200810-K
1 d10k.htm FORM 10-K










UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549









FORM
10-K









(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, 2008




OR




 ̈
            Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934




Commission
File Number: 000-28515









Firepond,
Inc.


(Exact
name of registrant as specified in its charter)









Delaware
            
            20-3446646(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (IRS
      Employer
              Identification
      No.)


11Civic
Center Plaza, Suite 310


Mankato,
Minnesota 56001


(Address
of principal executive offices)




Telephone
Number (507) 388-0400


(Registrant’s
telephone number, including area code)









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




Title
      of each class
            
            Name
      of each exchange on which registeredCommon
      Stock, par value $0.001 per share
            
            Over-the-Counter
      Bulletin Board




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




Not
applicable









Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act.    Yes      No  x




Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of
Act.    Yes   ̈    No  x




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




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.   ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
accelerated filer    ̈   Accelerated
filer   ̈        Non-accelerated
filer    ̈        Smaller
reporting company  x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).    Yes   ̈    No  x




Based on
the closing price of the Registrant’s common stock on the last business day of
the Registrant’s most recently completed second fiscal quarter, which was
December 31, 2007, the aggregate market value of its shares (based on a
closing price of $4.00 per share) held by non-affiliates was approximately
$16,245,732.  Shares of the Registrant’s common stock held by each
executive officer and director and by each entity or person that owned 5 percent
or more of the Registrant’s outstanding common stock were excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.




As of
June 30, 2008, there were 15,906,679 shares of the Registrant’s Common Stock
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the Registrant’s definitive proxy statement for its fiscal 2008 Annual
Meeting of Stockholders (the “Proxy Statement”), to be filed within 120 days of
the Registrant’s fiscal year ended June 30, 2008, are incorporated by reference
in Part III of this Report on Form 10-K. Except with respect to information
specifically incorporated by reference in this Form 10-K, the Proxy Statement is
not deemed to be filed as part of this Form 10-K.









Firepond, Inc.




INDEX




Page No.PART
      IItem 1.
            
            Business
            
            1Item
      2.
            
            Properties
            
            10Item
      3.
            
            Legal
      Proceedings
            
            10Item
      4.
            
            Submission
      of Matters to a Vote of Security Holders
            
            10Item
      4A.
            
            Executive
      Officers of the Registrant
            
            11PART
      IIItem
      5.
            
            Market for
      Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            
            12Item
      6.
            
            Selected
      Financial Data
            
            14Item
      7.
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
            
            16Item
      7A.
            
            Quantitative and Qualitative Disclosures About Market
      Risk
            
            31Item
      8.
            
            Consolidated Financial Statements and Supplementary
      Data
            
            31Item
      9.
            
            Changes in and
      Disagreements with Accountants on Accounting and Financial
      Disclosure
            
            32Item 9A.
            
            Controls and
      Procedures
            
            32Item
      9B.
            
            Other
      Information
            
            33PART
      IIIItem
      10.
            
            Directors,
      Executive Officers of the Registrant and Corporate Governance
      Matters
            
            34Item
      11.
            
            Executive
      Compensation
            
            34Item
      12.
            
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            
            34Item
      13.
            
            Certain
      Relationships and Related Transactions and Director
      Independence
            
            34Item
      14.
            
            Principal
      Accounting Fees and Services
            
            34PART
      IVItem
      15.
            
            Exhibits,
      Financial Statement Schedules
            
            34Signatures
            
            35Index to
      Exhibits
            
            36







FORWARD-LOOKING
INFORMATION




This
annual report contains forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as “may”, “will”,
“should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”,
“predicts”, “potential” or “continue” or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors that may cause 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 these
forward-looking statements.  Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.  Except as
required by applicable law, including the securities laws of the United States,
we do not intend to update any of the forward-looking statements to conform
these statements to actual results.




As
used in this annual report, the terms “we”, “us”, “our”, “the Company” mean
Firepond, Inc.




Index







PART I




ITEM 1.
            BUSINESS




Overview




We are a
leading provider of multi-tenant, on-demand software that automates and
simplifies the process companies use to sell complex products and services. Our
Configure, Price, Quote, or CPQ, software-as-a-service automates complex sales
processes, improves order accuracy, and accelerates sales cycles. We have
designed our CPQ product to be a low-cost Internet-based software application
delivered on a subscription basis. This model allows us to provide functionality
to companies of all sizes that has typically been available only to large
enterprises with substantial information technology resources and budgets. Our
Firepond CPQ OnDemand product offering capitalizes on our extensive expertise in
sales automation software and combines it with the positive attributes of
multi-tenant, Internet-based delivery.




We offer
our solutions on an annual or multi-year subscription basis. We sell our
products by targeting selected vertical markets, currently consisting of high
technology, transportation, construction machinery, agricultural equipment, and
service companies selling complex products and services. Our current customers
include Bell Helicopter, Alcan Cable (Division of Alcan Products), Cummins,
Inc., Deere & Co., G.E. Equipment Services Europe BV, Redback Networks,
Rolls Royce Motor Cars, SRI Surgical, and Symantec Corporation.




Industry
Background




Evolution from On-Premise to
On-Demand Applications




Over the
past two decades, businesses have widely adopted on-premise enterprise software
applications in an effort to improve and automate their business processes.
These applications have typically been implemented and deployed within an
organization’s internal IT environment. However, realizing the stated benefits
and return-on-investment from these on-premise enterprise applications has been
challenging for a number of reasons, including:


•
            High Total Cost of
      Ownership. In addition to the initial purchase cost, businesses
      deploying traditional on-premise application software must make
      substantial, ongoing investments in underlying IT infrastructure, such as
      hardware systems, networks, databases, application servers, and storage in
      order to run the applications. Businesses also need to employ costly IT
      staff and consultants to deploy, integrate, customize, support, and
      upgrade the applications. Moreover, upgrade and maintenance requirements
      are typically difficult to anticipate and implement on a cost-effective
      basis.•
            Lengthy Deployment, High
      Complexity, and Limited Utilization. The growing scope and
      complexity of on-premise software enterprise applications often makes
      implementation a lengthy and challenging process, frequently lasting from
      six months to several years. Custom programming is typically required to
      finish these applications, which extends time to deployment, reduces
      application reliability, and makes future upgrades more
      difficult.•
            Limited Incentives to Ensure
      On-Going Client Success. The traditional model for purchasing
      on-premise enterprise applications requires businesses to pay upfront for
      perpetual use of software before the software is actually deployed and to
      pay a fixed maintenance fee for a specified period of time. This
      purchasing model may not provide appropriate financial incentive for
      software vendors to assist their customers in successfully deploying their
      applications and fully realizing the intended benefits from their
      investments.





By
delivering software applications in a fundamentally new manner as “on-demand”
services, businesses can now leverage the open standards for application
integration and advances in network availability and security to access
applications over the Internet. On-demand solutions eliminate the need for
custom-implementation efforts and investments in on-premise hardware and
software and greatly simplify the application delivery process. As a result,
businesses can significantly reduce application deployment times, implementation
costs, investments in IT infrastructure, and ongoing maintenance and support
costs.




Single
Tenant versus Multi-Tenant Architecture




Delivering
on-demand applications, however, presents a number of technical advantages over
traditional on-premise software application vendors. To achieve economies of
scale benefits, on-demand applications must use multi-tenant architecture.
Multi-tenant architecture enables multiple enterprises to share the same
application infrastructure on a secure basis. In contrast, traditional
enterprise software applications hosted by application service providers are
deployed on individual servers and application infrastructures, increasing the
cost to the company and impeding economies of scale. Further, enterprise
software applications must be substantially redesigned and re-written to achieve
multi-tenant functionality.









We
believe the emergence of multi-tenant, on-demand applications has the potential
to transform the enterprise applications software industry, enabling faster
deployment, higher return-on-investment, and lower total cost of ownership.
Furthermore, we believe the on-demand model expands the addressable market
opportunity by making business applications more affordable for divisions of
large corporations, middle-market companies, and small businesses.


-1-
 Index


Complexity In The Sales
Process




Companies
with complex products typically require a lengthy consultative sales process to
convert a lead into an order. This process often involves numerous meetings
between a company’s sales, engineering, manufacturing, finance, and other
departments before a product recommendation can be made or quoted to a targeted
customer. This approach is both time consuming and error prone, driving
additional costs into the sales process and eroding profit margins,
competitiveness, and time to market. The process is further complicated because
companies store their product and customer data over multiple platforms in
multiple formats and in disparate locations, causing difficulty in accessing and
manipulating that data.




Sales
automation software originally emerged to reduce the complexity of the sales
process and improve sales productivity for large corporations. The role of such
software is to match the customer’s needs to available product attributes while
enforcing rules and constraints to assure the product can be delivered as
quoted. As this market need evolved, configuration vendors added proposal,
quotation, and pricing functionality to augment the effectiveness and usability
of their core configuration engines. Thesesophisticated applications, however,
required significant cash outlays for the initial purchase and ongoing
maintenance, limiting it to large corporations with significant information
technology resources. The software-as-a-service ,SaaS, model affords businesses
of any size the ability to centralize and simplify complex selling processes and
deploy a platform for aggregating, bundling, and pricing complex products and
services across all sales channels.




The
Firepond Solution




The
combination of our multi-tenant, on-demand architecture coupled with
25 years of expertise in developing sales-oriented software uniquely
positions us to deliver an affordable and feature-rich solution to large and
small companies. We believe that our solution enables our customers to
experience a number of key benefits, including:


•
            Automated Sales Processes of
      Complex Products. The sale of complex products by a company
      typically requires the assistance of personnel from multiple departments,
      including sales, engineering, manufacturing, finance, legal, and
      marketing. Our solution provides sales representatives of a company with
      timely, relevant, and accurate information from each department regardless
      of platform, format, or location of the data. As a result, our solution
      enables a company to capture design specifications from engineering,
      production constraints from manufacturing, discount authorization from
      finance, terms and conditions from legal, and product collateral from
      marketing on a real-time basis.•
            Increased Order
      Accuracy. Our software solutions increase order accuracy by
      centralizing all product specifications and pricing options on our
      web-based application. This centralization assures that all sales channels
      are quoting the most up-to-date and accurate product configurations and
      price information.•
            Accelerated Sales
      Cycles. Our software solution is designed to optimize the sales
      process and increase the speed at which a sale can be completed. Quick
      turnaround in product recommendations, pricing, proposals, and financing
      allows sales representatives to manage multiple sales simultaneously and
      close them faster. This high degree of responsiveness helps foster a
      strong and lasting customer-supplier relationship that we believe is a
      distinct competitive advantage for us.•
            Lowered Cost of
      Ownership. Our multi-tenant, on-demand subscription-based software
      application eliminates the need for heavy investment in an IT
      infrastructure and the staff necessary to support it. The reduced cost of
      accessing our application extends our addressable market to include small
      and medium businesses, as well as divisions of large
      companies.




Strategy




Our goal
is to be the leading provider of multi-tenant, on-demand software applications
that improve a company’s sales efficiency and associated business processes. Key
elements of our strategy include:


•
            Grow Our Sales Organization to
      Reach More Customers. Critical to our success will be our ability
      to expand our sales organization to provide broader market coverage and
      reach more customers. We believe our on-demand delivery model enables us
      efficiently to target clients of all sizes, including large corporations
      that historically have deployed on-site highly customized enterprise
      applications, as well as small and medium-sized companies that have been
      unable to afford higher-cost traditional applications.•
            Expand Targeted Vertical
      Markets. Critical to our success will be our ability to expand the
      number of vertical markets that we currently address. We believe our focus
      on targeted vertical markets enables us to offer solutions that meet the
      unique needs of our customers. We currently offer our products and
      services primarily to high technology, transportation, construction
      machinery, agricultural equipment, and service companies. We target
      companies within these selected vertical industries that have complex
      products, services, or channel relationships as well as organizations with
      a distributed and connected customer base or dealer
    network.•
            Deepen Relationships with Our
      Existing Customer Base. We believe there is significant opportunity
      to increase our business with existing customers. We seek to attract more
      users from existing customers by targeting additional functional areas and
      business units within the customer’s organization and pursuing
      company-wide deployments. In addition, by continuously enhancing the
      functionality of our product, we believe that customers will continue to
      renew their existing subscriptions and add additional
    users.•
            Expand and Enhance Our Product
      Offerings. We plan to continue to enhance our sales automation
      products and upgrade our implementation process. We are expanding our
      professional services teams while investing in research and development
      activities. In addition, we plan to continue to leverage the significant
      expenditures in research and development and engineering we made before
      changing our business model to a multi-tenant, on-demand
      platform.•
            Pursue Strategic Alliances and
      Acquisitions. We are focused on developing strategic relationships
      to expand our vertical markets, enlarge our customer base, and broaden our
      geographic reach. In addition, we may pursue acquisitions of complementary
      products, technologies, and businesses. We anticipate that these strategic
      alliances and possible acquisitions may focus on products and companies in
      analytics, order management, sales channel management, and product
      lifecycle management.












-2-
 Index




Firepond
CPQ OnDemand




Firepond
CPQ OnDemand has been our primary product focus since its launch in January
2006. Firepond CPQ OnDemand allows our subscribers to build detailed quotes and
proposals customized to their customer’s specific needs in real-time. We enable
a company to manage all the processes, images, and data required to present
product offerings accurately and consistently in the form of highly customized,
branded proposals to prospects and customers across all sales
channels.




Firepond
CPQ OnDemand streamlines a company’s entire configure-price-quote process,
reducing the time to build, price, and present quotes from days or even weeks to
just minutes. Our solution guides our customers’ sales force through each step
of the CPQ process.


•
            Configure. Configuring
      complex products or services involves the selection of many options before
      a product is ready to be priced and built. For example, an agricultural
      tractor has hundreds of models and thousands of options from which to
      choose. The Firepond solution guides the user to recommended model and
      options by asking pre-defined questions and providing pictures, help
      tools, and calculators to assist in making configuration choices. The
      application utilizes constraint options based upon predefined product
      compatibility rules that enable the user to view price, lead time, and
      availability in real-time during the build process. This functionality
      permits the configuration of nested systems that contain multiple products
      or services and supports complex sizing calculations and
      algorithms.•
            Price. Once
      configuration features and options have been selected by the user, our
      software provides pricing information based upon a number of parameters.
      Pricing and discounting rules are seamlessly integrated, incorporating
      customer, channel, volume, and product-specific prices and discounts.
      Furthermore, Firepond CPQ OnDemand calculates costs, margins, and
      commissions and manages special pricing and approval
    workflow.•
            Quote. Our quotation
      and proposal tool determines detailed pricing metrics and creates
      professional, customer-friendly proposals. Proposals are generated in
      Word, Excel, Adobe, PDF, or HTML format with built-in functionality to
      include recommended up-sell options and incorporate drawings, pictures,
      and technical datasheets.




