Existing AFG  Enterprises equity at time of reverse merger                                         | ** ** | **—**              |       | —                            |       | 1,108,502  |       | 1,108              |       | (23,123                  | )          | —                     |       | —                            |       | —                 |       | (22,015 | ) | — |   |
| Issuance of  common stock awards to directors and officers                                         | ** ** | **—**              |       | —                            |       | 1,814,525  |       | 1,815              |       | 562,527                  |       | —                     |       | (564,342                          | )          | —                 |       | — |   | — |   |
| Issuance of  warrants in connection with debt financing                                            | ** ** | **—**              |       | —                            |       | —     |       | —             |       | 1,970,000                |       | —                     |       | —                            |       | —                 |       | 1,970,000 |   | — |   |
| Net loss for the  twelve months ended June 30, 2006                                                | ** ** | **—**              |       | —                            |       | —     |       | —             |       |                     |       | (4,783,181                 | )          | 77,051                            |       | 680,778                |       | (4,025,352 | ) | (4,102,403 | ) |
| Reclassification  of Firepond equity as a result of Trust created to assume all prior  liabilities |       | (2,177,414              | )          | (2,177                            | )          | —     |       | —             |       | 2,177                    |       | —                     |       | —                            |       | —                 |       | — |   | — |   |
|                                                                                               |       |                    |       |                              |       |       |       |               |       |                     |       |                       |       |                              |       |                   |       |   |   |   |   |
| Balance, June 30, 2006                                                                             |       | —                  |       | $                                 | —     |       | 5,100,441  |               | $          | 5,100                    |       | $                          | 2,182,237  |                              | $          | (2,811,192             | )          | $ | (487,291 | ) | $ | — |   | $ | (1,111,146 | ) | $ | (2,811,192 | ) |

 

The accompanying notes arean integral part of these financial statements.

F-6

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**FP TECNOLOGY, INC.**

**CONSOLIDATED STATEMENT OF CASHFLOWS**

**For the period from December 2, 2003 to October 31, 2004, the eightmonths ended June 30, 2005 and the year ended June 30, 2006**

 
| ** **                                                                                                                                                                                                                                                                                                                                                             | ** ** | **Period Ended** | ** **    | **Period Ended** | ** ** | **Period Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|---------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                             | ** ** | **10/31/2004**        | ** **    | **6/30/2005**         | ** ** | **6/30/2006**         | ** ** |
| **Cash flows from operating  activities**                                                                                                                                                                                                                                                                                                                              |       |                  |          |                  |       |                  |       |
| Net income  (loss)                                                                                                                                                                                                                                                                                                                                                     |       | $                     | (69,203       | )                     | $          | 2,041,192             |       | $ | (4,783,181 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities                                                                                                                                                                                                                                                                                            |       |                  |          |                  |       |                  |       |
| (Gain) on  disposal of discontinued operations                                                                                                                                                                                                                                                                                                                         |       | —                |          | (2,514,837            | )          | —                |       |
| (Gain)/loss on  disposal of fixed assets                                                                                                                                                                                                                                                                                                                               |       | —                |          | 19,298                |       | —                |       |
| Settlement of  claim                                                                                                                                                                                                                                                                                                                                                   |       | —                |          | (646,863              | )          | (1,712,500            | )          |
| Depreciation and  amortization                                                                                                                                                                                                                                                                                                                                         |       | 92,734                |          | 105,863               |       | 2,382,183             |       |
| Loss from  discontinued operations                                                                                                                                                                                                                                                                                                                                     |       | 1,625,591             |          | —                |       | 680,778               |       |
| (Increase)  decrease in                                                                                                                                                                                                                                                                                                                                                |       |                  |          |                  |       |                  |       |
| Accounts  receivables                                                                                                                                                                                                                                                                                                                                                  |       | 281,012               |          | 29,603                |       | 433,750               |       |
| Unbilled  services                                                                                                                                                                                                                                                                                                                                                     |       | 36,039                |          | 1,269                 |       | 2,748                 |       |
| Prepaid expenses  and other assets                                                                                                                                                                                                                                                                                                                                     |       | 390,572               |          | 78,729                |       | (405,158              | )          |
| (Decrease)  increase in                                                                                                                                                                                                                                                                                                                                                |       |                  |          |                  |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                       |       | (183,502              | )             | (137,832              | )          | 364,428               |       |
| Accrued  liabilities                                                                                                                                                                                                                                                                                                                                                   |       | (931,476              | )             | 134,432               |       | 1,034,348             |       |
| Restructuring  accrual                                                                                                                                                                                                                                                                                                                                                 |       | (586,485              | )             | 56,874                |       | —                |       |
| Deferred revenue                                                                                                                                                                                                                                                                                                                                                       |       | (1,737,708            | )             | (281,047              | )          | 421,370               |       |
|                                                                                                                                                                                                                                                                                                                                                                   |       |                  |          |                  |       |                  |       |
| Net cash used in  operating activities                                                                                                                                                                                                                                                                                                                                 |       | (1,082,426            | )             | (1,113,319            | )          | (1,581,234            | )          |
|                                                                                                                                                                                                                                                                                                                                                                   |       |                  |          |                  |       |                  |       |
| **Cash flows from investing  activities**                                                                                                                                                                                                                                                                                                                              |       |                  |          |                  |       |                  |       |
| Change in  goodwill value                                                                                                                                                                                                                                                                                                                                              |       | 808,685               |          | —                |       | —                |       |
| Change in  intangible assets                                                                                                                                                                                                                                                                                                                                           |       | 1,731,200             |          | —                |       | —                |       |
| Restricted cash                                                                                                                                                                                                                                                                                                                                                        |       | —                |          | —                |       | (47,500,000           | )          |
| Purchase of  property and equipment                                                                                                                                                                                                                                                                                                                                    |       | (172,051              | )             | (19,032               | )          | (42,018               | )          |
| Other assets                                                                                                                                                                                                                                                                                                                                                           |       | —                |          | 29,002                |       | (22,274               | )          |
|                                                                                                                                                                                                                                                                                                                                                                   |       |                  |          |                  |       |                  |       |
| Net cash  provided by (used in) investing activities                                                                                                                                                                                                                                                                                                                   |       | 2,367,834             |          | 9,970                 |       | (47,564,292           | )          |
|                                                                                                                                                                                                                                                                                                                                                                   |       |                  |          |                  |       |                  |       |
| **Cash flows from financing activities**                                                                                                                                                                                                                                                                                                                               |       |                  |          |                  |       |                  |       |
| Issuance of  notes receivable                                                                                                                                                                                                                                                                                                                                          |       | (1,350,000            | )             | —                |       | —                |       |
| Issuance of  notes receivbale to owner                                                                                                                                                                                                                                                                                                                                 |       | (1,175,000            | )             | —                |       | —                |       |
| Payments on  notes payable                                                                                                                                                                                                                                                                                                                                             |       | (600,000              | )             | (1,600,000            | )          | (1,250,000            | )          |
| Debt issuance  costs                                                                                                                                                                                                                                                                                                                                                   |       | —                |          | —                |       | (1,297,669            | )          |
| Capital  contributions                                                                                                                                                                                                                                                                                                                                                 |       | —                |          | 180,000               |       | —                |       |
| Borrowings from  notes payable                                                                                                                                                                                                                                                                                                                                         |       | —                |          | —                |       | 52,500,000            |       |
|                                                                                                                                                                                                                                                                                                                                                                   |       |                  |          |                  |       |                  |       |
| Net cash  provided by (used in) financing activities                                                                                                                                                                                                                                                                                                                   |       | (3,125,000            | )             | (1,420,000            | )          | 49,952,331            |       |
|                                                                                                                                                                                                                                                                                                                                                                   |       |                  |          |                  |       |                  |       |
| **Effect of exchange rate changes  on cash and cash equivalents**                                                                                                                                                                                                                                                                                                      |       | (721,761              | )             | —                |       | —                |       |
|                                                                                                                                                                                                                                                                                                                                                                   |       |                  |          |                  |       |                  |       |
| Net (decrease)  increase in cash and cash equivalents                                                                                                                                                                                                                                                                                                                  |       | (2,561,353            | )             | (2,523,349            | )          | 806,805               |       |
|                                                                                                                                                                                                                                                                                                                                                                   |       |                  |          |                  |       |                  |       |
| **Cash and cash equivalents,  beginning of period**                                                                                                                                                                                                                                                                                                                    |       | 5,109,081             |          | 2,547,728             |       | 24,379                |       |
|                                                                                                                                                                                                                                                                                                                                                                   |       |                  |          |                  |       |                  |       |
| **Cash and cash equivalents, end  of period**                                                                                                                                                                                                                                                                                                                          | ** ** | **$**                 | **2,547,728** | ** **            | **$**      | **24,379**            | ** ** | **$** | **831,184** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                   |       |                  |          |                  |       |                  |       |
| **Supplemental cash flow  information:**                                                                                                                                                                                                                                                                                                                               |       |                  |          |                  |       |                  |       |
|                                                                                                                                                                                                                                                                                                                                                                   |       |                  |          |                  |       |                  |       |
| Taxes Paid                                                                                                                                                                                                                                                                                                                                                             |       | $                     | —        |                  | $          | —                |       | $ | — |   |
| Interest paid                                                                                                                                                                                                                                                                                                                                                          |       | $                     | —        |                  | $          | —                |       | $ | 226,667 |   |
|                                                                                                                                                                                                                                                                                                                                                                   |       |                  |          |                  |       |                  |       |
| **Non Cash Financing and Investing Activities:**                                                                                                                                                                                                                                                                                                                       |       |                  |          |                  |       |                  |       |
|                                                                                                                                                                                                                                                                                                                                                                   |       |                  |          |                  |       |                  |       |
| During the year ended  June 30, 2005, the Company transferred a note receivable of $1,350,000 and  recorded income of $646,863 in connection with the settlement of the GM note  in the principal amount of $1,800,000 plus accrued interest of $196,863. A  write-off of a related party note receivable was offset against additional  paid in capital (deficiency). |       |                  |          |                  |       |                  |       |
|                                                                                                                                                                                                                                                                                                                                                                   |       |                  |          |                  |       |                  |       |
| During the year ended  June 30, 2006, the Company issues convertible notes and warrants and valued  the conversion rights and the warrants at $670,000 as a discount on debt.                                                                                                                                                                                          |       |                  |          |                  |       |                  |       |
|                                                                                                                                                                                                                                                                                                                                                                   |       |                  |          |                  |       |                  |       |
| During the year ended  June 30, 2006, the Company issued warrants valued at $1,970,000 for debt  service costs.                                                                                                                                                                                                                                                        |       |                  |          |                  |       |                  |       |