Our
platform enables a customer to build multiple models, reflecting the specific
needs of each marketing and sales channel in which it operates. Each model can
be customized to specific market segments. As a result of this product feature,
our customers are able to service efficiently their product presentation and
proposal generation needs across multiple product lines, geographies, and sales
channels.




Firepond
CPQ OnDemand is built upon a multi-tenant application platform and is designed
to be easy to deploy, use, and upgrade. We have designed an open web service
layer around our product platform, making it easy to integrate with other
business systems in a customer’s operating environment. Our Web Services layer
also supports single sign-on for our subscribers, permitting them to access
Firepond CPQ OnDemand directly and securely from other applications without the
need to re-enter log-in information.




Users
access Firepond CPQ OnDemand either directly or through a CRM application. We
also provide an Offline Edition that allows the preparation of product
configurations and quotes without being connected to the Internet. These product
configurations and quotes can then be uploaded to the Firepond CPQ OnDemand
Online Edition when a connection is available.




Firepond
CPQ OnDemand Workflow is an enhanced feature that automates approval process
notification and tracking, resulting in a faster response to customers while
still adhering to business protocols. A structured approval process, defined by
the company, assures products, quotes, and proposals receive the proper
authorizations before they are presented to a customer.




Professional
Services




We offer
consulting and implementation services and training that complement our
on-demand application service.




Consulting
and Implementation Services




We offer
consulting and implementation services to our customers to facilitate the
adoption of our Firepond CPQ OnDemand application service. Consulting services
consist of services such as business process mapping, project management
services and guidance on best practices in using our solution. Implementation
services include systems integration, configuration and data conversion.
Historically, most of our consulting and implementation engagements have been
billed on a time and materials basis though we have offered a fixed fee
quotation for smaller projects.  We now bill our consulting services
and implementation engagements for the most part on a value-added
basis.




As the
reach of our Firepond CPQ OnDemand service grows, third party providers will
play a more integral part in also providing these consulting and implementation
services to our customers.




Training




We
provide both basic training and advanced-level user instruction, as well
training in setting up and configuring Firepond's powerful
solution.




The
majority of our training engagements are billed on a fixed fee basis.


-3-
 Index


Technology




Infrastructure and
Platform




Unlike
traditional software deployments, all of our customers are serviced from a
single baseline of application code installed, securitized, and maintained at a
secure hosting site. We do not need to allocate technical resources to make our
software compatible with customer environments nor do we need to test our
software in each possible combination of hardware and software services that may
exist in a customer environment. This in turn eliminates the need to develop
software that is compatible with the many hardware systems, operating systems,
and databases in various technical environments and allows our technical
resources to focus solely on enhancing our underlying product functionality.
This enables a frequency of product releases unattainable by traditional
enterprise software development vendors.




Our
customers access our OnDemand software as separate tenants via a single instance
of our application code linked to customer specific data sets. Because we do not
have to manage distinct applications for each of our customers with their own
business logic and database schemas, we believe our business is orders of
magnitude more scalable than traditional software vendors, even those that have
modified their products to be web native applications.




Firepond
CPQ OnDemand is built on our proprietary, highly scalable interactive
configurator suite, or ICS, platform. The ICS platform allows our customers to
logically associate their product data, prices, specifications, dimensions, and
images overlaying business rules and constraints that control the behavior of
the underlying data in a real-time quoting environment. Using the ICS platform,
our customers can build numerous data-rule-constraint based environments to
service the unique needs of all their sales channels, product lines, and
geographies.




Our ICS
technology packages each of these environments into highly compressed and
optimized binary files that reside in computer memory. These packages enable
complex product configuration and price calculations without numerous round
trips to an underlying database and avoid the performance degradation that would
normally occur in a high-volume transaction processing environment.




Architecture




In order
to construct and manipulate the data relationships and rules governing data
behavior specific to each customer environment, we provide our customers with a
sophisticated data modeling tool called the Firepond Product Data Manager, or
PDM. Utilizing the PDM our customers create multi-tiered business rule models
that govern how products are configured, offered, and sold to individual
customers, customer types, or market segments, in both e-commerce and
traditional channels. The PDM modeling capability allows our customers to
construct an enterprise wide normalized product data model that permits data
from outside systems to be integrated into the Firepond environment. Once the
rules, data relationships, and behaviors are constructed in the PDM, our
customers can import both structured and unstructured data from all their sales
and product systems into one centralized, highly optimized system. From a
quotation stored in our application, our customers can export the processed
price and product data back to legacy systems as needed, including a bill of
materials for processing by incumbent order entry systems. As a result of this
flexibility, we can be deployed as either the system of record for all product
and price data or as an adjunct system leveraging existing legacy
functionality.




Building
on two and a half decades of experience in the product configuration business,
we have codified a number of behaviors that, when applied to product and price
data, permit our customers to build highly customized sales scenarios. The
following are some examples from our standard behaviors library:


•
            Compatibility. A
      compatibility rule can be built controlling the selection of options, for
      example option A can only be selected with product Y.•
            Aggregates. A class of
      products or options can be linked, allowing an entire sub-assembly to be
      added based on a selection of a particular product or grouping of
      products. Aggregates behavior is a necessary function for feeding an
      accurate bill of materials to a downstream system.•
            Global Constraints.
      This behavior is used to create a rule that impacts the entire
      configuration. This behavior is useful when a product must have a certain
      option or option group selected to be constructed. For example, in a truck
      configuration, you may be required to select the 24-volt generator to
      support the selected entertainment center in the sleeper
    cab.•
            Spatial Dimension and
      Location. Our configuration engine can calculate the actual
      dimensions of a product as it is being constructed during the quotation
      process. This feature is necessary if there are spatial or weight-related
      constraints that must be adhered to.•
            Includes. “Includes” is
      the ability of the configuration run-time engine to automatically select
      options. This happens when other options are selected or conditions become
      true that force an Include to be activated. Includes can be set up in many
      different ways. For example, you can control whether the end-user is able
      to de-select an included instance.




The
algorithms driving the rules and constraints defining these behaviors are the
result of over $100 million of invested R&D capital. The data behaviors
that we define and control via our application have been developed from
extensive market experience in dealing with very complex product data from some
of the largest manufacturing companies in the world. We believe this deep domain
experience and its expression in our underlying algorithms is both a significant
competitive advantage and a barrier to entry.




Programming
Languages




Our
on-demand software is a highly scalable, multi-tenant application platform
written in or capable of supporting XML, DHTML, C, C++, Java, RMI, and ATL/COM.
In addition to our own proprietary software, we utilize commercially available
software, including Microsoft SQL Server and Inet Soft report generator. To
reduce cost and maintain flexibility, we incorporate open source solutions into
our application programming environment whenever feasible. Currently, we use
open source products from JBoss to augment our workflow capability and manage
our server environment.




-4-
 Index


Operations




Our
operations team is responsible for delivering, maintaining, and supporting our
software-as-a-service platform for our customers. The team oversees network
availability, quality assurance, release deployment, problem detection and
prevention, application availability, data imports and exports, and customer
support.




As a
multi-tenant software-as-a-service provider, all of our customers access a
single baseline of application code via the Internet. This provides us with
significant operational efficiencies as our operations and development teams
support only one instance of application code across our entire customer
footprint. This allows for frequent upgrades and any required software error
resolutions without interruption of service. We continually enhance our core
functionality and usability to address the evolving needs of our customers.
Since commercial availability of our product in January 2006, we have
successfully deployed five (5) major releases and thirty-two (32) minor releases
of our CPQ application. Releases are deployed simultaneously to all of our
customers without the need for any customer involvement. Prior to deployment,
each release undergoes multi-stage testing and substantial quality assurance,
including build acceptance tests, regression test cases, customer integration
tests, and final system verification tests.




Our
software is hosted in two data centers: one in Ashburn, Virginia, managed by
OpSource, and one in Minneapolis, Minnesota, managed by Qwest Communications.
Each of these facilities includes advanced security, power redundancy, and
disaster mediation safeguards, including automatic failover should any network
or hardware component fail. Our service providers are SAS 70 Type II
compliant and conform to all European Union data security
standards.




We
provide continuously available, responsive, and well-trained customer support
personnel who are critical to insuring broad user adoption of any
software-as-a-service offering. Our customer support team consists of
individuals with an average of over seven years experience with our products. We
closely monitor and prioritize all customer-support inquiries and have in place
well-defined escalation procedures.




Professional
Services and Support




We offer
implementation, training, and support to our customers in major markets
worldwide. Using vertically specific implementation templates, our professional
services team expedites the process of bringing our clients onto the network,
saving both costs and time. Our templates help our customers achieve a rapid and
successful deployment of our applications. In addition, our template-driven
approach provides customers with greater flexibility in their implementation
choices when working with our implementation partners, such as
salesforce.com.




Phone
support is available on a 24/7 basis for critical issues. Our technical support
team also provides data maintenance, enhancement, and end-user support services
on a time and materials basis. We have support resources in the United States,
Europe, and Japan.


-5-
 Index




Strategic
Relationships




We seek
to establish strategic relationships with third parties whose products,
technologies, and services complement our offerings. We work with industry
leaders that assist in joint sales activities and customer implementations. We
collaborate with partners, such as salesforce.com and Kozo Keikaku Engineering,
or KKE.


•
            salesforce.com
      is the leading provider of on-demand sales automation software with more
      than 47,000 customers, ranging in size from several users to thousands of
      users. Pursuant to our relationship, we have integrated our CPQ
      application with salesforce.com and in exchange receive leads to
      additional customers. Through the salesforce.com AppExchange, we engage in
      a variety of co-selling activities, ranging from webinars to joint sales
      presentations.•
            KKE
      is one of the largest engineering firms in Japan providing consulting
      services to manufacturers throughout Japan and Asia. KKE resells and
      implements our products, on a non-exclusive basis, in the Japanese
      market.




Sales
and Marketing




We market
our products through direct and indirect channels. The recent increased interest
in CPQ applications combined with the acceptance of the on-demand business model
have created opportunities for strategic relationships with salesforce.com, KKE,
and other enterprise application providers, which we are actively pursuing. We
continually drive market awareness and develop leads in our target markets
through a series of integrated sales and marketing campaigns. We utilize a
variety of programs to support our sales efforts, including market and product
research analysis, product and strategy updates with industry analysts, public
relations activities and speaking engagements, Internet-based and direct mail
marketing programs, seminars and trade shows, brochures, data sheets and white
papers, and web site marketing.




Customers




We target
selected vertical industries with complex products, services, or channel
relationships as well as organizations with a distributed and connected customer
base or dealer/broker network. Target vertical markets for our software
currently consist of high technology, transportation, construction machinery,
agricultural equipment, and service companies. Our current customers include
Bell Helicopter, Alcan Cable (Division of Alcan Products), Cummins, Inc., Deere
& Co., G.E. Equipment Services Europe BV, Redback Networks, Rolls Royce
Motor Cars, SRI Surgical, and Symantec Corporation.




The
following table highlights select customers in each of our current target
markets.







High
      Technology
            
            Construction,
      Machinery
            
            Transportation
            
            Serviceand
      Agricultural EquipmentCommvault
      Systems, Inc.
            
            CNH
      North America
            
            Bell
      Helicopter/Textron
            
            Alcan
      CableDecru/Network
      Appliance
            
            Deere
      & Co.
            
            DAF
      Trucks N.V.
            
            BroadSoft,
      Inc.RedBack
      Networks
            
            Cummins,
      Inc.
            
            Freightliner
      Corporation
            
            GenBand,
      Inc.SecureLogix
      Corporation
            
            Kozo
      Keikaku Engineering, Inc.
            
            GE
      Equipment Services Europe BV
            
            Independent
      Health AssociationSonitrol
      Corporation
            
            Steelcase
      International
            
            Hino
      Motor Sales USA, Inc.
            
            Misys
      plcSony
      Professional Services
            
            
            
            Kelvin
      Hughes Limited
            
            Perimeter
      SecuritySymantec
      Corporation
            
            
            
            Rolls
      Royce Motor Cars Ltd.
            
            SRI/Surgical
      Express, Inc.Symyx
      Technologies, Inc.
            
            
            
            Renault
      TrucksTumbleweed
      Communications








The
following customers accounted for more than five percent (5%) of our revenues in
fiscal 2007 and 2008:







2007
            
            2008DAF
      Trucks N. V.
            
            DAF
      Trucks N. V.Deere
      & Co.
            
            Deere
      & Co.GE
      Equipment Services Europe BV
            
            Horizon
      BCBSHorizon
      BCBS
            
            Kozo
      Keikaku Engineering, Inc.Kozo
      Keikaku Engineering, Inc.
            
            Symantec
      CorporationSymantec
      Corporation







-6-
 Index




Research
and Development




Our
research and development team is responsible for product planning, design and
development, network upgrade and quality assurance functions, third-party
integration, and developing data templates for target vertical markets. We
incurred research and development expenses of approximately $2.1 million
and $1.8 million in the fiscal 2007 and 2008, respectively. We expect to
continue to invest in research and development in the future.




Competition




The
markets for sales configuration software are intensely competitive, constantly
evolving, and subject to rapid technological change. We encounter competition
from a number of different sources, including in-house technical staffs,
traditional customer relationship management vendors, enterprise license
planning vendors, and other vendors of sales configuration point solutions. Of
these vendors, our principal competitors include Access Commerce, Big Machines,
Cincom, Oracle, N-Site, QuoteWerks, SAP, Selectica,, and Webcom. A number of our
competitors have longer operating histories, greater name recognition, and
substantially greater financial, technical, marketing, management, and support
resources than we do. There are a substantial number of other companies focused
on providing on-demand software applications for customer relationship
management that may offer competitive products in the future. However, we
believe that the market for on-demand sales configuration solutions is still in
its formative stage and that no currently identified competitor represents a
dominant presence in this market.




We expect
competition to increase as a result of software industry consolidation. For
example, a number of enterprise license software companies have acquired point
solution providers to expand their product offerings. Our competitors may also
package their products in ways that may discourage users from purchasing our
products. Current and potential competitors may establish alliances among
themselves or with third parties or adopt aggressive pricing policies to gain
market share. In addition, new competitors could emerge and rapidly capture
market share. Although we believe we have advantages over our competitors in
terms of the functionality and comprehensiveness of our solution, as well as our
targeted vertical focus, we may be unable to maintain our competitive position
against current and potential competitors.




We
believe that the principal competitive factors in our target markets
include:


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









Proprietary
Rights




We regard
our products as proprietary. We attempt to protect our products by relying on 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 and copyrights in our business. We hold over 200
copyrights related to our business. In addition, we own four trademark
registrations in the United States. Federal registration of a trademark enables
the registered owner of the mark to bar the unauthorized use of the registered
mark in connection with similar products in the 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 the area where the unauthorized use occurs.
We have filed applications and own trademark registrations and intend to
register additional trademarks in foreign countries where products are or may be
sold in the future. We own one trademark registration in each of the European
Union, Japan and Korea. We believe these trademarks and copyrights constitute
valuable assets, adding to our recognition and the marketing of our products and
that these proprietary rights have been and will continue to be important in
enabling us to compete.


-7-
 Index




Our
software products depend on a non-exclusive worldwide license from Clear with
Computers, LLC, formerly known as Orion IP, LLC,, to utilize certain critical
patents and related rights in connection with the conduct of our business. In
January 2004, a predecessor company also named “Firepond, Inc.” (hereinafter,
“Old Firepond”) sold to Clear with Computers all rights in 14 U.S. patents
and seven U.S. patent applications, including patents for methods and
technology used by Old Firepond in its software as well as those unrelated to
Old Firepond’s products.  Pursuant to a non-exclusive patent license
agreement, in March 2004 Clear with Computers granted to Old Firepond a
non-exclusive, royalty free, non-transferable, worldwide license to use certain
of these patents solely in connection with Old Firepond’s products and business,
without the right to sublicense.  Under the terms of the license,
these rights will continue, subject to certain limitations,  with
respect to each patent licensed to Old Firepond until such patent is no longer
in force.  In September 2005 we acquired all of the operating assets
of Old Firepond, including its software products and the license to use certain
patents owned by Clear with Computer’s in our business.




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




Employees




At
August 31, 2008, we had a total of 40 employees, of whom 17 were in
research and development, 9 were in professional services and support, 6 were in
sales and marketing, and 8 were in finance and administration.




We
believe our future success and growth will depend on our ability to attract,
motivate and retain qualified employees in all areas of our business. None of
our employees is represented by a labor union. We consider our relationship with
our employees to be good. However, we face competition for qualified employees,
and we expect to face continuing challenges in recruiting and
retention.




Corporate
Information




We were
incorporated in Delaware in August 2005 as FP Technology Holdings, Inc to
acquire most of the assets and some of the liabilities of our predecessor
company, Old Firepond.  On June 18, 2007 we changed our name to
“Firepond, Inc.”




We
maintain our principal executive offices at 11 Civic Center Plaza, Suite 310,
Mankato, Minnesota 56001 and our telephone number at that location is (507) 388
0400. Our website is www.firepond.com. Information on our website does not
constitute part of this annual report.   Our common stock, par
value $0.001 per share, is quoted on the Over-the-Counter Bulletin Board under
the symbol “FPND.”


-8-
 Index


Recent Events







FUNDING
AGREEMENT:


Pursuant
to the Common Stock Purchase Agreement, dated as of April 24, 2008 (the "Stock
Purchase Agreement"), FP Tech Holdings, LLC, a Texas limited liability company
(“FP Tech”) and affiliate of the Firepond’s majority shareholder group, was
granted by us an option to purchase approximately 357,143 shares of Common Stock
at a purchase price of no more than $1.40 per share with gross cash proceeds to
us of at least $500,000 (the "July Financing").





As part
of an agreement, entered into as of August 7, 2008 (the “Funding Agreement”)
that included the exercise of FP Tech’s option underlying the July Financing,
the holders of the Company’s secured notes (“Investors”) agreed to exchanged
their notes in certain circumstances which circumstances include exercise by FP
Tech of an option to invest additional equity in the Company and our election to
extend the maturity of our secured notes (the “Transaction”).





The
Transaction outlined by the Funding Agreement is described below:





A.
            EXERCISE OF JULY
      FINANCING OPTION:





·
            On
      August 12, 2008, FP Tech purchased pursuant to the Stock Purchase
      Agreement 357,143 shares of Common Stock at $1.40 per shares, in full
      satisfaction of the July Financing (the "Initial
  Funding").





B.
            ADDITIONAL
      FUNDING:





·
            Beginning
      on August 13, 2008, and for a period extending through June 30, 2009, the
      Company granted to FP Tech or its assigns, an option to purchase, at an
      exercise price of $1.40 per share of Common Stock (such amount, the "AF
      Purchase Price"), a total of $1.5 million in aggregate amount of Common
      Stock (the "Additional Funding").





C.
            EXCHANGE
      ELECTION:





·
            During
      the period commencing on the closing of the Additional Funding and ending
      on the earlier to occur of (a) June 30, 2009 and (b) the fifth (5th)
      Business Day following the closing of the Additional Funding, the Company
      may, by written notice to each of the Investors during such period, elect
      to consummate the Exchange Election (as defined
  below).





D.
            SENIOR SECURED
      CONVERTIBLE NOTES DUE DECEMBER 31, 2009 (“Exchanged CAP
      Notes”):   Upon exercise of the Exchange
      Election:





·
            Maturity
      – the Company’s Exchanged CAP Notes will be exchanged for new notes (the
      “New Exchanged CAP Notes”) with a Maturity Date of December 31,
      2010.·
            Interest
      - Interest on the principal balance outstanding from time to time of the
      New Exchanged CAP Notes accruing at the rate of 12% per annum after
      December 31, 2009 shall be due and payable quarterly in arrears on the
      second business day following the end of each fiscal quarter end beginning
      March 31, 2010 through the Maturity
Date.





·
            Conversion
      Price - The Conversion Price of the New Exchanged CAP Notes shall be $2.00
      per share of Common Stock.·
            Certain
      Definitions – the definition of “Excluded Securities” in the New Exchanged
      CAP Notes shall be amended to provide that the Additional Funding will not
      cause any adjustment in the Conversion Price of the New Exchanged CAP
      Notes.





E.
            WARRANTS TO PURCHASE
      COMMON STOCK (“Exchanged CAP Warrants”): Upon exercise of the
      Exchange Election:





·
            The
      Company shall exchange the Exchanged CAP Warrants issued in connection
      with the Exchanged CAP Notes for new warrants to purchase Common Stock
      (the "New Exchanged CAP Warrants"), which will be identical to the
      Exchanged CAP Warrants except that the Exercise Price of such warrants
      shall be $2.00 per share of Common
Stock.





F.
            SENIOR SECURED
      SUBORDINATED NOTES DUE JULY 1, 2009 (the “Exchanged Bridge Notes”):
      Upon exercise of the Exchange
Election:




·
            The
      Company shall exchange  the Exchanged Bridge
      Notes  for (x) a number of shares of Common Stock (the "New
      Exchanged Common Shares") determined according to the following
      formula:





Original
Principal Amount of the Exchanged Bridge Notes of each Exchanged Bridge Note
holder / (AF Purchase Price X 1.1) X 0.1





and (y)
senior secured notes identical to the Exchanged Bridge Notes (the "New Exchanged
Bridge Notes"), except as follows:





i)
            Maturity
      Date – The Maturity Date in the New Exchanged Bridge Notes shall be July
      1, 2010.ii)
            Interest
      - Interest accruing on the principal balance of the New Exchanged Bridge
      Notes at the rate of 15% per annum beginning July 2, 2009 shall be due and
      payable quarterly in arrears on the second business day following the end
      of each fiscal quarter end beginning September 30, 2009 through the
      Maturity Date.





G.
            WAIVER OF EXISTING
      DEFUALTS:





·
            Upon
      closing the Initial Funding all existing defaults under the Exchanged CAP
      Notes and the Exchanged Bridge Notes were
  waived.




-9-
 Index




Available
Information




You can
obtain copies of this Form 10-K and previous filed Annual Reports on Form
10-KSB, Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K, and other
filings with the Securities and Exchange Commission (“SEC”), and all amendments
to these filings, free of charge from our Web site at http://www.firepond.com/company/investor/
as soon as reasonably practicable following our filing of any of these reports
with the SEC. You can also obtain copies free of charge by contacting our
Investor Relations department at the office address described
above.  Moreover all our filings at the SEC are available at the
following link:   http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001012316&owner=include&count=10







ITEM 1B.
            UNRESOLVED
      STAFF COMMENTS




None.




ITEM2.
            PROPERTIES





We
currently lease space in three commercial properties. Our principal executive
offices and operations are located in 7,491 square feet of space in
Mankato, Minnesota under a lease expiring on February 28, 2011. We also
lease 4,467 square feet of space in Framingham, Massachusetts under a lease
expiring on August 31, 2010. We have vacated the Framingham space and are
negotiating a settlement with the landlord.   We also lease
1,800 square feet of space in Beverly Hills, California under a lease that
expires in January 2009.  However, the payments on the Beverly Hills,
California lease are presently being paid directly by the Company’s former
Chairman of the Board.




We
believe that our existing facilities and offices are adequate to meet our
requirements for the foreseeable future.  If we require additional
space, we believe that we will be able to obtain such space on acceptable,
commercially reasonable terms.




ITEM3.
            LEGAL
      PROCEEDINGS







Our
predecessor, Old Firepond, is subject to a securities class action related to
its initial public offering. See Note 10 to our Consolidated Financial
Statements for fiscal 2008.





Additionally,
we are involved in various legal proceedings arising from the normal course of
business activities. In our opinion, resolution of these matters is not expected
to have a material adverse impact on our consolidated results of operations,
cash flows or our financial position. However, depending on the nature and
timing of any such dispute, an unfavorable resolution of a matter could
materially affect our future results of operations, cash flows or financial
position in a particular period.





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




No
matters were submitted to a vote of security holders during the fourth quarter
of fiscal 2008.




-10-
 Index


ITEM4A.
            EXECUTIVE
      OFFICERS OF THE REGISTRANT




The
following sets forth certain information as of June 30, 2008 regarding our
executive officers:




Name
            
            Age
            
            PositionL.
      Bradlee Sheafe
            
            40
            
            PresidentStephen
      Peary
            
            59
            
            Vice
      President, General CounselWilliam
      P. Stelt
            
            60
            
            Vice
      President, Chief Financial OfficerJames
      Scheper
            
            53
            
            Vice
      President, Sales and MarketingCraig
      Christiansen
            
            43
            
            Vice
      President, Technology and Implementation




L. Bradlee
Sheafehas
served as our President since May 2008. Mr. Sheafe is also President of TechDev
Holdings, LLC.   TechDev Holdings LLC is the sole member of FP
Tech Holdings, LLC.  Mr. Sheafe joined TechDev Holdings on May 12,
2008.  Prior to joining TechDev Holdings, Mr. Sheafe served as a
Special Agent with the Federal Bureau of Investigation since
1997.   Mr. Sheafe’s focus at the Federal Bureau of Investigation
was criminal and national security cyber investigations.  Most
recently he was the FBI Liaison to the National Center for Supercomputing
Applications.  Mr. Sheafe is a 1990 graduate of the United States Air
Force Academy and served as an officer in the United States Air Force from 1990
to 1997.  Mr. Sheafe was a Captain at the time of his departure from
the U.S. Air Force.




Stephen
Pearyhasserved
as our Vice President, General Counsel since May 2008. He has served as the
Company’s Secretary since April 2005.  He served as the Chief
Financial Officer of the Company or its predecessor (also named Firepond, Inc.)
from April 2005 until May 2008. He has assisted the Company in its transition to
an OnDemand Saas software provider and has led the Company through several
financings and registrations culminating in the most recent debt restructuring
and equity raise that closed on August 12, 2008.   He consulted
for that predecessor company regarding restructuring operations, finance, audit
and insurance matters from September 2004 until April
2005.   From 2001 to 2005, Mr. Peary served as Managing
Director of Stinson Capital Management, Ltd. and its affiliates managing
investment portfolios and financing marine and energy related assets. From 1997
to 2001 he served as Managing Director of Liverpool & London Protection
and Indemnity Association, a mutual manager of marine assets and liability risks
located in Liverpool, England. From 1987 to 1997, Mr. Peary served as
Senior Vice President at PLM International, Inc., a public company, manager of
diversified investment portfolios focused on transportation related equipment,
including ships, commercial aircraft, marine containers, and oil drilling rigs.
Mr. Peary holds a Bachelor of Arts degree in Economics from the University
of Illinois, a Juris Doctorate degree from Georgetown University Law School and
an LLM in Taxation from Boston University.




William P. Stelthas served as our Vice President, Chief Financial Officer since May
2008.   Mr. Stelt previously held the position of
Controller.  Mr. Stelt joined the Company in November 2005 serving
first as a consultant and then becoming Controller in April
2006.  During the previous five years Mr. Stelt was employed in
similar accounting and finance capacities in both private and public
companies.  His responsibilities have encompassed all aspects of
accounting and include SEC reporting, procuring financing, as well as managing
human resources, risk management, information technology and general and
administrative departments.  As Treasurer for Western Gas Resources, a
NYSE listed oil and gas company, Mr. Stelt participated in two initial public
offerings.  During his tenure annual revenues at Western Gas Resources
grew from less than $10 million to more than $1 billion.  From
February 2005 through October 2005, Mr. Stelt served as chief financial officer
for AFG Enterprises USA, Inc. (“AFG Enterprises”), a shell company that was
merged into the Company in March 2006.  From July 2003 to February
2005, Mr. Stelt consulted to AFG Enterprises on accounting and financial
matters.   Mr. Stelt is a former certified public accountant but
does not hold an active certificate.  Mr. Stelt has a Bachelor of
Science degree in accounting from California State University at
Northridge.




James Scheperhas served as our Vice President of Sales and Marketing since
2004.  Mr. Scheper brings over 20 years experience working for high
technology companies and a track record of putting successful sales teams in
place resulting in rapid revenue growth.  He helped lead a successful
transition from the Company’s legacy enterprise software market to the current
SaaS based On-Demand delivery business model.  He has spearheaded strategic
customer acquisitions and Firepond’s leading partnership with
Salesfoce.com.  Prior to joining Firepond, Mr. Scheper managed sales teams
and sales plans for large software developers such as BroadVision Inc, eGain
Communications, and Vignette Inc.  Mr. Scheper also has held various
positions in the technology marketplace including sales executive, vice
president of sales, marketing and business development positions for well
respected companies.   Mr. Scheper has a Bachelor of Science in
Business Administration from Wright State University, and also attended Harvard
Business School Management Retreats and Seminars.




Craig
Christiansen has served as our Vice President, Technology and
Implementation since May 2008.  Mr. Christiansen has primary
responsibility for onboarding the Company’s new customers to our Firepond CPQ tm
OnDemand, multi-tenant solution that automates complex sales processes, improves
order accuracy, and accelerates sales cycles.  He also oversees the
Company’s product development.  Mr. Christiansen, a 22-year employee
of Firepond, was formerly head of Research and Development.  Mr.
Christiansen earned a Bachelor of Science in Computer Science from Minnesota
State University – Mankato in 1986.







-11-
 Index





PART
II




ITEM5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES




Market
Information for Common Stock




Since
July 10, 2007, our common stock has been quoted on the OTC
Bulletin Board under the symbol “FPND.” From on or about July 6, 2006
to July 9, 2007, our common stock was quoted on the OTC Bulletin Board
under the symbol “FPTI.” From June 9, 2006 to on or about July 5,
2006, our common stock was quoted on the OTC Bulletin Board under the
symbol “AFGU.”