 

The accompanying notes arean integral part of these financial statements.

F-7

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**FPTECHNOLOGY, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**June 30,2006**

**NOTE 1 - ORGANIZATION AND LINES OF BUSINESS**

FP Technology, Inc. (the “Company”)is a pioneer in software solutions that help companies with complex products toconvert more leads into accurate orders. Companies with complex products may achieve measurable and meaningfulreturns on investment using the Company’s technology by reducing total cost ofsales, whether sales are generated through a direct sales force, an indirectchannel network or via the web.

The Company generatesrevenue from its new OnDemand subscription based software as well as legacylicense and service revenue.  TheOnDemand product was launched in commercial form in August 2005 and we arestrategically transitioning from an historic enterprise software model to a webbased delivery model.   License revenueis generated from licensing the rights to the use of Company’s packagedsoftware products.  Service revenue isgenerated from sales of maintenance, consulting and training services performedfor customers that license the Company’s products.

In June 2006, FPTechnology Holdings, Inc. (“FPT”) changed its name to FP Technology, Inc.

On June 29, 2006, AFGEnterprises USA, Inc. (“AFG”) as the 100% owner of all of the outstanding stockof FP Technology, Inc., merged with and into FP Technology, Inc. with FPTechnology, Inc. as the surviving corporation.

On March 29, 2006, AFGentered into an Agreement and Plan of Merger by and among FP Merger Sub, Inc.,a Delaware corporation and wholly-owned subsidiary of FPT, pursuant to whichAFG agreed to acquire all of the issued and outstanding capital stock of FPT(the “FP Acquisition”).  AFG completedthe acquisition of FPT on the same date, and FPT became a wholly-ownedsubsidiary of AFG.  In connection withthe FP Acquisition, AFG changed its fiscal year end from December 31 to June30.

As a result of themerger, each share of common stock of FPT outstanding immediately prior to theeffective time of the merger (the “Effective Time”) was converted into theright to receive shares of common stock of AFG at an exchange ratio of0.4032248 for each share of FPT common stock. AFG issued an aggregate of 3,991,939 shares of its common stock, parvalue $0.001 per share (the “Purchase Price”) in exchange for all issued andoutstanding shares of FPT common stock. The issuance of such shares of common stock was exempt from registrationrequirements pursuant to Section 4(2) of the Securities Act of 1933, as amended(the “Securities Act”), and Rule 506 promulgated thereunder.  The transaction has been recorded as arecapitalization of FPT whereby the capital structure and outstanding shares ofcommon stock have been adjusted as if there was a stock split and a subsequentissuance of common stock to AFG valued at the net book value of AFG at March29, 2006.

On September 13, 2005,FPT acquired all of the operating assets, certain liabilities, and all of theemployees of Firepond, Inc. (“Firepond”) as part of a restructuring and newfinancing transaction (the “Firepond Asset Acquisition”).  Firepond and FPT shared the same 100%

F-8

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owner both immediately before and after the FirepondAsset Acquisition.  As such, thefinancial statements included herein present the consolidated post mergerfinancial statements of Firepond, Inc., FP Technology, Inc. (formerly - FPTechnology Holdings, Inc.) and AFG Enterprises USA, Inc.  Firepond was liquidated in January 2006 andits assets were transferred to a liquidating trust.

A wholly owned subsidiary (“Fire Sub”) of JaguarTechnology Holdings, LLC (“Jaguar”) completed a tender offer (“Tender Offer”)for Firepond on December 2, 2003, after which Fire Sub held 90.3% of Firepond’soutstanding shares.  Immediately afterconsummation of the Tender Offer, Fire Sub completed a merger (the “Merger”)without the vote of shareholder’s in accordance with Delaware’s short formmerger procedures.  Pursuant to theTender Offer and the Merger, each share of Firepond common stock was convertedinto the right to receive $3.16 in cash, without interest. Upon completion ofthe Merger, the shareholders were redeemed at the tender offer price, andJaguar owned all of the outstanding equity of Firepond.

At the completion of the merger, Jaguar assumed controlof the Company.  In accordance with FAS141, the net assets were adjusted to reflect the new basis of the assets.