The
following table sets forth for the indicated periods the high and low sales
prices of our common stock as reported by the Over-the Counter Bulletin
Board.




High
            
            LowFiscal
      year ending June 30, 2007First
      quarter
            
            $
            6.50
            
            $
            2.50Second
      quarter
            
            $
            13.00
            
            $
            7.25Third
      quarter
            
            $
            10.75
            
            $
            8.25Fourth
      quarter
            
            $
            9.00
            
            $
            5.50Fiscal
      year ending June 30, 2008First
      quarter
            
            $
            7.50
            
            $
            5.00Second
      quarter
            
            $
            4.00
            
            $
            1.01Third
      quarter
            
            $
            4.00
            
            $
            1.40Fourth
      quarter
            
            $
            1.40
            
            $
            0.40




The last
reported sale price of our common stock on August 29, 2008 on the OTC
Bulletin Board was $0.45 per share.




There
currently is a very limited public market for our common stock and no assurance
can be given that a large public market will develop in the future.  The
trading market for our common stock is extremely thin.  In view of the lack
of an organized or established trading market for the common stock and the
extreme thinness of trading in our stock, the prices reflected on the chart as
reported on the Over-the-Counter Bulletin Board may not be indicative of the
price at which any prior or future transactions were or may be effected in the
common stock.  Stockholders are cautioned against drawing any conclusions
from the data contained herein, as past results are not necessarily indicative
of future stock performance.




Dividend
Policy




We have
never paid any cash dividends on our common stock.   Our board of
directors currently intends to retain any future earnings to support operations
and to finance the growth and development of our business and does not intend to
pay cash dividends on our common stock for the foreseeable future. Any future
determination related to our dividend policy will be made at the discretion of
our board of directors.




Stockholders




We
estimate that there were approximately 625 record holders of our common stock as
of August 31, 2008, which does not include an indeterminate number of
stockholders whose shares may be held by brokers in street name.




Securities
Authorized for Issuance under Equity Compensation Plans




The
information concerning our equity compensation plans is incorporated by
reference herein to the section of the Proxy Statement entitled “Equity
Compensation Plan Information.”


-12-
 Index


Stock
Performance Graph




The
following shall not be deemed incorporated by reference into any of our other
filings under the Securities Exchange Act of 1934, as amended, or the Securities
Act of 1933, as amended, except to the extent we specifically incorporate it by
reference into such filing.




The graph
below compares the cumulative total stockholder return on our common stock with
the cumulative total return on the Wilshire 5000 Index and the Nasdaq
Computer & Data Processing Index for the period beginning on March 31,
2006 (the day after the date our common stock commenced trading on the Pink
Sheets) through June 30, 2008, assuming an initial investment of $100. Data for
the Standard & Poor’s 500 Index and the Nasdaq Computer & Data
Processing Index assume reinvestment of dividends.




The
comparisons in the graph below are based upon historical data and are not
indicative of, nor intended to forecast, future performance of our common
stock.




Comparison
of Cumulative Total Return of Firepond, Inc.











3/31/06
            6/30/06
            9/30/06
            12/31/06
            3/31/07
            6/30/07
            9/30/07
            12/31/07
            3/31/08
            6/30/08Firepond,
      Inc.
            -
            7.50
            7.25
            10.75
            9.00
            7.50
            4.00
            4.00
            1.40
            0.45Nasdaq
      Computer & Data Processing Index
            1,003.80
            917.77
            990.49
            1,052.81
            1,046.44
            1,152.54
            1,213.95
            1,282.91
            1,024.38
            1,074.42Wilshire
      5000 Index
            13,155.00
            12,849.30
            13,383.30
            14,257.50
            14,409.30
            15,210.70
            15,362.00
            14,819.60
            13,332.00
            13,073.50




-13-
 Index







Recent
Sales of Unregistered Securities




On August
12, 2008, pursuant to a Stock Purchase Agreement, dated April 24, 2008, we sold
357,143 shares of common stock to FP Tech Holdings, LLC (together with its
affiliates, “FP Tech”) for $1.40 per share, or an aggregate amount of
$500,000.  As part of this sale, we granted to FP Tech an option to
purchase an additional $1.5 million of common stock.  The option must
be exercised prior to June 30, 2009.  The exercise price of the option
is $1.40 per share.    See, Item 1, Business, Recent Events
– Funding Agreement.







ITEM 6.
            SELECTED
      FINANCIAL DATA




The
following selected consolidated financial data should be read in conjunction
with our audited consolidated financial statements and related notes thereto and
with Management’s Discussion and Analysis of Financial Condition and Results of
Operation, which are included elsewhere in this Form 10-K. The consolidated
statement of operations data for fiscal 2007 and 2008, and the selected
consolidated balance sheet data as of June 30, 2008 and 2007 are derived from,
and are qualified by reference to, the audited consolidated financial statements
and are included in this Form 10-K.




Statement
      of operations data (in thousands):
            
            2007
            
            
            2008OnDemand
      revenue
            
            $
            2,170
            
            
            $
            2,329Enterprise
      revenue
            
            
            2,455
            
            
            
            2,375Total
      revenue
            
            
            4,625
            
            
            
            4,704Cost
      of revenue
            
            
            1,782
            
            
            
            1,983Gross
      profit
            
            
            2,843
            
            
            
            2,721Selling
      and marketing
            
            
            1,795
            
            
            
            1,935Research
      and development
            
            
            2,114
            
            
            
            1,767General
      and Administrative
            
            
            4,914
            
            
            
            3,700Impairment
      of goodwill expense
            
            
            -
            
            
            
            4,772Restructuring
      and other special charges
            
            
            (14)
            
            
            
            86Settlement
      of claims
            
            
            (148)
            
            
            
            -Operating
      loss
            
            
            (5,818)
            
            
            
            (9,539)Interest
      expense
            
            
            (5,040)
            
            
            
            (4,867)Extinguishment
      of debt expense
            
            
            (13,705)
            
            
            
            -Other
      income (expense)
            
            
            1,293
            
            
            
            52Net
      income (loss)
            
            
            (23,270)
            
            
            
            (14,354)Reconciliation
      of net income (loss) to normalized EBITDA (in thousands):Net
      income (loss)
            
            
            (23,270)
            
            
            
            (14,354)Legal
      settlement
            
            
            (148)
            
            
            
            -Interest
      expense
            
            
            5,040
            
            
            
            4,867Other
      income
            
            
            (1,293)
            
            
            
            (52)Depreciation
      and amortization
            
            
            1,346
            
            
            
            1,028Non-recurring
      expenses (1)
            
            
            13,705
            
            
            
            4,772Normalized
      EBITDA
            
            $
            (4,620)
            
            
            $
            (3,739)






(1)
            Debt
      extinguishment expense in 2007 and impairment expense of goodwill in
      2008




-14-
 Index


General
and Administrative expenses include the following amounts related to stock-based
awards.





2007
            
            
            2008General
      and administrative
            
            $
            1,216
            
            
            $
            978Total
      stock-based expenses
            
            $
            1,216
            
            
            $
            978








We
account for stock-based compensation under Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), referred to as SFAS 123R. We
recognize the fair value of our stock awards on a straight-line basis over the
requisite service period of the award, which can vary from 18 to 60 months, the
vesting term.





We
recognized stock-based expense of $978,000, or 20.8% percent of revenue, during
fiscal 2008 as compared to $1,216,000 or 26.3% in the prior fiscal period. The
requirement to expense stock-based awards will continue to reduce our reported
results of operations. As of June 30, 2008, we had an aggregate of $88,000 of
stock compensation remaining to be amortized to expense over the remaining
requisite service period of the underlying awards. We expect to issue
share-based awards to our employees in future periods.







For all
periods, we granted employees options to purchase shares of common stock at
exercise prices equal to the fair value of the underlying common stock at the
time of grant, as determined by our Board of Directors. To determine the fair
value of our common stock, our Board of Directors may consider many factors, but
has determined the primary factor in determining the fair value of stock based
compensation awards is the price of our common stock on the market closing
immediately prior to the date of any
option or share grant, or in the event there is no trading in our common stock
during trading hours of the immediate prior market close, then the last bid
price for our common stock during such trading hours.









As of June 30,Balance
      Sheet Data (in thousands):
            
            2007
            
            
            2008Cash
      and equivalents
            
            $
            690
            
            
            $
            113Working
      capital (deficit)
            
            
            (1,673)
            
            
            
            (1,868)Total
      assets
            
            
            8,720
            
            
            
            2,467Long
      term debt
            
            
            1,368
            
            
            
            6,722Total
      stockholders’ equity (deficit)
            
            
            2,849
            
            
            
            (7,817)




-15-
 Index




ITEM 7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS







Our
discussion includes forward-looking statements, which involve certain risks and
uncertainties.  Certain statements in the “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” are forward-looking
statements that involve risks and uncertainties. Words such as anticipates,
expects, intends, plans, believes, seeks, estimates, and similar expressions
identify such forward-looking statements. The forward-looking statements
contained herein are based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from these
expressed in such forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those set forth under
“Overview”  and “Liquidity and Capital Resources” included in these
sections and those appearing elsewhere in this Form10-K. Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect
management’s analysis only as of the date hereof.  We assume no
obligation to update these forward-looking statements to reflect actual results
or changes in factors or assumptions affecting forward-looking
statements.   Rounding of figures for presentation purposes
sometimes results in inconsistent results for comparison purposes.  We
believe these inconsistencies to be immaterial.





Overview





We are a leading provider of
multi-tenant, on-demand software that automates and simplifies the process
companies use to sell complex products and services. Our Configure, Price,
Quote, or CPQ, software-as-a-service automates complex sales processes, improves
order accuracy, and accelerates sales cycles. We have designed our CPQ product
to be a low-cost Internet-based software application delivered on a subscription
basis. This model allows us to provide functionality to companies of all sizes
that have typically been available only to large enterprises with substantial
information technology resources and budgets. Our Firepond CPQ OnDemand product
offering capitalizes on our extensive expertise in sales automation software and
combines it with the positive attributes of multi-tenant, Internet-based
delivery.




We offer
our solutions on an annual or multi-year subscription basis. We sell our
products by targeting selected vertical markets, currently consisting of high
technology, transportation, construction machinery, agricultural equipment, and
service companies selling complex products and services. Our current customers
include Bell Helicopter, Alcan Cable (Division of Alcan Products), Cummins,
Inc., Deere & Co., G.E. Equipment Services Europe BV, Redback Networks,
Rolls Royce Motor Cars, SRI Surgical, and Symantec Corporation.




Fiscal
Year




Our
fiscal year ends on June 30. References to fiscal 2008, for example, refer to
the fiscal year ended June 30, 2008.






Recent Events




See Item 1, Business, Recent Events –
Funding Agreement




Financial
Condition




At June
30, 2008, we had net assets of a negative $7.8 million compared with net assets
of $2.8 million at June 30, 2007. The decrease was primarily a consequence
of operating results plus non-cash interest expense arising from the Master
Exchange Agreement executed on January 24, 2007 under which we issued new
debt and warrants, which resulted in a debt discount of
$5.6 million.  See, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Company
Financings.”Over the course of the note period, the
discount will be recognized as interest expense and the indebtedness will
accrete to become the amount of the obligation due of $5.3 million, as
adjusted.  From fiscal 2007 to fiscal 2008 $2.4 million of the debt
discount was recorded as interest expense resulting in a corresponding increase
to outstanding indebtedness.    In addition the Company
wrote off Goodwill in the amount of $4.8 million pursuant to the provisions of
FAS 142 as impairment expense.  Accounts payable at June 30, 2008 were
approximately $715,000 compared with approximately $570,000 at June 30, 2007.
Accrued liabilities were $1.1 million at June 30, 2008 compared with
$1.3 million at June 30, 2007. The decrease results primarily from reversal
of a $200,000 accrued liability resulting from a favorable
settlement.  Short-term notes payable were $35,000 at June 30, 2008
compared with $1.1 million at June 30, 2007. The decrease results from the
restructuring of the CAP Financing in January 2007.  We had a working
capital deficit of $1.9 million at June 30, 2008 compared with a working capital
deficit of $1.7 million at June 30, 2007.




The
accompanying consolidated financial statements have been prepared by us on a
going concern basis. As such, the statements anticipate the realization of
assets and the liquidation of liabilities in the normal course of
business.   Notwithstanding, we have, for some time, been
incurring losses and negative cash flow from operations. For the fiscal 2008 and
fiscal 2007, we incurred net losses of approximately $14.4 million and $23.3
million, respectively, and negative cash flows from operations of approximately
$4.9 and $5.4 million, respectively. Moreover, while demand for our on-demand
applications seems to be growing, it is not clear at this point that future
operational cash flow will be sufficient to sustain present operations and meet
debt obligations that mature in the next twelve months.  We are,
therefore, likely to require additional capital either in the form of new debt,
renegotiation of existing debt facilities or equity infusions.




In the
past, we have been successful in completing numerous rounds of financing,
including a $7.0 million PIPE Financing in August 2006, the January 2007
restructuring of the CAP Financing, providing $3.5 million net proceeds, the
August 2007 short-term debt financing providing $3.0 million net proceeds, the
April 2008 common stock financing providing $1.5 million net proceeds, and the
August 2008 common stock financing providing $500,000 in gross
proceeds.   However, no assurances can be given that additional
financing will be available, in which case, our ability to achieve our business
objectives may be adversely affected.  The accompanying consolidated
financial statements do not include any adjustments that might result from such
adverse outcomes.


-16-
 Index




Sources
of Revenues




We derive
Firepond CPQ OnDemand revenues from two sources: (1) subscription revenues,
which are comprised of subscription fees from customers accessing our on-demand
application service, and from customers purchasing additional support beyond the
standard support that is included in the basic subscription fee and
enhancements; and (2) related professional services and other revenues,
including training fees. Subscription and support revenues accounted for
approximately 49 percent of our total revenues during fiscal 2008. Subscription
revenues are driven primarily by the number of paying subscribers
of our service and the subscription price of our service.  Four of our
customers individually accounted for 5 percent or more of our OnDemand revenues
during fiscal 2008. In fiscal 2007 two of our customers individually accounted
for 5 percent or more of our OnDemand revenues.




Subscription
and support revenues are recognized ratably over the contract terms beginning on
the commencement dates of each contract. The typical subscription and support
term is 12 to 36 months, although some terms may be longer.  Rarely
are subscription contract terms shorter than 12 months.   Our
subscription and support contracts are noncancelable, though customers typically
have the right to terminate their contracts for cause if we materially fail to
perform. We generally invoice our customers in advance, in annual or quarterly
installments, and typical payment terms provide that our customers pay us within
30 days of invoice. Amounts that have been invoiced when the customer has a
legal obligation to pay are recorded in accounts receivable and in deferred
revenue. In general, we collect our billings in advance of the subscription
service period.