The difference between the Company’s new basis and thefair market value of its assets at the date of the acquisition was recorded asgoodwill.  A summary of the assetspurchased in the acquisition is as follows:
| Cash                                           |   | $          | 5,109,081 |   |
|------------------------------------------------|--------|------------|-----------|--------|
| Receivables                                    |   | 859,571    |      |
| Assets to be sold                              |   | 2,465,174  |      |
| Other assets                                   |   | 641,065    |      |
| Property and equipment                         |   | 191,600    |      |
| Intangible assets                              |   | 1,731,200  |      |
| Accounts Payable                               |   | (481,062   | )         |
| Accrued liabilities                            |   | (1,920,701 | )         |
| Deferred Revenue                               |   | (3,207,042 | )         |
| Accrued Restructuring                          |   | (809,818   | )         |
| Liabilities associated  with assets to be sold |   | (3,160,156 | )         |
| Notes Payable                                  |   | (7,000,000 | )         |
|                                           |   |       |      |
| Basis of net  liabilities assumed              |   | (5,581,088 | )         |
| Goodwill                                       |   | 5,581,088  |      |

 

F-9

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**NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

Principlesof Consolidation

For the period from December2, 2003 through September 12, 2005, the financial statements presented hereinare those of Firepond.  For the periodfrom September 13, 2005 through January 17, 2006, the financial statementspresented herein are the combined financial statements of Firepond andFPT.  Pursuant to FIN 46(R), thefinancial statements presented herein for the fiscal year ended June 30, 2006include the consolidated financial statements of FP, AFG (commencing March 29,2006) and the Firepond liquidating trust.

Estimates

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe amounts reported in the consolidated financial statements and accompanyingnotes.  Actual results could differ fromthose estimates.

Liquidity

Duringthe fiscal year ended June 30, 2006, the Company incurred loses of $4,019,929from continuing operations and $763,252 from discontinued operations and hadnegative cash flow from operations of $1,581,234. Subsequent to year end, theCompany secured new capital in the form of $7,000,000 in proceeds from the saleof common stock as described in Note 13.

RevenueRecognition

***Enterprise Software Revenue Recognition***

Enterprise softwarerevenue or license revenue is generated from licensing the rights to the use ofthe Company’s packaged software products.  The Company recognizesenterprise software revenue based on the provisions of the American Instituteof Certified Pubic Accountants (AICPA) Statement of Position, No. 97-2, “*Software Revenue Recognition*” (“SOP 97-2”), as amended, andStatement of Position No. 81-1, “*Accounting for Performanceof Construction-Type and Certain Production-Type Contracts*” (“SOP 81-1”).

TheCompany generates enterprise software revenue from licenses and services.  License revenue is generated from licensingthe rights to the use of the Company’s packaged software products.  Service revenue is generated from sales ofmaintenance, consulting and training services performed for customers thatlicense the Company’s packaged software products.

TheCompany has concluded that generally, where the Company is responsible forimplementation services for the SalesPerformer product suite and theircomponents, the implementation services are essential to the customer’s use ofthe products.  In such arrangements, theCompany recognizes revenue following the percentage-of-completion method overthe implementation period.  Percentage ofcompletion is computed on the

F-10

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basisof the number of implementation hours incurred to date compared to estimatedtotal implementation hours.  This methodis used because management has determined that past experience has evidencedexpended hours to be the best measure of progress with respect to these typesof arrangements.  In those instanceswhere the estimate of total contract revenue and total contract cost indicatethat a loss will be realized with respect to a particular arrangement, a provisionfor the entire loss on the contract is recorded in the period of determination.

Insituations where the Company is not responsible for implementation services forthe SalesPerformer product suite, the Company recognizes revenue on delivery ofthe packaged software provided (i) there is persuasive evidence of anarrangement, (ii) collection is probable and (iii) the fee is fixed ordeterminable.  In situations where theCompany is not responsible for implementation services for the SalesPerformerproduct suite, but is obligated to provide unspecified additional softwareproducts in the future, the Company recognizes revenue as a subscription overthe term of the commitment period.

Forproduct sales that are recognized on delivery, the Company will executecontracts that govern the terms and conditions of each software license, aswell as maintenance arrangements and other services arrangements.  If an arrangement includes an acceptanceprovision, acceptance occurs upon the earlier of receipt of a written customeracceptance or expiration of the acceptance period.

Revenueunder multiple element arrangements (which may include several differentsoftware products and services sold together) is allocated to each elementbased on the residual method in accordance with Statement of Position, No.98-9, “*Software Revenue Recognition with Respect toCertain Arrangements*” (“SOP 98-9”). The Company uses the residual method when vendor-specific objectiveevidence of fair value does not exist for one of the delivered elements in thearrangement.  Under the residual method,the fair value of the undelivered elements is deferred and subsequentlyrecognized.  The Company has establishedsufficient vendor-specific objective evidence for professional services,training and maintenance and support services based on the price charged whenthese elements are sold separately. Accordingly, packaged software license revenue is recognized under theresidual method in arrangements in which software is licensed with professionalservices, training, and maintenance and support services.

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

***OnDemand Hosted License Revenue***

Firepond OnDemand is anapplication that enables a company’s sales force and supporting organizationsto configure complex products, and accurately price those products.  For Firepond OnDemand contracts, the Company does not actually delivera software product to a customer for installation on the customer’s in-housesystems but rather makes the software available to the customer through aCompany hosting

F-11

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arrangement.In this case the Company installs and runs the software application either onits own or a third-party’s server giving customers access to the applicationvia the Internet or a dedicated line. Accordingly, the Company evaluates its revenue recognition inconsideration of SOP 97-2 or whether such activity falls outside of suchguidance.

AnEmerging Issues Task Force was tasked with assessing the applicability of SOP97-2 to such hosting arrangements and considering how a vendor’s hostingobligation would impact revenue recognition. This discussion resulted in theissuance of Emerging Issues Task Force 00-03, “*Applicationof AICPA Statement of Position 97-2 to Arrangements That Include the Right toUse Software Stored on Another Entity’s Hardware” (“EITF 00-03”)*.  Under EITF 00-03, the Task Force reached aconsensus that a hosting arrangement is within the scope of SOP 97-2 if:

·                  thecustomer has the contractual right to take possession of the software at anytime during the hosting period without significant penalty; and

·                  it is feasible for the customer to either runthe software on its own hardware or contract with another party unrelated tothe vendor to host the software without significant penalty.

Thisallows the Company the ability to recognize that portion of the feeattributable to the license on delivery, while that portion of the fee relatedto the hosting element would be recognized ratably as the service is provided,assuming all other revenue recognition criteria have been met.   If a hosting arrangement fails to meet therequirements of EITF 00-03 then the arrangement is not considered to have asoftware element and therefore is outside of the scope of SOP 97-2. The hostingarrangement, which would follow a services accounting model, would then likelybe accounted for in accordance with the guidance contained in the Securitiesand Exchange Commission’s Staff Accounting Bulletin No. 101, “*Revenue Recognition in Financial Statements*” (“SAB 101”).  SAB 101 contains the same four basic criteriafor revenue recognition as SOP 97-2:

·                  Persuasiveevidence of an arrangement exists;

·                  Deliveryhas occurred or services have been rendered;

·                  Thevendor’s price to the buyer is fixed or determinable; and

·                  Collectibility is reasonably assured.

Oncethese conditions have been met, revenue can be recognized.  SAB 101 was amended by Securities andExchange Commission’s Staff Accounting Bulletin No. 104 (“*RevenueRecognition, corrected copy*” (“*SAB 104*”),which codified current and existing revenue recognition issues.    In consideration of the above criteria, ingeneral terms, revenue from product-related hosted solution is recognizedratably over the term of the contract after payment has been received.  Hosted solution includes unspecifiedupgrades, end user support up to two primary contacts and hosted serversupport.

The Company has recordeddeferred revenue on amounts billed or collected by the Company beforesatisfying the above revenue recognition criteria.  Deferred revenue at June 30, 2005 and 2006consisted of the following:

F-12

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|                                       | ** ** | **Period Ended**       | ** ** | **Period Ended**       | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **June 30, 2005** | ** ** | **June 30, 2006** | ** ** |
| OnDemand revenue                      |       | $                           | 0          |                        | $          | 440,647 |   |
| Product license  and related services |       | 80,337                      |       | 76,636                      |       |
| Product-related  maintenance          |       | 1,107,950                   |       | 1,092,374                   |       |
|                                  |       | $                           | 1,188,287  |                        | $          | 1,609,657 |   |

 

Cost of goods sold

Cost of licenses includesroyalties, media, product packaging, documentation, and other production costs.

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

 

Advertising Costs

Advertising costs areexpensed as incurred.  Advertisingexpense for the periods ended October 31, 2004, June 30, 2005 and 2006 were $3,869,$713 and $9,085 respectively.

Allowance for DoubtfulAccounts

The Company uses theallowance method to determine the allowance for doubtful accounts. Theallowance is based upon prior years’ experience and management’s analysis ofspecific receivables.

The allowance for doubtfulaccounts was $10,000 at June 30, 2005 and 2006.

Fair Value of Financial Instruments

Financial instrumentsconsist of cash and cash equivalents, accounts receivable and payable, anddebt. The carrying values of cash and cash equivalents and accounts receivableand payable approximate fair value.  TheCompany believes the fair values and the carrying value of the Company’s debtwould not be materially different due to the instruments interest rates andmaturity dates.

Income Taxes

Income taxes are accountedfor based on guidance in Statement of Financial Accounting Standards No. 109, “*Accounting for Income Taxes*” (“*SFAS No. 109*”).  Under SFAS No. 109, deferred income taxliabilities and assets are determined based on the difference between thefinancial reporting and tax bases of assets and liabilities using currentlyenacted tax rates.

Cash and Cash Equivalents

The Company considers allhighly liquid investments purchased with original maturities of three months orless to be cash equivalents.  The Companymaintains its cash deposits at numerous banks located throughout the UnitedStates, which at times, may exceed federally insured limits.  The Company has not experienced any losses insuch accounts

F-13

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and believes it is notexposed to any significant risk on cash and cash equivalents.  Cash equivalents, which may consist of moneymarket, commercial paper and U.S. federal agency securities, are classified asavailable-for-sale and therefore carried at fair market value.  As of June 30, 2005 and 2006, cashequivalents were $0.

Property and Equipment

Property and equipment are stated at cost.Depreciation is computed using the straight-line method over the estimateduseful lives of the assets, as follows:

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

 

The cost of assets retired or disposed ofand the accumulated depreciation thereon is removed from the accounts with anygain or loss realized upon sale or disposal credited or charged to operations,respectively.

Goodwill 

Prior to the January 1, 2002implementation of Statement of Financial Accounting Standards No. 142, “*Goodwill and Other Intangible Assets*” (“*SFAS 142*”),goodwill was amortized on a straight-line basis over 5-20 years.  Since that date, goodwill has been subject toperiodic impairment tests in accordance with SFAS 142.

The Company identifies andrecords impairment losses on long-lived assets, including goodwill that is notidentified with an impaired asset, when events and circumstances indicate thatan asset might be impaired.  Events andcircumstances that may indicate that an asset is impaired include significantdecreases in the market value of an asset, a change in the operating model orstrategy and competitive forces.

If events and circumstancesindicate that the carrying amount of an asset may not be recoverable and theexpected undiscounted future cash flow attributable to the asset is less thanthe carrying amount of the asset, an impairment loss equal to the excess of theasset’s carrying value over its fair value is recorded.  Fair value is determined based on the presentvalue of estimated expected future cash flows using a discount ratecommensurate with the risk involved, quoted market prices or appraised values,depending on the nature of the assets. To date no such impairment has been recorded.

Concentration of Credit Risk

Statement of Financial Accounting Standards No. 105, “*Disclosure of Information about Financial Instruments withOff-Balance-Sheet Risk and Financial Instruments with Concentrations of CreditRisk*,” (“*SFAS No. 105*”)requires disclosure of any significant off-balance sheet risks and credit riskconcentrations.  The Company has nosignificant off-balance-sheet risks. Financial instruments that potentially subject the Company to

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concentrations of credit risk are principally cash andcash equivalents, short-term investments, and accounts receivable.  The Company maintains its cash and cashequivalents with established financial institutions. The Company’s credit riskis managed by investing its cash in high quality money market instruments andhigh quality corporate issuers.

Concentration of credit risk related to accountsreceivable and unbilled services is limited to several customers to whom theCompany makes substantial sales.  TheCompany performs periodic credit evaluations of its customers and has recordedallowances for estimated losses.  TheCompany has not experienced any material losses related to receivables fromindividual customers, geographic regions or groups of customers.

During the period ended June 30, 2006, the Companyconducted business with three customers whose sales made up 11.7% (foreigncustomer), 10.8% (foreign customer) and 10.2% of net revenues.  As a percentage of total revenues, domesticsales were approximately 53.5% and foreign sales were approximately 46.5%.

Net Income (Loss) Per Share

Net income (loss) per share is computed based on theguidance of SFAS No. 128, “Earnings per Share” (“SFAS No. 128”).  SFAS No. 128 requires companies to reportboth basic income (loss) per share, which is computed by dividing the netincome (loss) by the weighted average number of common shares outstanding, anddiluted income (loss) per share, which is computed by dividing the net income(loss) by the weighted average number of common shares outstanding plus theweighted average dilutive potential common shares outstanding using thetreasury stock method.  In periods oflosses, diluted loss per share is computed on the same basis as basic loss pershare as the inclusion of any other potential shares outstanding would beanti-dilutive.

Foreign Currency Translation

The local currency is the functional currency of theCompany’s subsidiaries.  Assets andliabilities are translated into U.S. dollars at exchange rates in effect at thebalance sheet date. Income and expense items are translated at average ratesfor the period. Gains and losses arising from translation are accumulated as aseparate component of stockholder’s equity. Gains and losses arising from transactions denominated in foreigncurrencies are included in other income.

ComputerSoftware Development Costs and Research and Development Expenses

The Company incurs software development costsassociated with its licensed products as well as new products.  Since June 1997, the Company has determinedthat technological feasibility occurs upon the successful development of aworking model, which happens late in the development cycle and close to generalrelease of the products.  Because the developmentcosts incurred between the time technological feasibility is established andgeneral release of the product are not material, the Company expenses thesecosts as incurred.

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Discontinued Operations

On August 26,2003, the Company decided to discontinue the operations of all foreign subsidiaries.  The results of operations of the foreignsubsidiaries of the Company have been classified as discontinued operations inthe accompanying consolidated statements of operations for the periods endedOctober 31, 2004, June 30, 2005 and June 30, 2006. During the period ended June 30, 2005, theCompany recorded the elimination of the liabilities associated with its foreigndiscontinued operations except for Germany and Switzerland which were still inthe liquidation process.  Thiselimination resulted in the Company recording approximately $2.6 million ingain on disposal of discontinued operations.

During the period ended June 30, 2006, the Company recorded theelimination of the assets and liabilities associated with its foreigndiscontinued operations for Germany and Switzerland.  This elimination resulted in the Companyrecording approximately $763,000 in loss from discontinued operations.   Accordingly, all assets and liabilities offoreign operations have been written off of the books.