Professional
services and other revenues consist of fees associated with consulting and
implementation services and training. Our consulting and implementation
engagements have historically been typically billed on a time and materials
basis. We also offer classes on implementing, using and administering our
service that are billed on a per consultant, per diem basis though we may
occasionally bill for training on a fixed fee basis depending on the terms of
the subscription agreement. Presently, we bill our consulting and implementation
services on a value-added basis.  Our typical payment terms provide
that our customers pay us within 30-90 days of invoice.




We
generate enterprise revenue by selling licenses to third parties and maintaining
and servicing legacy enterprise license clients. Our resources are no longer
focused on generating new enterprise revenue.




Cost
of Revenues and Operating Expenses




Cost of Revenues. Cost of
subscription and support revenues primarily consists of expenses related to
hosting our service and providing customer support, data communications
expenses, salaries and benefits of operations and support personnel, and
software license fees. Our recent operational restructuring eliminated
approximately $473,000 in annual professional services
costs.   We allocate employee benefit costs to all departments
based on headcount. As such, employee benefit expenses are reflected in each
cost of revenue and operating expense category.  Cost of professional
services and other revenues consists primarily of employee-related costs
associated with these services, including the cost of subcontractors and
allocated employee benefit costs. The cost associated with providing
professional services is significantly higher as a percentage of revenue than
for our on-demand subscription service due to the labor costs associated with
providing professional services.





We expect
the cost of on-demand revenue to decrease as a percentage of revenue; however,
it could fluctuate period-to-period depending on the growth of our services
business and any associated increase in costs relating to the delivery of
services and the timing of significant expenditures. We intend to continue to
invest additional resources in our on-demand application service and in our
consulting services. The timing of these additional expenses will affect our
cost of revenues, both in terms of absolute dollars and as a percentage of
revenues, in a particular quarterly period.


-17-
 Index


Sales and Marketing. Sales
expenses consist primarily of salaries, commissions, and bonuses for sales and
marketing personnel, and promotional expenses.   Marketing
programs consist of advertising, events, corporate communications and brand
building and product marketing activities.    Our recent
operational restructuring eliminated approximately $489,000 in annual marketing
expenses.   However, we may further invest in marketing and sales
by, among other things, increasing the number of direct sales personnel to meet
new customer demand and increase penetration within our existing customer base,
developing new distribution partnerships, expanding our domestic and
international selling and marketing activities, building brand awareness and
sponsoring additional marketing events. We expect that in the future, sales and
marketing expenses will increase in absolute dollars.




Research and Development.
Research and development expenses consist primarily of salaries and related
personnel costs and the costs of contractors associated with development of new
products, enhancement of existing products, and performance of quality assurance
and documentation activities.  Our recent operational restructuring
eliminated approximately $91,000 in annual research and development
expenses.  We continue to focus our research and development efforts
on increasing the functionality and enhancing the ease of use of our on-demand
application service. Our proprietary, scalable and secure multi-tenant
architecture enables us to provide all our customers with a service based on a
single version of our application. As a result, we do not have to maintain
multiple versions, which enables us to have relatively low research and
development expenses as compared to traditional enterprise software companies.
We expect that in the future, research and development expenses will increase in
absolute dollars as we upgrade and extend our service offerings and develop new
technologies.




General and Administrative.
General and administrative expenses consist of salaries and related expenses,
including stock-based expenses, for executive, finance and accounting, human
resources and management information systems personnel, legal costs,
professional fees, and other corporate expenses. We have recently restructured
operations resulting in the elimination of approximately $873,000 in annual
general and administrative expenses.   However, in the future
general and administrative expenses may increase in absolute dollars as we add
personnel and incur additional professional fees and insurance costs related to
the growth of our business.




Stock-Based Expenses. Our
general and administrative expenses include stock-based expenses related to
option and stock awards to employees and non-employee directors. We account for
stock-based expenses pursuant to the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment, or SFAS
123R which we adopted on January 1, 2006. SFAS 123R requires that
share-based payments, including grants of employee stock options be recognized
as an expense in the statement of operations based on their fair values and
vesting periods. These charges have been significant
historically.   However, we expect them to decrease in absolute
dollars in the future.




Critical
Accounting Policies and Estimates




Our
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues, costs and
expenses, and related disclosures. On an ongoing basis, we evaluate our
estimates and assumptions. Our actual results may differ from these estimates
under different assumptions or conditions.




We
believe that of our significant accounting policies, which are described in Note
2 to our consolidated financial statements, the following accounting policies
involve a greater degree of judgment and complexity. Accordingly, these are the
policies we believe are the most critical to aid in fully understanding and
evaluating our consolidated financial condition and results of
operations.





Revenue
Recognition.




OnDemand Revenue.  
We evaluate our OnDemand revenue recognition in consideration of AICPA Statement of Position 97-2
(“SOP 97-2”), Emerging Issues Task Force (“EITF”) 00-03 and 00-21 as
further discussed below.




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




·
            the
      customer has the contractual right to take possession of the software at
      any time during the hosting period without significant penalty;
      and




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




-18-
 Index


We,
therefore, recognize that portion of the fee attributable to the license on
delivery, while that portion of the fee related to 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 the requirements of EITF 00-03 then the
arrangement is not considered to have a software element and therefore is
outside of the scope of SOP 97-2. The hosting arrangement, which would follow a
services accounting model, would then likely be accounted for in accordance with
the guidance contained in the Securities and Exchange Commission’s Staff
Accounting Bulletin No. 101, “Revenue Recognition in Financial
Statements” (“SAB 101”).  SAB 101 contains the same four basic
criteria for revenue recognition as SOP 97-2:




·
            Persuasive
      evidence of an arrangement exists;




·
            Delivery
      has occurred or services have been
rendered;




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




·
            Collectibility
      is reasonably assured.




Once
these conditions have been met, revenue can be recognized.  SAB 101
was amended by Securities and Exchange Commission’s Staff Accounting Bulletin
No. 104 (“Revenue Recognition,
corrected copy” (“SAB
104”), which codified current and existing revenue recognition
issues.




In
determining whether the consulting services can be accounted for separately from
subscription and support revenues, we rely on the criteria detailed in EITF
00-21to establish a
separate unit of accounting for our consulting/implementation
services.




Thus, in
general terms, revenue from product-related hosted solutions is recognized
ratably over the term of the contract after payment has been
received.  Hosted solutions include unspecified upgrades, end user
support and hosted server support.




Enterprise
Revenue.  Enterprise software revenue or license revenue is
generated from licensing the rights to the use of our packaged software
products. We recognize enterprise software revenue based on the provisions of
the American Institute of Certified Public Accountants, or AICPA, Statement of
Position, No. 97-2, “Software Revenue Recognition”, or SOP 97-2, as
amended, and Statement of Position No. 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts”, or
SOP 81-1.




We
generate enterprise software revenue from licenses and services. License revenue
is generated from licensing the rights to the use of our packaged software
products. Service revenue is generated from sales of maintenance, consulting,
and training services performed for customers that license our packaged software
products.




We have
concluded that generally, where we are responsible for implementation services
for the enterprise software product suite and their components, the
implementation services are essential to the customer’s use of the products. In
such arrangements, we recognize revenue following the percentage-of-completion
method over the implementation period. Percentage of completion is computed on
the basis of the number of implementation hours incurred to date compared to
estimated total implementation hours. This method is used because we have
determined that past experience has evidenced expended hours to be the best
measure of progress with respect to these types of arrangements. In those
instances when costs are running ahead of completion estimates, we book the
additional expense and adjust our percentage-of-completion estimates. In
situations when we are not responsible for implementation services for the
enterprise software product suite, we recognize revenue on delivery of the
packaged software provided (1) there is persuasive evidence of an
arrangement, (2) collection is probable, and (3) the fee is fixed or determinable.
For product sales that are recognized on delivery, we will execute contracts
that govern the terms and conditions of each software license, as well as
maintenance arrangements and other services arrangements. If an arrangement
includes an acceptance provision, acceptance occurs upon the earlier of receipt
of a written customer acceptance or expiration of the acceptance
period.




Revenue
under multiple element arrangements (which may include several different
software products and services sold together) is allocated to each element based
on the residual method in accordance with Statement of Position, No. 98-9,
“Software Revenue Recognition with Respect to Certain Arrangements”, or
SOP 98-9. We use the residual method when vendor-specific objective
evidence of fair value does not exist for one of the delivered elements in the
arrangement. Under the residual method, the fair value of the undelivered
elements is deferred and subsequently recognized. We have established sufficient
vendor-specific objective evidence for professional services, training, and
maintenance and support services based on the price charged when these elements
are sold separately. Accordingly, packaged software license revenue is
recognized under the residual method in arrangements in which software is
licensed with professional services, training, and maintenance and support
services.




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




-19-
 Index





Accounting for Stock-Based
Awards. Effective January 1, 2006, we account for share-based
compensation under SFAS 123R. We recognize the fair value of our stock or stock
option awards on a straight-line basis over the requisite service period of the
award, which is normally the vesting term.




For
periods we granted employees options to purchase shares of common stock, the
exercise price is equal to the fair value of the underlying common stock at the
time of grant, as determined by our Board of Directors. To determine the fair
value of our common stock, our Board of Directors may consider many factors, but
has determined the primary factor in determining the fair value of stock based
compensation awards is the price of our common stock on the market closing
immediately prior to any option or share grant, or in the event there is no
trading in our common stock during trading hours of the immediate prior market
close, then the last bid price for our common stock during such trading
hours.




We
recognized stock-based expense of $978,000, or 21 percent of revenue, during
fiscal 2008. The requirement to expense stock-based awards may continue to
materially reduce our reported results of operations. As of June 30, 2008, we
had approximately $88,000 of stock compensation remaining to be amortized to
expense over the remaining requisite service period of the underlying awards. We
currently expect this stock compensation balance to be amortized as follows:
approximately $65,000 during fiscal 2009; and approximately $13,000 during
fiscal 2010. These amounts reflect only stock awards outstanding as of June 30,
2008 and assumes no forfeiture activity. We may issue additional share-based
awards to our employees in future periods.




The
impact of SFAS 123R in the future is dependent upon, among other things, the
timing of when we hire additional employees, the effect of long-term incentive
strategies involving stock awards in order to continue to attract and retain
employees, the total number of stock awards granted, the fair value of the stock
awards at the time of grant, changes in estimated forfeiture assumption rates
and the tax benefit that we may or may not receive from stock-based expenses.
Additionally, the application of SFAS 123R requires the use of an
option-pricing model to determine the fair value of stock option awards. This
determination of fair value is affected by our stock price as well as
assumptions regarding a number of highly complex and subjective variables. These
variables include, but are not limited to, our expected stock price volatility
over the term of the awards.




As of
June 30, 2008, there were options to purchase 325,161shares of common stock
outstanding. We may award additional stock options or shares of restricted stock
to our employees in the future. The outstanding options, which entitle the
holder to purchase one share of common stock for each option upon vesting, have
an average exercise price of $0.40 per share, and vest over eighteen (18)
months.




Goodwill.We record
goodwill based on SFAS 142. We identify and record impairment losses on
long-lived assets, including goodwill that is not identified with an impaired
asset, when events and circumstances indicate that an asset might be impaired.
Events and circumstances that may indicate that an asset is impaired include
significant decreases in the market value of an asset, a change in the operating
model or strategy, and competitive factors. If events and circumstances
indicate that the carrying amount of an asset may not be recoverable and the
expected undiscounted future cash flow attributable to the asset is less than
the carrying amount of the asset, we record an impairment loss equal to the
excess of the asset’s carrying value over its fair value. We determine fair
value based on the present value of estimated expected future cash flows using a
discount rate commensurate with the risk involved, quoted market prices, or
appraised values, depending on the nature of the assets.




Any
changes in key assumptions about the business and its prospects, or changes in
market conditions or other externalities, could result in an impairment charge,
and such a charge could have a material adverse effect on our results of
operations and financial condition.   We have determined that
goodwill carried on our balance sheet was fully impaired as of June 30,
2008.  As such, we have recorded an impairment expense of $4.8 million
for the fiscal period ended June 30, 2008.





Computer Software Development Costs
and Research and Development Expenses.We incur software
development costs associated with our licensed products as well as new products.
We have determined that technological feasibility occurs upon the successful
development of a working model, which happens late in the development cycle and
close to general release of the products. Because the development costs incurred
between the time technological feasibility is established and general release of
the product are not material, we expense these costs as incurred.




Changes in Fiscal Year
End




On
March 29, 2006, our former parent, AFG Enterprises USA, Inc. (“AFG”),
changed from a December 31 to a June 30 fiscal year end as a result of its
acquisition of the Company, then named FP Technology Holdings, Inc. The change
was made to (1) reflect our business cycles, (2) conform AFG’s fiscal
year to the Company’s fiscal year end of June 30, and (3) permit
engagement of independent public accountants that may not have been possible had
a December 31 fiscal year end been maintained.


-20-
 Index





Results
of Operations







Fiscal Year Ended June 30, 2007
Compared with Fiscal Year Ended June 30, 2008




Fiscal
      Year Ended June 302007
            
            
            2008Amount
            
            
            % of Revenue
            
            
            Amount
            
            
            % of RevenueRevenue
            
            $
            4,624,763
            
            
            
            100.0
            %
            
            $
            4,703,943
            
            
            
            100.0
            %Cost
      of revenue
            
            
            1,781,703
            
            
            
            38.5
            
            
            
            1,983,027
            
            
            
            42.2Gross
      profit
            
            
            2,843,060
            
            
            
            61.5
            
            
            
            2,720,916
            
            
            
            57.8Operating
      expensesSales
      and marketing
            
            
            1,795,447
            
            
            
            38.8
            
            
            
            1,934,979
            
            
            
            41.1General
      and administrative
            
            
            4,913,719
            
            
            
            106.3
            
            
            
            3,699,977
            
            
            
            78.7Research
      and development
            
            
            2,113,841
            
            
            
            45.7
            
            
            
            1,766,556
            
            
            
            37.5Impairment
      of goodwill expense
            
            
            -
            
            
            
            -
            
            
            
            4,772,413
            
            
            
            101.5Restructuring
            
            
            (14,285)
            
            
            
            (.3)
            
            
            
            85,657
            
            
            
            1.8Settlement
      of claim
            
            
            (147,500)
            
            
            
            (3.2)
            
            
            
            -
            
            
            
            -Total
      operating expenses
            
            
            8,661,222
            
            
            
            187.3
            
            
            
            12,259,582
            
            
            
            260.6Loss
      from operations
            
            
            (5,818,162)
            
            
            
            (125.8)
            
            
            
            (9,538,666)
            
            
            
            (202.8)Other
      income (expense), netInterest
      expense
            
            
            (5,039,513)
            
            
            
            (109.0)
            
            
            
            (4,866,707)
            
            
            
            (103.5)Extinguishment
      of debt
            
            
            (13,705,000)
            
            
            
            (296.3)
            
            
            
            -
            
            
            
            -Other
      income (expense)
            
            
            1,292,538
            
            
            
            27.9
            
            
            
            51,710
            
            
            
            1.1Total
      other income (expense), net
            
            
            (17,451,975)
            
            
            
            (377.4)
            
            
            
            (4,814,997)
            
            
            
            (102.4)Net
      loss
            
            
            (23,270,137)
            
            
            
            (503.2)
            
            
            
            (14,353,663)
            
            
            
            (305.2)








Overview
of Fiscal Year Ended June 30, 2008




During
fiscal 2008, our net loss was $14.4 million, which included $978,000 of
stock-based expenses, or approximately 20.8 percent of total revenue. Net loss
during the same period a year ago was $23.3 million, which included $1.2 million
of stock-based expenses, or approximately 26.3 percent of total
revenue.