Recently IssuedAccounting Pronouncements 

In December2004, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standard (“SFAS”) No. 153, “*Exchanges ofNonmonetary Assets*,” (“SFAS No. 153”) an amendment to AccountingPrinciples Board (“APB”) Opinion No. 29 (“Opinion No. 29”), “*Accounting for Nonmonetary**Transactions*”.Statement No. 153 eliminates certain differences in the guidance in Opinion No.29 as compared to the guidance contained in standards issued by theInternational Accounting Standards Board. The amendment to Opinion No. 29 eliminates the fair value exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance. Such an exchange has commercial substance if the futurecash flows of the entity are expected to change significantly as a result ofthe exchange. SFAS No. 153 is effective for nonmonetary asset exchangesoccurring in periods beginning after June 15, 2005.  Earlier application is permitted fornonmonetary asset exchanges occurring in periods beginning after December 16,2004.  The adoption of SFAS No. 153 didnot have a material impact on the Company’s financial statements.

InMay 2005, the FASB issued SFAS No. 154, *“Accounting Changes andError Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.3.”* SFAS No. 154 replaces APB Opinion No. 20, *“AccountingChanges”*, and SFAS No. 3, *“Reporting AccountingChanges in Interim Financial Statements,”* and changes therequirements for the accounting for and reporting of a change in accountingprinciple. SFAS No. 154 will apply to all voluntary changes in accountingprinciple as well as to changes required by an accounting pronouncement in theunusual instance that the pronouncement does not include specific transitionprovisions. APB No. 20 previously required that most voluntary changes inaccounting principle be recognized by including in net income of the period ofthe change the cumulative effect of changing to the new accounting principle.

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SFASNo. 154 requires retrospective application to prior periods’ financialstatements of changes in accounting principle, unless it is impracticable todetermine either the period-specific effects or the cumulative effect of thechange. When it is impracticable to determine the period-specific effects of anaccounting change on one or more individual prior periods presented, SFAS No.154 requires that the new accounting principle be applied to the balances ofassets and liabilities as of the beginning of the earliest period for whichretrospective application is practicable and that a corresponding adjustment bemade to the opening balance of retained earnings (or other appropriate componentsof equity or net assets in the statement of financial position) for that periodrather than being reported in an income statement. When it is impracticable todetermine the cumulative effect of applying a change in accounting principle toall prior periods, SFAS No. 154 requires that the new accounting principle beapplied as if it were adopted prospectively from the earliest date practicable.SFAS No. 154 carries forward without change the guidance contained in APBOpinion No. 20 for reporting the correction of an error in previously issuedfinancial statements and a change in accounting estimate, and also the guidancein APB No. 20 requiring justification of a change in accounting principle onthe basis of preferability. SFAS No. 154 is effective for accounting changesand corrections of errors made in fiscal years beginning after December 15,2005. Early adoption is permitted for accounting changes and corrections oferrors made in fiscal years beginning after the date SFAS No. 154 was issued.The Company presently does not believe that the adoption of the provisions ofSFAS No. 154 will have a material affect on its financial statements.

InDecember 2004, the FASB issued SFAS No. 123 (Revised 2004), “*Share Based Payment*,” (“*SFAS No. 123 (R)”)*which eliminates the use of APB Opinion No. 25 and will require theCompany to measure the cost of employee services received in exchange for anaward of equity instruments based on the grant-date fair value of the award.That cost will be recognized over the period during which an employee isrequired to provide service in exchange for the reward (the requisite serviceperiod). No compensation cost is recognized for equity instruments for whichemployees do not render the requisite service. The grant-date fair value ofdirector/employee share options; share grants and similar instruments will be estimated using option-pricing modelsadjusted for the unique characteristics of those instruments.  SFAS No. 123 (R) must be applied to allshares and options granted or modified after its effective date and also torecognize the cost associated with the portion of any share or option awardsmade before its effective date for with the associated service has not beenrendered as of its effective date.

On April 14, 2005, theU.S. Securities and Exchange Commission announced that the effective date ofSFAS No. 123(R) is deferred for calendar year companies until the beginning of2006. On January 1, 2006, the Company elected to adopt SFAS No. 123(R) early (seeNote 11).

InMarch 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “*Accounting for Conditional Asset Retirement Obligations*” (“*FIN No. 47*”).  FIN No.47 clarifies that the term conditional asset retirement obligation asused in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,”refers to a legal obligation to perform an asset retirement activity inwhich the timing and (or) method of settlement are conditional on a futureevent that may or may not be within the control of the entity.  Theobligation to perform the asset retirement activity is unconditional eventhough uncertainty exists

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aboutthe timing and (or) method of settlement.  Uncertainty about the timingand/or method of settlement of a conditional asset retirement obligation shouldbe factored into the measurement of the liability when sufficient informationexists.  This interpretation also clarifies when an entity wouldhave sufficient information to reasonably estimate the fair value of an assetretirement obligation.  Fin No. 47 is effective no laterthan the end of fiscal years ending after December 15, 2005 (December 31, 2005for calendar-year companies). Retrospective application of interim financial information is permittedbut is not required.  Management does notexpect adoption of FIN No. 47 to have a material impact on the Company’sfinancial statements.

SFAS155, “*Accounting for Certain Hybrid FinancialInstruments—an amendment of FASB Statements No. 133 and 140*” (‘SFASNo. 155”). This Statement shall be effective for all financial instrumentsacquired, issued, or subject to a remeasurement (new basis) event occurringafter the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006. The fair value election provided for in paragraph 4(c) ofthis Statement may also be applied upon adoption of this Statement for hybridfinancial instruments that had been bifurcated under paragraph 12 of Statement133 prior to the adoption of this Statement. Earlier adoption is permitted asof the beginning of an entity’s fiscal year, provided the entity has not yetissued financial statements, including financial statements for any interimperiod, for that fiscal year. Management does not expect adoption of SFAS No.155 to have a material impact on the Company’s financial statements.

SFAS157, “*Fair Value Measurements*”, defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles (GAAP), and expands disclosures about fair valuemeasurements. This Statement applies under other accounting pronouncements thatrequire or permit fair value measurements, the Board having previouslyconcluded in those accounting pronouncements that fair value is the relevantmeasurement attribute. Accordingly, this Statement does not require any newfair value measurements. However, for some entities, the application of thisStatement will change current practice. Management has not evaluated the impactof this statement

In June 2005,the Emerging Issues Task Force reached a consensus on Issue No. 05-6 (“EITFNo. 05-6”), *“Determining the Amortization Period for LeaseholdImprovements Purchased after Lease Inception or Acquired in a BusinessCombination.”*   EITF No. 05-6clarifies that the amortization period for leasehold improvements acquired in abusiness combination or placed in service significantly after and notcontemplated at or near the beginning of the lease term should be amortizedover the shorter of the useful life of the assets or a term that includes therequired lease periods and renewals that are reasonably assured of exercise atthe time of the acquisition. EITF No. 05-6 is to be applied prospectively toleasehold improvements purchased or acquired in reporting periods beginningafter June 29, 2005. The adoption of EITF No. 05-6 did not have a materialimpact on the Company’s consolidated financial statements.

**NOTE 3 -PROPERTY AND EQUIPMENT**

Property and equipment at June 30, 2005 and 2006consisted of the following:

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| Property and equipment:               | ** ** | **2005**  | ** **  | **2006**   | ** ** |
|-------------------------------------------------|------------|-----------|-------------|------------|------------|
| Computer  equipment and software                |       | $         | 3,677,176   |       | $          | 3,421,851 |   |
| Furniture and  fixtures                         |       | 527,902   |        | 527,902    |       |
| Leasehold  improvements                         |       | 19,915    |        | 19,915     |       |
|                                            |       | 4,224,993 |        | 3,969,668  |       |
| Less accumulated  depreciation and amortization |       | 3,920,383 |        | 3,778,587  |       |
| **Property  and equipment, net**                | ** ** | **$**     | **304,610** | ** ** | **$**      | **191,081** | ** ** |

 

Depreciation expense was $92,734, $105,863 and $155,547 for the periodsended October 31, 2004, June 30, 2005 and June 30, 2006, respectively.