Revenues
during fiscal 2008 were $4.7 million, an increase of 1.7 percent over the same
period a year ago.




Our gross
profit during fiscal 2008 was $2.7 million, or 57.8 percent of revenues. Our
operating loss was $9.5 million and included stock-based expenses of $978,000.
During the same period a year ago, we generated a gross profit of $2.8 million,
or 61.5 percent of revenues, and had an operating loss of $5.8 million. The
operating loss for fiscal 2008 included an impairment of goodwill expenses of
$4.8 million.  The operating loss for fiscal 2007 included $1.2
million of stock-based expenses.




During
fiscal 2008, we used $4.9 million of cash from operating activities, as compared
to $5.4 million during the same period a year ago. At June 30, 2008, we had
cash, cash equivalents and marketable securities of $113,000, as compared to
$690,000, exclusive of restricted cash, at June 30, 2007, accounts receivable of
$1.0 million at June 30, 2008, as compared to $801,000 at June 30, 2007, net of
an allowance for doubtful accounts of $10,000 in both periods, and deferred
revenue, current and noncurrent of $1.7 million at June 30, 2008, as compared to
$1.6 million at June 30, 2007.


-21-
 Index




Fiscal
Years Ended June 30, 2007 and 2008




Revenues. Total revenues were
$4.7 million for fiscal 2008, compared to $4.6 million during the same period a
year ago, an increase of $79,000, or 1.7 percent.   On-demand
revenue increased 7.3 percent from $2.2 million to $2.3 million. On-demand
revenue has increased as demand for our application has increased. Enterprise
revenue decreased 3.3 percent from $2.5 million to
$2.4 million.  Having launched our Firepond CPQ OnDemand solution
in early 2006 and coupled with the fact that we no longer pursue new business in
our Enterprise business segment, we expect that our on-demand revenue will
continue to increase as a percentage of our total revenue.




Cost of Revenues. Cost of
revenues was $2.0 million, or 42.2 percent of total revenues, during fiscal
2008, compared to $1.8 million, or 38.5 percent of total revenues, during the
same period a year ago, an increase of $200,000. The increase in absolute
dollars was primarily due to increased personnel and benefits costs and
independent contractor costs resulting from increased OnDemand service
implementation projects.




As
described above, we intend to continue to invest additional resources in our
on-demand application service and in our capacity to deliver related
professional services. The timing of these additional expenses will affect our
cost of revenues, both in terms of absolute dollars and as a percentage of
revenues.




Sales and
Marketing.   Sales and Marketing expenses were $1.9
million, or 41.1 percent of total revenues, during fiscal 2008, compared to $1.8
million, or 38.8 percent of total revenues, during the same period a year ago,
an increase of $140,000. The increase in absolute dollars was primarily due to
increased marketing and trade show expenses and lead generation
activities.  Our sales and marketing headcount decreased in fiscal
2008 by 25 percent as result of our recent operational
restructuring.




Research and
Development.  Research and development expenses were $1.8
million, or 37.6 percent of total revenues, during fiscal 2008, compared to $2.1
million, or 45.7 percent of total revenues, during the same period a year ago, a
decrease of $350,000. The decrease in absolute dollars was due to the temporary
assignment of development staff to assist with the Company’s increased
implementation projects.   Our research and development headcount
declined by approximately 16% in fiscal 2008.





General and
Administrative.  General and administrative expenses were $3.7
million, or 78.7 percent of total revenues, during fiscal 2008, compared to $4.9
million, or 106.3 percent of total revenues, during the same period a year ago,
a decrease of $1.2 million. The decrease was primarily due to the termination of
a stock-based consulting agreement in fiscal 2007, combined with reductions in
legal, accounting, and personnel costs offset by increased costs associated with
being a public company, including costs associated with accelerated vesting of
restricted stock granted a departing director.





Loss from
Operations.  Operating loss during fiscal 2008 was $9.5 million
and included $978,000 of stock-based expenses related to SFAS 123R. During the
same period a year ago, operating loss was $5.8 million and included $1.2
million of stock-based expenses.




Interest
Expense.  Interest expense was $4.9 million during fiscal 2008,
including amortization of certain debt issuance and debt discount costs of $3.8
million.  During fiscal 2007 interest expense was $5.0 million during
fiscal 2007, including amortization of certain debt issuance costs equal to $3.2
million. The decrease was primarily due to conversion of approximately $300,000
of our previously issued secured debt to equity and the extension of the
maturity of our remaining secured debt, thus, extending the period over which
debt issuance costs and discounts are being amortized.




Goodwill.  We have
determined that goodwill carried on our balance sheet was fully impaired at June
30, 2008 and  as such, we recorded in fiscal 2008 an impairment of
goodwill expense of $4.8 million.  There was no similar impairment to
goodwill for fiscal 2007.




Extinguishment of
Debt.    In fiscal 2007, as a result of the Master
Exchange Agreement (See, Company Financings, below) certain debt with rights to
convert to equity was extinguished and certain previously issued warrants for
shares of common stock were redeemed.  This transaction resulted for
accounting purposes in recording $13.7 million expense as extinguishment of
debt.    There was no similar adjustment in fiscal
2008.




Net
Loss.    We recorded a net loss of approximately
$14.4 million for the fiscal 2008 and a net loss from of approximately $23.3
million for the fiscal 2007.  The significant difference between
fiscal 2008 and fiscal 2007 is the non-cash recognition of $13.7 million in debt
extinguishment expense pursuant to the Master Exchange Agreement in fiscal 2007,
offset by the non-cash recognition of $4.8 million in goodwill impairment
expense in fiscal 2008.


-22-
 Index


Fiscal
Years Ended June 30, 2007 and 2006







Fiscal
      Year Ended June 302006
            
            
            2007Amount
            
            
            % of Revenue
            
            
            Amount
            
            
            % of RevenueRevenue
            
            $
            3,761,594
            
            
            
            100.0
            %
            
            $
            4,624,763
            
            
            
            100.0
            %Cost
      of revenue
            
            
            1,602,827
            
            
            
            42.6
            
            
            
            1,781,703
            
            
            
            38.5Gross
      profit
            
            
            2,158,767
            
            
            
            57.4
            
            
            
            2,843,060
            
            
            
            61.5Operating
      expensesSales
      and marketing
            
            
            747,150
            
            
            
            19.9
            
            
            
            1,795,447
            
            
            
            38.8General
      and administrative
            
            
            2,760,071
            
            
            
            73.4
            
            
            
            4,913,719
            
            
            
            106.3Research
      and development
            
            
            1,835,176
            
            
            
            48.8
            
            
            
            2,113,841
            
            
            
            45.7Restructuring
            
            
            (16,170)
            
            
            
            (0.5)
            
            
            
            (14,285)
            
            
            
            (0.3)Settlement
      of claim
            
            
            (1,712,500)
            
            
            
            (45.5)
            
            
            
            (147,500)
            
            
            
            (3.2)Total
      operating expenses
            
            
            3,613,727
            
            
            
            96.1
            
            
            
            8,661,222
            
            
            
            187.3Loss
      from operations
            
            
            (1,454,960)
            
            
            
            (38.7)
            
            
            
            (5,818,162)
            
            
            
            (125.8)Other
      income (expense), netInterest
      expense
            
            
            (3,068,063)
            
            
            
            (81.6)
            
            
            
            (5,039,513)
            
            
            
            (109.0)Extinguishment
      of debt
            
            
            -
            
            
            
            -
            
            
            
            (13,705,000)
            
            
            
            (296.3)Other
      income (expense)
            
            
            503,094
            
            
            
            13.4
            
            
            
            1,292,538
            
            
            
            27.9Total
      other income (expense), net
            
            
            (2,564,969)
            
            
            
            (68.2)
            
            
            
            (17,451,975)
            
            
            
            (377.4)Net
      loss from continuing operations
            
            
            (4,019,929)
            
            
            
            (106.9)
            
            
            
            (23,270,137)
            
            
            
            (503.2)Loss
      from discontinued operations
            
            
            (763,252)
            
            
            
            (20.3)
            
            
            
            -
            
            
            
            -Net
      Loss
            
            $
            (4,783,181)
            
            
            
            (127.2)
            
            
            $
            (23,270,137)
            
            
            
            (503.2)




Revenues. Total revenues were
$4.6 million for fiscal 2007, compared to $3.8 million for fiscal 2006, an
increase of $900,000, or 23.0 percent.   On-demand revenue
increased 380.8 percent from $451,000 to $2.2 million.  Our
On-demand solution was launched in January 2006.   New business
segment revenues often increase substantially on a percentage basis in initial
periods. Enterprise revenue decreased 25.9 percent from $3.3 million to
$2.5 million.  With the launch of our On-demand solution we
decided not to pursue new Enterprise customers.  As such On-demand
revenue is expected to increase as a percentage of total revenue.




Cost of
Revenues.  Cost of revenue was approximately $1.8 million
during the fiscal 2007 compared with approximately $1.6 million during the
prior year period, an increase of $179,000, or 11.2%. Total cost of revenue as a
percentage of total revenue decreased to 38.5% during fiscal 2007 from 42.6%
during fiscal 2006. The decrease in cost of revenue as a percentage of revenue
was primarily attributable to refocusing operations to our on-demand
subscription-based business. The increase in absolute dollars was primarily due
to an increase in service hosting costs.




Sales and
Marketing.   Marketing and sales expenses were $1.8
million, or 38.8 percent of total revenues, during fiscal 2007, compared to
$700,000, or 19.9 percent of total revenues, during fiscal 2006, an increase of
$1.1 million. The increase in absolute dollars was primarily due to hiring of a
Vice President of Marketing in late fiscal 2006 and a senior sales person and a
marketing lead generation individual in fiscal 2007.  The additional
personnel were added to expand our customer base and increase penetration within
our existing customer base.


-23-
 Index




Research and
Development.  Research and development expenses were $2.1
million, or 45.7 percent of total revenues, during fiscal 2007, compared to $1.8
million, or 48.8 percent of total revenues, during fiscal 2006, an increase of
$279,000. The increase is a direct result of our efforts to distribute upgraded
versions of our on-demand application.  The increase in absolute
dollars was due primarily to increases in personnel related expenses and payroll
plus engagement of independent contractors to support development efforts. We
increased our research and development headcount by 5 percent in fiscal 2007 in
order to upgrade and extend our On-demand offering.





General and
Administrative.  General and administrative expenses were $4.9
million, or 106.3 percent of total revenues, during fiscal 2007, compared to
$2.8 million, or 73.4 percent of total revenues, during fiscal 2006, an increase
of $2.2 million. The increase was primarily due to establishment of a
Boston-area headquarters and hiring of senior personnel. Additionally, the
Company recognized substantial stock-based consulting expenses in fiscal
2007.





Settlement of
Claim.  Old Firepond experienced litigation for which reserves
were created. All the outstanding litigation facing Old Firepond was settled in
fiscal 2006 and 2007. In certain instances, favorable settlements were reached,
resulting in reversal of reserves. Specifically, on April 8, 2004, Old
Firepond entered into an agreement with General Motors Corporation settling all
matters between the companies arising under prior management for the sum of
$7.0 million. Old Firepond executed a note payable to General Motors as
part of the settlement. In September 2005, Old Firepond, the Company, and
General Motors entered into a letter agreement under which General Motors
accepted certain cash and received an unsecured note from us.  In
return, General Motors cancelled a $3.5 million note due from Old Firepond,
and released its security interest in Old Firepond assets then being acquired by
us. The Settlement of Claim for fiscal 2006 represented a non-cash principal
reduction of $1.5 million plus the interest forgone by General Motors. In
fiscal 2007, a favorable settlement in another Old Firepond litigation matter
resulted in recording $148,000 as a settlement of claim.




Loss from
Operations.  Operating loss during fiscal 2007 was $5.8 million
and included $1.2 million of stock-based compensation expenses related to SFAS
123R. During fiscal 2006, operating loss was $1.5 million and included $77,000
of stock-based compensation expenses.




Interest
Expense.  Interest expense was $5.0 million during fiscal 2007
compared to $3.1 million during fiscal 2006.  Interest expense in
fiscal 2007 includes amortization of certain debt issuance costs equal to $3.2
million.  For fiscal 2006 amortization of debt issuance costs were
$77,000.   The absolute dollar increase in interest expense was
primarily attributable to issuance of the Company’s $3.3 million Senior Secured
Subordinated Notes in August 2007 increasing our outstanding debt by 58.9
percent.




Extinguishment of
Debt.  The Company experienced a non-cash extinguishment of
debt charge of $13.7 million in fiscal 2007 due to the Master Exchange Agreement
in January 2007 (See, Company Financings, below).   Accounting
conventions provide for the charge when certain debt with rights to convert to
equity is extinguished and certain warrants to purchase shares of common stock
are redeemed.   There was no similar accounting treatment in
fiscal 2006.




Net
Loss.    We recorded a net loss of approximately $4.8
million for the fiscal 2006 and a net loss of $23.3 million for the fiscal
2007.  The significant difference between fiscal 2007 and fiscal 2006
is the non-cash recognition of $13.7 million in debt extinguishment expense
pursuant to the Master Exchange Agreement.


-24-
 Index


Liquidity
and Capital Resources




Our
primary liquidity and capital requirements have been for working capital,
repayment of debt, and general corporate needs. Our main sources of liquidity
and capital have been a variety of debt and equity financings (See,
below).   As of June 30, 2008, cash and cash equivalents were
approximately $113,000
as compared with cash and cash equivalents of approximately $690,000 and
restricted cash of $1.2 million as of June 30, 2007.    (See
“Financial Condition,” above).   Our working capital at June 30,
2008 represented a deficit of approximately $1.9 million compared to a working
capital of approximately $1.7 million at June 30, 2007.