**NOTE 4- ACCRUED LIABILITIES**

Accrued liabilities at June 30, 2005 and 2006consisted of the following:

|                                   | ** ** | **2005** | ** **    | **2006**   | ** ** |
|-----------------------------------|------------|----------|---------------|------------|------------|
| Accrued interest                  |       | $        | 162,500       |       | $          | 606,436 |   |
| Consulting and  professional fees |       | 148,355  |          | 631,908    |       |
| Compensation and  benefits        |       | 190,832  |          | 247,312    |       |
| Sales, use and  other taxes       |       | 239,943  |          | 123,547    |       |
| Restructuring                     |       | 280,207  |          | 217,735    |       |
| Other                             |       | 185,164  |          | 255,521    |       |
| **Total  accrued liabilities**    | ** ** | **$**    | **1,207,001** | ** ** | **$**      | **2,082,459** | ** ** |

 

**NOTE 5 –NOTESPAYABLE**

On September 13, 2005,Trident Growth Fund, L.P. (“Trident”) loaned FPT $2,000,000, with interestaccruing at 12% per annum.  Interest ispayable monthly and principal due on September 30, 2006 or on consummation of achange in control transaction.  The Notewas originally convertible into shares of common stock based upon a fixedratio.  On or about November 25, 2005,FPT closed an additional $500,000 note with Trident Growth Fund on the sameterms and conditions as the note issued in September 2005.  The funds received pursuant to these Noteswere used for working capital.

In connection with theacquisition of FPT by AFG and the CAP Financing as described below, on March29, 2006 AFG entered into an agreement with Trident which amended the operativedocuments entered into by FPT and Trident in September and November 2005 (the “MasterAmendment”) and added AFG as a party to certain of these agreements.  Under the Master Amendment, the Notes issuedto Trident were amended to be convertible into AFG stock at a price of $6.40per share, subject to the same anti-dilution adjustments applicable to theNotes issued in the CAP Financing.  Inaddition, the warrants issued to Trident were amended to be exercisable for AFGstock and to reflect an exercise price of $4.00 per share, and the amount ofshares issuable under the Trident Warrants was changed to 390,625 shares of AFGcommon stock (exercisable for a period of 5 years from the date of the initialnotes).  In addition, the financialcovenants

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under the agreementswith Trident were amended to match the financial covenants contained in the CAPFinancing.

Also, on March 29, 2006,AFG entered into an Intercreditor and Subordination Agreement with FPT andTrident (the “Subordination Agreement”), pursuant to which Trident agreed tosubordinate its rights to those of the investors in the CAP Financing.

On September 13, 2005,Firepond, FPT and General Motors entered into a letter agreement wherebyGeneral Motors accepted $1,250,000 in cash from FPT, received a $250,000, 5%unsecured note from FPT, cancelled the note due from Firepond and released itssecurity interest in Firepond assets. This resulted in a $1,712,500 gain on settlement of which $1,500,000 wasa non cash settlement of principal and $212,500 was forgiveness of interest.

On March 29, 2006, AFG entered into a SecuritiesPurchase Agreement (the “Purchase Agreement”) with certain investors (the “Buyers”)to which the Buyers agreed to purchase (i) AFG’s Senior SecuredNonconvertible Notes due 2011 (the “Nonconvertible Notes”) in an aggregateprincipal amount of $50,000,000 (“CAP Financing”), which Nonconvertible Notesmay be exchanged for Senior Secured Convertible Notes due 2011 (the “ConvertibleNotes”, and together with the Nonconvertible Notes, the “Notes”) or redeemedunder certain circumstances, and which Convertible Notes are convertible intoshares of AFG’s common stock (the “Conversion Shares”); and (ii) warrants (the “Warrants”)to acquire in the aggregate up to 6,875,000 shares of AFG’s common stock(including warrants granted to the placement agent to acquire 625,000 shares ofcommon stock) exercisable from the earlier of six months after issuance or theThreshold Acquisition Date (as such term is defined in the Indenture) untilMarch 29, 2011 at an exercise price equal to the lower of $8.00 or 125% of theper share price of AFG’s common stock to be sold in an equity offering.  The purchase and sale of the Notes andWarrants was consummated on March 29, 2006. The Notes are subject to certainrequirements which must be fulfilled or the Notes will be callable within oneyear.

Notes payable at June 30, 2005 and 2006 consisted of the following:

|                                                                                                               | ** ** | **2005**  | ** ** | **2006**   | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|
| Unsecured note  payable to General Motors, 5.00%                                                              |       | $         | 3,000,000  |       | $          | 250,000 |   |
| Trident secured  note payable, 12%                                                                            |       | —    |       | 2,500,000  |       |
| Senior secured  nonconvertible notes, variable rate based on the greater of 4.51% or the 3  month T-Bill rate |       | —    |       | 50,000,000 |       |
|                                                                                                          |       |      |       |       |       |
| Less discount                                                                                                 |       | —    |       | (154,250   | )          |
|                                                                                                          |       |      |       |       |       |
| Total notes  payable                                                                                          |       | $         | 3,000,000  |       | $          | 52,595,750 |   |
|                                                                                                          |       |      |       |       |       |
| Less current  portion:                                                                                        |       | 1,000,000 |       | 52,595,750 |       |
|                                                                                                          |       |      |       |       |       |
| Non-current portion:                                                                                          |       | $         | 2,000,000  |       | $          | — |   |

 

(Weighted averageinterest rate – 5% for 2005 and 4.88% for 2006)

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**NOTE 6- INTEREST EXPENSE**

During the periods ended October 31, 2004, June 30,2005 and 2006, the Company recorded interest expense of $208,787, $128,333 and$3,068,063 respectively.  Included ininterest expense is amortization of debt issuance costs related to the CAPfinancing totaling $1,633,835 for the year ended June 30, 2006.  Interest expense in the period ended June 30,2006 net of the respective amortization is attributable to the note obligationsto GM, Trident and the CAP Notes.

**NOTE 7- ACCUMULATED OTHER COMPREHENSIVE LOSS**

The components of accumulated othercomprehensive loss at June 30, 2005 was as follows:
| Foreign currency translation                      |   | $ | (680,778 | ) |
|---------------------------------------------------|--------|---|----------|---|
| Accumulated other  comprehensive loss at 6/30/05: |   | $ | (680,778 | ) |

 

As a result of the liquidation of the remaining foreign subsidiariesduring the period, there was no accumulated other comprehensive loss at June30, 2006.

**NOTE 8 - RESTRUCTURING AND OTHER SPECIAL CHARGES**

During the period fromDecember 2, 2003 (Acquisition) to June 30, 2006, the Company continued torestructure its operations as a result of a prolonged slowdown of globalinformation technology spending, specifically within the enterprise softwaremarketplace. As such, the Company announced a strategic realignment to furtherenhance its focus on the “lead-to-order’’ market as well as measures to betteralign its cost structure with projected revenue and preserve cash. The Companyreduced its headcount and facilities as well as writing-off excess equipmentand terminated and restructured certain contractual relationships.  In connection with the restructuring of itsoperations, the Company recognized direct and other special charges for theperiods ended October 31, 2004, June 30, 2005 and June 30, 2006 of $3.4million, $200,000 and $0, respectively.