The
Company has, for some time, been incurring losses and negative cash flow from
operations. For the fiscal 2008, we incurred a net loss of approximately $14.4
million and negative cash flow from operations of approximately $4.9
million.  For fiscal 2007 our net loss was approximately $23.3 million
and negative cash flow from operations was approximately $5.4
million.  Moreover, while demand for our on-demand applications seems
to be growing, operational cash flows over the ensuing months may be
insufficient to sustain current operations.  Recognizing the necessity
to align capital with operational and other expenditures, the Company completed
a financial restructuring on April 25, 2008 that included from FP Tech (1) an
investment of $1,500,000 cash, (2) conversion of $336,000 senior secured
convertible notes plus accrued interest held by it to common stock, (3)
conversion of $100,000 of other debt plus accrued interest held by it to common
stock, and (4) subject to certain conditions, an option to make additional
equity contributions to the Company. The financial restructuring also included
extension of the maturity dates of the Company’s senior secured debt facilities
(Exchanged CAP Notes and Exchanged Bridge Notes) to December 31, 2009 and July
1, 2009, respectively.




The
Company has commenced an operational restructuring that includes, among other
things, focusing additional resources to onboard new customers under contract
and reductions in payroll and operating expenses. To that end, the Company
recently eliminated several positions and relocated headquarters from
Framingham, Massachusetts to Mankato, Minnesota resulting in a projected annual
cash savings of approximately $1.9 million and reorganized operations to focus
more resources to our OnDemand services group.




While FP
Tech has an option to make additional equity contributions to the Company (see
Note 13 - Subsequent Events to the financial statements), those contributions
are likely dependent upon improving operational metrics.  At this
stage it is unclear whether the Company can achieve those operational metrics,
and as such, whether current cash will sustain the Company to a point that
operational cash flow will meet or exceed operational
expenses.  Failure to achieve positive operational cash flow in the
near term may limit the ability of the Company to access additional capital
whether in the form of new debt or equity infusions.




On August
14, 2007, the Company filed a registration statement on Form SB-2 with
the SEC for a proposed public offering of the Company’s common
stock.  Due to market conditions as it relates to equity offerings,
the Company withdrew its registration statement on April 17,2008.  The
Company may pursue a public or private offering in the
future.   However, no assurance can be given that any such equity
offering will be completed, or that if completed, will be on terms that are
favorable or acceptable to the Company.




The
accompanying consolidated financial statements do not include any adjustments
that might result from such adverse outcomes.




August
2007 Bridge Financing:




On
August 2, 2007, we entered into a Securities Purchase Agreement with
certain holders of the Company’s Senior Secured Convertible Notes due December
2008 (the “CAP Notes”) that we issued in January 2007. Pursuant to the
Securities Purchase Agreement, we sold for $3 million in gross proceeds Senior
Secured Subordinated Notes due July 2008 (the “Bridge Notes”) in the face amount
of approximately $3.3 million, providing for original issue discount of 15% per
annum. We also issued the Bridge Note holders 125,000 shares of common
stock. In the event of a change in control of our company, the note holders may
require that we repurchase the Bridge Notes at 100% of the outstanding principal
amount.   We used $1 million of the net proceeds of the
Securities Purchase Agreement to repay the outstanding
indebtedness to Trident Growth Fund.   (See, Company Financings,
Financings with Trident Growth Fund, below).   The remaining net
proceeds were used for working capital purposes.




On April
25, 2008, the Bridge Notes were exchanged for the Exchanged Bridge Notes
extending maturity to July 1, 2009.  The face amounts of the Exchanged
Bridge Notes reflect outstanding principal on the Bridge Notes plus accrued
interest through the new maturity date.  (See, Amendment and Exchange
Agreement - Bridge Notes, below).




Subsequent
to fiscal 2008, the holders of the Exchanged Bridge Notes agreed, upon the
exercise of FP Tech’s option to make additional equity contributions to the
Company in the form of the Additional Funding, to extend, at the option of the
Company, the maturity of the Exchanged Bridge Notes to July 1,
2010.   See Item 1, Business, Recent Events – Funding Agreement
and Note 13 – Subsequent Events to the financial statements for additional terms
of the Exchanged Bridge Notes.


-25-
 Index


February
2008 Equipment Lease Agreement:




On
February 11, 2008, the Company entered into an equipment lease agreement with FP
Tech, wherein the Company established a credit facility of up to $200,000 to be
used for capital purchases and general corporate purposes.  The
agreement has a twenty four month lease commitment term.  Outstanding
principal accrues interest at the rate of 8% per annum during the first twelve
months, 9% per annum during months 13-24 and 20% thereafter. Accrued interest is
due and payable at the earlier of the end of the lease commitment term or upon
optional repayment of principal.  Principal may be repaid in full or
in part at any time without penalty, but in no case later than expiration of the
lease commitment term.   The outstanding principal ($100,000) and
accrued interest was converted to common stock of the Company on April 25,
2008.    (See “Stock Purchase Agreement,”
below).




Amendment
and Exchange Agreement:




On April
24, 2008, the Company, entered into an Amendment and Exchange Agreement with
each of the holders of our CAP Notes and Bridge Notes (the “Investors”).
Pursuant to the Amendment and Exchange Agreement, effective April 25, 2008, the
Company exchanged with the Investors all of its outstanding (i) CAP Notes,
in the aggregate principal amount of $5,264,000; (ii) CAP Warrants to purchase
an aggregate of 1,214,285 shares of common stock of the Company at an exercise
price of $7.00 per share through January 24, 2012; and (iii) Bridge Notes, in
the aggregate principal amount of $3,337,500, for the following aggregate
consideration:






CAP
NOTES:







·
            A
      new issue of the Exchanged CAP Notes;·
            Termination
      of the Indenture and related Registration Rights
  Agreement;·
            Termination
      of the Letter of Credit from Wells Fargo Bank, National Association, in
      favor of The Bank of New York, as trustee under the Indenture, securing
      interest payments on the CAP Notes and  payment of pre-paid
      interest on the Exchanged CAP Notes through January 23, 2009 in the
      aggregate amount of $514,117 from the account underlying the Letter of
      Credit; and·
            New
      CAP Warrants to purchase an aggregate of 1,214,285 shares of common stock
      at an exercise price of $7.00 per share through January 23, 2014 (the
      “Exchanged Warrants”).




The
indebtedness evidenced by the Exchanged CAP Notes is senior secured indebtedness
of the Company, and ranks superior to the Company’s other indebtedness. As
security for the Company’s obligations under the Exchanged CAP Notes, the
Company executed the CAP Security Agreement, pursuant to which the Company
granted a security interest in substantially all assets of the Company in favor
of The Bank of New York, in its capacity as collateral agent for the holders of
the Exchanged CAP Notes.




On April
25, 2008, the Company also exchanged with certain Warrant holders outstanding
warrants previously issued to the certain Warrant holders to purchase an
aggregate of 71,428 shares of common stock at an exercise price of $7.00 per
share through January 24, 2012 for new Amended and Restated Warrants (the
“Exchanged Warrants”) to purchase 71,428 shares of common stock at an exercise
price $7.00 per share through January 23, 2014.




Subsequent to fiscal 2008, the holders
of the Exchanged CAP Notes agreed, upon the exercise of FP Tech’s option to make
additional equity contributions to the Company in the form of the Additional
Funding, to extend, at the option of the Company, the maturity of the Exchanged
CAP Notes to December 31, 2010 and to certain changes to the Exchanged
Warrants.     See, Item 1, Business, Recent Events –
Funding Agreement and Note 13 – Subsequent Events to the financial
statements.




BRIDGE
NOTES:







·
            A
      new issue of the “Exchanged Bridge Notes; and·
            180,000
      fully paid shares of common stock.




The
indebtedness evidenced by the Exchanged Bridge Notes is senior secured
indebtedness of the Company, and ranks superior to the Company’s other
indebtedness except for the Exchange CAP Notes. As security for the Company’s
obligations under the Exchanged Bridge Notes, the Company executed the Bridge
Security Agreement, pursuant to which the Company granted a security interest in
substantially all assets of the Company in favor of Radcliffe SPC, Ltd., for and
on behalf of the Class A Segregated Portfolio, in its capacity as collateral
agent for the holders of the Exchanged Bridge Notes.




Subsequent
to fiscal 2008, the holders of the Exchanged Bridge Notes agreed, upon the
occurrence of certain terms and conditions in the form of the Additional
Funding, to extend, at the option of the Company, the maturity of the Exchanged
Bridge Notes to July 1, 2010.   See, Item 1, Business, Recent
Events – Funding Agreement and Note 13 – Subsequent Events to the financial
statements.




-26-
 Index


Stock
Purchase Agreement:




Effective
April 25, 2008, the Company entered into a Common Stock Purchase Agreement with
FP Tech.  Pursuant to the Stock Purchase Agreement, effective with
entering the Amendment and Exchange Agreements and the CWC Operating Agreement
(discussed below), the Company and FP Tech agreed
the following (capitalized terms used but not defined in the following
discussion have the meanings ascribed to such terms in the Stock Purchase
Agreement):







1.
            Sale of Common
      Stock.  The Company sold to FP Tech 1,071,429 shares of
      common stock for a purchase price of $1.40 per share, or for a total price
      of $1,500,000.







2.
            Conversion of CAP
      Notes.  FP Tech has converted the outstanding principal
      and accrued interest on certain CAP Notes held by FP Tech into 241,840
      shares of common stock.  The conversion amount was
      $338,576.  The conversion rate was $1.40 per
      share.   The CAP Notes converted by FP Tech have been
      cancelled.






3.
            Conversion of
      Equipment Lease Agreement.  FP Tech has converted the
      outstanding principal and accrued interest on the Equipment Lease
      Agreement, dated as of February 11, 2008, into 72,572 shares of common
      stock.  The conversion amount was $101,601.  The
      conversion rate was $1.40 per
share.







4.
            Option to
      Purchase. The Company has provided FP Tech the option to purchase
      an additional 357,143 shares of common stock for a purchase price of $1.40
      per share, or a total price of $500,000 (the “July
      Financing”).   The option to purchase must be exercised, if
      at all, no later than July 31, 2008.  Failure of FP Tech to
      consummate the July Financing will result in an Event of Default pursuant
      to both the Exchanged CAP Notes and the Exchanged Bridge
      Notes.  The July Financing closed on August 12, 2008. Upon
      closing the July Financing all existing defaults under the Exchanged CAP
      Notes and the Exchanged Bridge Notes were
  waived.







5.
            Grant of Preemptive
      Right. In the event of a Qualified Financing, FP Tech has agreed,
      if necessary to complete such financing, to purchase at least $1,000,000
      of the securities issued in the Qualified Financing and has the right to
      purchase up to an aggregate of 25% of the securities issued in such
      Qualified Financing.  A Qualified Financing is a transaction in
      which the Company sells equity or debt securities in exchange for
      aggregate gross proceeds of an amount equal to or greater than the
      aggregate amount outstanding (including principal and interest) under the
      Exchanged Bridge Notes and Exchanged Cap
Notes.




Subsequent
to fiscal 2008, FP Tech exercised its option pursuant to the July Financing and
received an additional option to purchase common stock.   See,
Item 1, Business, Recent Events – Funding Agreement and Note 13 – Subsequent
Events to the financial statements.







CWC
Operating Agreement:




Effective
April 25, 2008, the Company and TechDev Holdings, LLC, a Texas limited liability
company (“TechDev”) and an affiliate of FP Tech, entered into the Company
Agreement (the “CWC Operating Agreement”) of CWC Holdings, LLC (“CWC”), as
members of CWC.  Capitalized terms used but not
defined in the following discussion have the meanings ascribed to such terms in
the CWC Operating Agreement. The CWC Operating Agreement was amended and
restated as of June 30, 2008.




TechDev,
as sole Class A member, is entitled to receive 100% of the Distributable Cash of
CWC (the “Class A Interest”).   The Distributable Cash is all the
cash proceeds generated by the property contributed to CWC by the Class A
Interest.   The Class A Interest may forego receipt of all or any
portion of its share of the Distributable Cash (the “Declined Distribution”) in
favor of exercising its Common Stock Option to Purchase.  The Common
Stock Option to Purchase is an option provided the Class A Interest to purchase
the number of shares of common stock of Firepond, Inc. initially contributed
(the “Initial Shares”) by the Class B Member to CWC.




The
Company, as sole Class B member, is entitled to receive 100% of the Declined
Distributions (the “Class B Interest”).   In return, the Company
issued 6,000,000 shares of common stock to CWC.  The Class B Interest
is a non-voting interest.




TechDev
will receive from CWC the Common Stock Distribution in return for the Declined
Distribution or exercise of the Common Stock Option to Purchase.  The
Common Stock Distribution will be equal to the quotient of (i) the total amount
of the Declined Distribution divided by (ii) for any time prior to the Exchanged
Bridge Notes and Exchanged Cap Notes being paid in full, 1.40 and
thereafter, the higher of (A) the product of (x) 0.8 times (y) the arithmetic
average of the closing price for the common stock for each of the twenty (20)
trading days ending on the trading day immediately preceding the date of the
Declined Distribution and (B) 1.40.  Proceeds received by the Company
from CWC shall be used to pay principal to the holders of the Exchanged CAP
Notes and the Exchanged Bridge Notes pro rata.




CWC holds
the Initial Shares in trust for the Class B Member for the purpose of carrying
out the Common Stock Option to Purchase.




Failure
by the Company to accept the Declined Distribution during a period that either
any of the Exchanged CAP Notes or Exchanged Bridge Notes remains outstanding
will result in an Event of Default pursuant to both the Exchanged CAP Notes and
the Exchanged Bridge Notes.




Profits
and losses (and, to the extent necessary, individual items of income, gain,
loss, deduction or credit) are allocated among the Members in accordance with
the profits and losses generated by the property contributed by such
Member.




CWC shall
be dissolved upon the occurrence of any of the following events: (1) the written
consent of a majority of the outstanding Class A Interests;  (2) an
event specified under applicable law; or (3) upon the earlier of (a) one year
beyond the maturity of the later maturity date of either the CAP Notes or the
Bridge Notes, (b) 90 days after repayment in full of both the CAP Notes and
Bridge Notes prior to maturity, or (c) a change in control of any
Member.




Upon
dissolution of CWC, the assets of CWC shall be distributed in the following
manner and order:  (a) first, to the claims of all creditors of CWC,
and (b) second, to the Class A Member, the Distributable Cash and the property
contributed to CWC by the Class A member, and to the Class B Member any proceeds
representing a Declined Distribution and any Remaining Shares, the Initial
Shares minus the aggregate number of such shares issued to the Class A Member
pursuant to the Common Stock Option to Purchase.


-27-


Index


Cash Flows:





Operating
Activities.Net cash used in operating activities was $4.9
million during the fiscal 2008, primarily attributable to a net loss of
$14.4 million, offset by non-cash charges of $4.8 million related to
the impairment of goodwill, and depreciation and amortization expense of
approximately $4.8 million. Cash used in
operating activities during the fiscal 2007 was approximately $5.4 million,
primarily attributable to a net loss of $23.8 million offset by non-cash
charges of $13.7 million related to the extinguishment of debt, and
depreciation and amortization expense of approximately $4.6 million.
Cash used in operating activities in both periods included changes in elements
of working capital.