**NOTE 9 - INCOME TAXES**

There was no provision for income taxesfor the periods ended October 31, 2004, June 30, 2005 and June 30, 2006.  Deferred income taxes reflect the net taxeffects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for incometax purposes.  Significant components ofour deferred tax assets (liabilities) are as follows:
|                                                | ** ** | **Period Ended**       | ** ** | **Period Ended**       | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **June 30, 2005** | ** ** | **June 30, 2006** | ** ** |
| Net operating  losses and credit carryforwards |       | $                           | 5,133,424  |                        | $          | 6,759,706 |   |
| Nondeductible  reserves and accruals           |       | 618,065                     |       | 548,877                     |       |
| Depreciation and  amortization                 |       | 78,274                      |       | 216,351                     |       |
| Capitalized  research and development          |       | 1,316,060                   |       | 692,100                     |       |
| Other                                          |       | —                      |       | 179,478                     |       |
| Gross deferred tax assets                      |       | 7,145,823                   |       | 8,396,512                   |       |
| Valuation  allowance                           |       | (7,145,823                  | )          | (8,396,512                  | )          |
|                                           |       |                        |       |                        |       |
| Net deferred tax assets                        |       | $                           | —     |                        | $          | — |   |

 

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Statement of FinancialAccounting Standards No. 109, “Accounting for Income Taxes” provides for therecognition of deferred tax assets if realization of the deferred tax assets ismore likely than not.  Based upon theweight of available evidence, which includes FPT and its predecessors’historical operating performance and the reported cumulative net losses inprior years, FPT has provided a full valuation allowance against it netdeferred tax assets.  The valuationallowance increased by $1,250,689 during the fiscal year ended June 30,2006.  The net operating loss carryforward expires as follows:

| 2022   |   | $         | 3,548,000  |   |
|--------|--------|-----------|------------|--------|
| 2023   |   | 7,095,000 |       |
| 2024   |   | 4,193,000 |       |
| 2025   |   | 151,000   |       |
| 2026   |   | 3,678,000 |       |
|   |   | $         | 18,665,000 |   |

 

Through December 3, 2003, ona tax basis, the Company has a $149,744,000 net operating loss carryforwardwhich will be limited by Section 382 of the Internal Revenue Code of 1986, asamended.  The Company has estimated thefuture limited net operating loss carryforward for this period to be approximately$11,000,000.

**NOTE 10 - COMMITMENTS AND CONTINGENCIES**

Litigation

On October 19, 2001, GeneralMotors Corporation (“General Motors”) filed a complaint against the Firepond,Inc. in the Superior Court of Massachusetts, Middlesex County.  The complaint alleging, among other things, abreach of contract under agreements entered into in 1994, as amended;anticipatory repudiation in the spring of 2000 of agreements entered into in1994, as amended; unjust enrichment; establishment of a constructive trust;rescission and restitution based upon failure of consideration as well asextortion and coercion relating to agreements entered into in 1994, as amended;breach of the covenant of good faith and fair dealing; fraud; as well asviolation of Chapter 93A of the General Laws of the Commonwealth ofMassachusetts relating to unfair and deceptive trade practices. General Motors’claims further relate to license agreements, services agreements and a generalrelease entered into with Firepond, Inc. in May 2000.

This matter was settled onApril 14, 2004, per the terms of the settlement, Firepond, Inc. estimated andaccrued a liability of $7,000,000 as of October 31, 2003.  During the period ended June 30, 2006, theCompany negotiated a further settlement of the note payable and recorded afavorable settlement amount of $1,712,500 into its records.

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On December 7, 2004, Firepond, Inc. entered into arevised settlement agreement that called for a promissory note of $3,000,000,the assigning of $1,350,000 of Firepond notes receivable to General Motors, aswell as a cash payment of $1,600,000.

On September 13, 2005, Firepond, FP TechnologyHoldings, Inc. and General Motors entered into a letter agreement wherebyGeneral Motors accepted $1,250,000 in cash from FP Technology Holdings,received a $250,000 unsecured note from FP Technology Holdings Inc., cancelledthe note due from Firepond and released its security interest in Firepondassets.

On or about December 1, 2004, Freightliner LLC filed acomplaint against the Company. The plaintiff alleges breach of contacts, breathof warranty arising out of the parties’ License Agreement and ServicesAgreement.  This matter was settled onAugust 1, 2005, per the terms of the settlement the Company agreed to pay$3,000,000 over a period of 70 days.  Thesettlement was covered by the Company’s insurance carrier, Steadfast InsuranceCompany (“Steadfast”), which provided the full amount for the settlement exceptfor a $50,000 deductible which the Company has accrued.  Firepond agreed that Steadfast has the rightto seek a judicial determination as to the reasonableness of the settlementvalue of the Freightliner claim and the $3,000,000 settlement.  Firepond acknowledged and granted Steadfastthe right to recoup from Firepond the amount which represents the differencebetween the judicially determined settlement value and the $3,000,000settlement, if the court determines that the reasonable settlement value of theFreightliner claim is less than $3,000,000. Steadfast and Firepond agreed on May 26, 2006 that the Company does nothave a reimbursement obligation to Steadfast.

In August, 2001, Firepond, Inc. (“Firepond”) was namedas a defendant in a securities class action filed in United States DistrictCourt for the Southern District of New York related to its initial publicoffering (“IPO”) in February, 2000.  Thelawsuit also named certain of the underwriters of the IPO, includingFleetBoston, Dain Rauscher, and SG Cowan, as well as officers and directors ofFirepond, Klaus P. Besier and Paul K. McDermott, as defendants.  Approximately 300 other issuers and theirunderwriters have had similar suits filed against them, all of which areincluded in a single coordinated proceeding in the Southern District of NewYork (the “IPO Litigations”).  Thecomplaints allege that the prospectus and the registration statement for theIPO failed to disclose that the underwriters allegedly solicited and received“excessive” commissions from investors and that some investors in the IPOallegedly agreed with the underwriters to buy additional shares in theaftermarket in order to inflate the price of Firepond’s stock.  An amended complaint was filed April 19,2002.  Firepond, Inc. and the officersand directors identified above were named in the suits pursuant to Section 11of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934, andother related provisions.  The complaintsseek unspecified damages, attorney and expert fees, and other unspecified litigationcosts.

On July 1, 2002, the underwriter defendants in theconsolidated actions moved to dismiss all of the IPO Litigations, including theaction involving Firepond.

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In June 2003, a proposed settlement of this litigationwas structured between the plaintiffs, the issuer defendants in the consolidatedactions, the issuer officers and directors named as defendants, and theissuers’ insurance companies.  On orabout July 30, 2003, a committee of Firepond’s Board of Directorsconditionally approved the proposed partial settlement.  The settlement would provide, among otherthings, a release of Firepond and of the individual defendants for the conductalleged to be wrongful in the amended complaint.  Firepond would agree to undertake otherresponsibilities under the partial settlement, including agreeing to assignaway, not assert, or release certain potential claims the Company may haveagainst its underwriters.  Any directfinancial impact of the proposed settlement is expected to be borne byFirepond’s insurance carriers.

In June 2004, an agreement of settlement was submittedto the court for preliminary approval. The court granted the preliminary approval motion on February 15, 2005,subject to certain modifications.

On August 31, 2005, the court issued a preliminaryorder further approving the modifications to the settlement and certifying thesettlement classes. The court also appointed the Notice Administrator for thesettlement and ordered that notice of the settlement be distributed to allsettlement class members beginning on November 15, 2005.  The settlement fairness hearing was held onApril 24, 2006, and the court reserved decision.  If the court determines that the settlementis fair to the class members, the settlement will be approved.  There can be no assurance that this proposedsettlement will be approved and implemented in its current form, or at all.

The Company is also subjectto various other claims and legal actions arising in the ordinary course ofbusiness. In the opinion of management, after consultation with legal counsel,the ultimate disposition of these matters is not expected to have a materialeffect on the Company’s business, financial condition, or results ofoperations.

Leases

The Company leases its office space under operatingleases expiring at various dates through 2011. For the periods ended October 31, 2004, June 30, 2005 and June 30, 2006,rent expense under these agreements totaled approximately $340,744, $132,612and $ 192,332 respectively.

At June 30, 2006, theminimum future obligations under operating leases, exclusive of sublease incomeare as follows:

For the Fiscal Year Ended June 30,
| 2007   |   | $       | 244,000 |   |
|--------|--------|---------|---------|--------|
| 2008   |   | 230,000 |    |
| 2009   |   | 188,000 |    |
|   |   | $       | 662,000 |   |

 

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**NOTE 11 -STOCKHOLDERS’ EQUITY**

Loan Receivable

The Company made a loan to an entity controlled by theprevious Chief Executive Officer and majority shareholder in the Company in theamount of $1,175,000. In conjunction with the General Motors settlement thereceivable was written off as a charge to additional paid in capital during theperiod ended June 30, 2005.

Restricted Stock Awards

On January 5, 2006, in connection with the employment of the ChiefExecutive Officer and the Chief Financial Officer, the Company issuedrestricted common stock awards for 302,419 and 201,622 respectively.  Such shares vest in their entirety on January5, 2009.  In March, 2006, the Companyawarded  1,250,000 common shares tocertain officers, and a director which shares vest in their entirety on March29, 2008.

In March, 2006 a non-employee director was appointedto the Board of Directors and issued 60,484 (post merger) shares of restrictedcommon stock which vest on March 31, 2008. The stock awardswere valued at $564,342.

2006 Stock Incentive Plan

Effective June 29, 2006, our board of directors andholders of an aggregate of 3,991,939 shares of our Common Stock, representingapproximately 78.3% of the total shares of our Common Stock then outstanding,approved by written consent in lieu of a special meeting our 2006 StockIncentive Plan (the “2006 Plan”).  The2006 Plan will become effective upon the filing and distribution of theinformation statement relating therewith to our shareholders pursuant toapplicable SEC rules and regulations. The 2006 Plan will permit us to grant to our key employees, directorsand consultants up to 1,766,000 shares of Common Stock pursuant to stock optionawards, restricted stock grants, and other stock-based award.  No stock award has been issued under the 2006Plan, and no award will be issued to our employees or directors until after wehave filed a definitive information statement relating to the 2006 Plan withthe SEC.

Warrants

The following is a summary of warrant activitythrough 6/30/06:
|                                         | ** ** | **Exercise** | ** ** | **Number of** | ** ** |
|-----------------------------------------|------------|--------------|------------|--------------------|------------|
| ** **                              | ** ** | **price**    | ** ** | **shares**         | ** ** |
|                                    |       |         |       |               |       |
| Issued in  connection with Trident Loan |       | $            | 4.00       |               | 390,625    |   |
| Issued in  connection with CAP          |       | $            | 8.00       |               | 6,875,000  |   |
|                                    |       |         |       |               |       |
| Balance at June 30,  2006               |       |         |       | 7,265,625          |       |

 

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Thefollowing is additional information related to warrants:

 
| ** **                            | ** ** | **Warrant price  per share** | ** **    | **Weighted  average  exercise  price** | ** ** | **Number of  shares** | ** ** |
|---------------------------------------|------------|----------------------------------------|---------------|----------------------------------------|------------|----------------------------|------------|
|                                  |       |                                   |          |                                   |       |                       |       |
| Balance June 30, 2005                 |       | —                                 |          | —                                 |       | —                     |       |
|                                  |       |                                   |          |                                   |       |                       |       |
| Granted                               |       | $                                      | 4.00 to $8.00 |                                   | $          | 7.78                       |       | 7,265,625 |   |
| Exercised                             |       | —                                 |          | —                                 |       | —                     |       |
| Forfeited                             |       | —                                 |          | —                                 |       | —                     |       |
|                                  |       |                                   |          |                                   |       |                       |       |
| Balance June 30, 2006                 |       | $                                      | 4.00 to $8.00 |                                   | $          | 7.78                       |       | 7,265,625 |   |
|                                  |       |                                   |          |                                   |       |                       |       |
| Warrants exercisable at June 30, 2006 |       | $                                      | 4.00 to $8.00 |                                   | $          | 7.78                       |       | 390,625 | * |

 

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*All existing CAP warrants are exercisablefrom the earlier of six months after issuance or the Threshold Acquisition Dateas defined in the CAP documentation.

 
| Price per share | ** ** | **Weighted  average  remaining  contractual  life in years** | ** ** | **Weighted  average  exercise  price** | ** ** | **Number of  shares** | ** ** |
|---------------------------|------------|------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------|------------|
| $4.00                     |       | 4.24                                                                   |       | $                                      | 4.00       |                       | 390,625    |   |
| $8.00                     |       | 4.75                                                                   |       | $                                      | 8.00       |                       | 6,875,000  |   |
|                      |       |                                                                   |       |                                   |       | 7,265,625                  |       |

 

**NOTE 12 - PROFIT-SHARING PLAN**

The Company sponsors adefined contribution profit-sharing plan for US employees which conforms toInternal Revenue Service provisions for 401(k) plans. Employees must be atleast 21 years of age to be eligible to participate in the plan.  Participants may contribute up to 100% oftheir earnings.  The Company has theoption to match 50% of the first 2% and 25% of the next 4% of employeecontributions and may make additional contributions as determined by the boardof directors.  There were no employermatching contributions in the periods ended October 31, 2004, June 30, 2005 andJune 30, 2006.

## **NOTE 13 -SUBSEQUENT EVENTS**

On August 31, 2006, theCompany completed a private placement of public equity units (the “Units”) ofFP Technology, Inc. (“PIPE Offering”). The Units were offered through Rodman & Renshaw, LLC, as placementagent, on a best efforts basis at $7.00 per Unit.  Each Unit consisted of one share of commonstock, $0.001 par value per share, of the Company (“Common Stock”) and awarrant (“Warrant”) to acquire one share of Common Stock at $7.00 per share.

The Units were offered pursuant to Rule 506 ofRegulation D under the Securities Act of 1933. To purchase Units, the investor had to be an accredited investor andmeet the other suitability requirements set forth under the caption “InvestorSuitability Requirements and Subscription Procedures” within the offeringdocuments.  The Company closed itsprivate placement offering on August 31, 2006, raising $7,000,000

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(1,000,000 Units) in grossequity proceeds.  The net proceeds of theoffering are to be used for working capital purposes and debt retirement.

The Company has recordedcertain deferred offering costs of $43,076 as of June 30, 2006 which costs willbe recorded as a cost of the PIPE Offering in its August, 2006 financialrecords.

On August 18, 2006 theCompany deposited $2,500,000 to the CAP escrow fund maintained for the CAPFinancing, bringing the fund balance to $50,000,000 in accordance with theterms and conditions of the CAP Financing. Additionally, on the same date, the Company repaid Trident Growth Fund,L.P. $500,000 of principal.

The remaining $2,000,000Trident Growth Fund, L.P. debt was amended as of September 13, 2006, extendingthe maturity date to August 31, 2008 and providing for ratable monthly paymentsof principal plus accrued interest beginning September 30, 2006.

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