Investing
Activities.Net cash provided by investing activities
was approximately $1.1 million in the fiscal 2008, which was principally a
result of liquidating $1.2 million in restricted cash (letter of credit)
pursuant to the Amendment and Exchange Agreement to pre-pay interest on the
Exchanged CAP Notes through January 23, 2009, acquisition of approximately
$32,000 of certain other assets, and purchasing approximately $40,000 of
property and equipment.   Net cash provided by investing
activities was approximately $46.4 million in the fiscal 2007, which was
principally a result of liquidating $46.3 million in restricted cash (net)
pursuant to the terms of the Master Exchange Agreement, liquidating
approximately $42,000 of certain other assets, and purchasing certain property
and equipment, resulting in a net source of cash of $16,000.





Financing
Activities.Net cash provided by financing activities was $3.3
million in fiscal 2008 consisting of $1.4 million from the sale of common stock,
net of expenses, and $3.1 million from borrowings and $1.3 million in payments
under notes payables. Net cash used in financing activities was $41.0 million in
the fiscal 2007 which consisted of net proceeds from the sale of stock of
approximately $6.1 million and the issuance of new convertible debt of
approximately $5.0 million, less debt issuance costs of approximately
$702,000, less payment of approximately $51.0 million under the terms of
the Master Exchange Agreement and other debt payments.





Leased
Facilities.We lease facilities under non-cancelable
operating leases which have various expiration dates through 2011. During July
2007, we committed to a new lease for our former corporate headquarters in
Framingham, Massachusetts, effective September 1, 2007.  We are
currently negotiating with the landlord to terminate this lease.  The
lease for our present corporate headquarters in Mankato, Minnesota expires in
2011.    At June 30, 2008, including the commitment for the
lease of our former corporate headquarters, future minimum annual lease payments
amounted to approximately $548,000 under these leases.  We also lease
office space in Beverly Hills, California.  This lease expires in
January 2009.   However, the payments on the Beverly Hills,
California lease are presently being paid directly by the Company’s former
Chairman of the Board.





We
believe, based upon current cash balances, forecasts of cash flows from future
operations, and possible future purchases of our common stock, that we will have
sufficient capital resources to operate our business for at least the next
12 months.  Beyond the next 12 months, additional financing
may be required to fund working capital and our business plan as well as to pay
maturing debt. Changes in our operating plans, lower than anticipated revenue,
increased expenses, or other events presently unforeseen may require us to seek
additional debt or equity financing on an accelerated basis. Financing may not
be available on acceptable terms, or at all, and our failure to raise capital
when needed could impact negatively our growth plans, financial condition, and
results of operations. Additional equity financing may be dilutive to the
holders of our common stock and debt financing, if available, may involve
significant cash payment obligations or financial covenants and ratios that
restrict our ability to operate our business.





-28-
 Index


Company
Financings





August 2007 Bridge
Financing:





For a
description regarding the August 2007 Bridge Financing and Amendment and
Exchange Agreement, see, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Liquidity and Capital
Resources- August 2007 Bridge Financing and Amendment and Exchange Agreement”, above.





Master Exchange Agreement
Exchange of Stock, Notes, and
Warrants:


On
January 24, 2007, we entered into a Master Exchange Agreement with the
holders of the securities issued in our Senior Secured Convertible Notes, due
March 2011 (originally, the “CAP Financing”).   Under the Master
Exchange Agreement, we exchanged with the investors in the CAP Financing all of
the Senior Secured Nonconvertible Notes, or the Nonconvertible Notes, (with an
aggregate principal balance of $50,000,000) and all of the outstanding CAP
Warrants (exercisable for an aggregate of 6,250,000 shares of common stock
at an initial exercise price of $8.00 per share) originally issued in the CAP
Financing for the following aggregate consideration:


•
            $45.0 million
      in principal repayment of the Nonconvertible Notes, plus accrued interest
      thereon;•
            a
      new issue of 12% Senior Secured Convertible Notes due January 2009 in
      the aggregate principal amount of $5.6 million, or the New
      Convertible Notes, issued under an indenture with The Bank of New York, or
      the New Indenture;•
            warrants
      to purchase an aggregate of 1,214,285 shares of common stock at an
      initial exercise price of $7.00 per share, or the New Warrants,
      exercisable for five years, and containing customary pro-rata
      anti-dilution protections; and•
            1,500,000
      fully paid shares of common stock.





Under the
terms of the New Indenture, we obtained a letter of credit from Wells Fargo
Bank, National Association in a stated amount of $1.3 million in respect of
approximately two years of interest payments payable under the New Convertible
Notes.





The
$45.0 million principal repayment on the Nonconvertible Notes and the
$5.0 million gross proceeds to us were obtained from the $50.0 million
CAP escrow account plus the accrued interest on the Nonconvertible Notes. After
payment of associated fees and expenses and securing the letter of credit, net
proceeds to us from the New Convertible Notes were approximately
$3.5 million. The Convertible Noteholders have certain rights in the event
of a sale of our company and may require the repurchase of the Convertible Notes
in certain circumstances.





Many of
the terms and conditions of the Master Exchange Agreement of Stock, Notes and
Warrants have been substantially superseded by the terms of the Amendment and
Exchange Agreement, described above, and the Funding Agreement described in Item
1, Business, Recent Events – Funding Agreement and Note 13 – Subsequent Events
to the financial statements.








PIPE Financing:





In August
2006, we completed a private placement, or the PIPE Financing, of an aggregate
of 1,000,000 Units at $7.00 per Unit, with each Unit consisting of one share of
our common stock and a warrant to purchase one additional share of our common
stock at $7.00 per share, exercisable for five years after issuance. Subsequent
sales of common stock, including sales associated with the Amendment and
Exchange Agreement in April 2008 and the Funding Agreement in August 2008, have
resulted in an adjustment of the PIPE Financing warrant exercise price to $4.18
and an increase in the number of PIPE Financing warrants outstanding to
1,840,368.  The aggregate gross proceeds from the PIPE Financing
totaled $7.0 million. After payment of fees and expenses of the offering,
net proceeds were used for working capital and repayment of debt. The
registration statement for the Units became effective on October 20,
2006.





Financings with Trident Growth
Fund:





In 2005,
Trident Growth Fund, L.P. loaned the Company
$2.5 million.    The outstanding indebtedness to
Trident Growth Fund, L.P. was repaid as of August 31, 2007.




We do not
have any special purpose entities, and other than operating leases for office
space and computer equipment, we do not engage in off-balance sheet financing
arrangements.  Additionally, we currently do not have a bank line of
credit.




Our
principal commitments consist of obligations under leases for office space. At
June 30, 2008, the future non-cancelable minimum payments under these
commitments were approximately $548,000.




During
fiscal 2009, we may enter into arrangements to acquire or invest in other
businesses, services or technologies. While we believe we have sufficient
financial resources, we may be required to seek additional equity or debt
financing. Additional funds may not be available on terms favorable to us or at
all.


-29-
 Index


Recent
Accounting Pronouncements




In
February, 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
155, Accounting for Certain
Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140
(‘SFAS No. 155”). The Company adopted SFAS No. 155 and it had no material
impact on its financial statements.





In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157
provides guidance for using fair value to measure assets and liabilities. It
also responds to investors' requests for expanded information about the extent
to which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on
earnings.  SFAS No. 157 applies whenever other standards require
(or permit) assets or liabilities to be measured at fair value, and does not
expand the use of fair value in any new circumstances. The Company adopted SFAS
No. 157 and it had no material impact on its financial statements.





In
February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities—including an amendment of FASB
Statement No. 115.  This Statement permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. This Statement is expected to expand the use of fair
value measurement, which is consistent with the Board’s long-term measurement
objectives for accounting for financial instruments.  Management does
not believe that the adoption of this pronouncement will have a material impact
on its financial statements.





In
December 2007, the FASB issued FASB Statement No. 160 – Non-controlling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51. This
Statement amends ARB 51 to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements.  This Statement is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008 (that is, January 1, 2009, for entities with calendar
year-ends). Earlier adoption is prohibited.  Management does not
believe that the adoption of this pronouncement will have a material impact on
its financial statements.





In March
2008, the FASB issued FASB Statement No. 161 - Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133.  This Statement changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows.  This Statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. This
Statement encourages, but does not require, comparative disclosures for earlier
periods at initial adoption.  Management has not evaluated the impact
of this statement.


In May
2008, the FASB issued FASB Statement No. 162 - The Hierarchy of Generally
Accepted Accounting Principles.  This Statement identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP  hierarchy).  This Statement
is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles. Management
does not believe that the adoption of this pronouncement will have an impact on
its financial statements.


-30-
 Index







ITEM 7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Foreign
currency exchange risk




Our
results of operations and cash flows are not significantly subject to
fluctuations due to changes in foreign currency exchange rates as most of our
contracts are denominated in U.S dollars.  However, we occasionally
are paid in foreign currency subjecting us to brief periods of currency risk
between the time of payment and conversion to U.S.
dollars.   Therefore, we do not enter into any hedging
contracts.




Interest
rate sensitivity




Our cash
balances are invested primarily in money market funds and government securities.
The cash, cash equivalents and short-term marketable securities are held for
working capital purposes. Our investments are made for capital preservation
purposes. We do not enter into investments for trading or speculative
purposes.




At June
30, 2008, we had cash, cash equivalents and marketable securities totaling
approximately $113,000. We do not believe our short term investments are subject
to interest rate risk.










ITEM 8.
            CONSOLIDATED
      FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




The
following financial statements are filed as part of this Report:




Page No.Reports of
      Independent Registered Public Accounting Firm
            
            F-2ConsolidatedBalance Sheets as of June
      30, 2008 and
      2007
            
            F-3Consolidated
      Statements of Operations for each of thetwoyears in the period ended June
      30,
      2008
            
            F-4Consolidated
      Statements of Stockholders’ Equity for each of thetwoyears in theperiod ended June 30, 2008
            
            F-5Consolidated
      Statements ofCash
      Flows for each of the twoyears in the period ended June
      30,
      2008
            
            F-6Notes to
      Consolidated Financial Statements
            
            F-7
      - F-22




-31-
 Index






ITEM 9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE




None.




ITEM 9A.
            CONTROLS
      AND PROCEDURES




(a)
Evaluation of disclosure controls and procedures




We
maintain disclosure controls and procedures designed to provide reasonable
assurance that information required to be in disclosed in reports filed under
the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed,
summarized and reported within the specified time periods.  Our
President and our Chief Financial Officer (collectively, the “Certifying
Officers”) are responsible for maintaining our disclosure controls and
procedures.




Our
management evaluated, with the participation of our President and our Chief
Financial Officer, the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined in Rules 13a-15(e)
or 15d-15(e) promulgated under the Exchange Act as of June 30, 2008 (the
“Evaluation Date”). Based on this evaluation, our President and Chief Financial
Officer concluded as of the Evaluation Date that our disclosure controls and
procedures were not effective to provide reasonable assurance that the
information required to be disclosed by us in periodic SEC reports is
accumulated and communicated to our management, including our President and
Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure, and that such information is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.




(b)
Management’s Report on Internal Control over Financial Reporting




Section
404 of the Sarbanes-Oxley Act of 2002 requires that management document and test
our internal control over financial reporting and include in this Annual Report
on Form 10-K a report on management’s assessment of the effectiveness of our
internal control over financial reporting, and to delineate any material
weakness in our internal control.  A material weakness is a
deficiency, or a combination of deficiencies, internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our President and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
as of June 30, 2008 based on the guidelines established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Our internal controls over financial reporting are
to include policies and procedures that provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external reporting purposes in accordance with U.S. generally
accepted accounting principles.




Based on
the results of our evaluation, our management has concluded that our internal
control over financial reporting were not effective as of June 30,
2008.  In that regard, we identified the following weaknesses in our
internal control over financial reporting as of June 30, 2008:




1.           Lack of Effective Corporate
Governance Policies and Procedures.




Management
did not establish an adequate policy and procedures statement governing
authority levels within the management group for recording business
transactions.  The lack of such control permitted a material revenue
transaction to be recorded in contravention of the Company’s revenue recognition
criteria.




Additionally,
certain other management policy statements, including whistle blower, sales
commitments, business expense and document retention and destruction policies,,
were not implemented by June 30, 2008. While management has not identified any
specific irregularities as a result of not having such policy statements in
place, management has determined that the lack of such policy statements
constitutes a material weakness.




Remediation
of Material Weakness:




The
Company implemented during fiscal 2008 a policy statement approved by the Board
of Directors which establishes defined levels of authority for all management
levels.  Additionally, an additional level review has been implemented
for all new revenue contracts and the resulting revenue recognized from such
contracts.  While these procedures were implemented prior to June 30,
2008, insufficient time has elapsed to permit adequate testing of the new
procedures to insure an adequate level of internal control.  The new
measures will continue to be tested in ensuing periods.




In
addition, management has developed and submitted for approval of the Board of
Directors certain other policy statements which address the other above
identified deficiencies.




-32-
 Index




2.           Lack of Effective Control in
Certain Accounting Areas.




During
the review and documentation of the accounts payable and disbursement process,
it was determined that the individual responsible for ACH disbursement activity
had the ability to process ACH transfers without a control review by either
another accounting staff member or management.  While there is
segregation of duties established for disbursement and bank reconciliation
activities, such a segregation of duties did not exist for ACH activity and as
such represents a material weakness.




Additionally,
formal testing of certain components of the accounts payable and disbursement
process was not timely completed for fiscal 2008 reporting
requirements.




Remediation
of Material Weakness:




Within
the accounting department, a detailed review process for all ACH transfers has
been implemented providing oversight on the processing and recording of ACH
transfer activity.  While the new procedure was implemented prior to
June 30, 2008, insufficient time has elapsed to permit adequate testing of the
new procedures to insure an adequate level of internal control.  The
new measures will continue to be tested in ensuing periods.




We believe the foregoing efforts will
enable us to improve our internal controls over financial
reporting.  Management is committed to continuing efforts


aimed at
improving the design, adequacy and operational effectiveness of its system of
internal controls.  The remediation efforts noted above will be
subject to continuing internal control assessment, testing and evaluation
process.




We
reviewed the results of management’s assessment with our Audit
Committee.




(c)
Changes in internal control over financial reporting




Except as
identified above, there has been no change in our internal control over
financial reporting that occurred during the quarter ended June 30, 2008 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.




(d)
Inherent Limitations on Effectiveness of Controls




Our
management, including our Chief Executive Officer and Chief Financial Officer,
do not expect that our disclosure controls or our internal control over
financial reporting will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people or by management override of the
controls. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.




Attestation:




This
annual report does not include an attestation report of our registered public
accounting firm regarding our internal control over financial
reporting.  Attestation by our registered public account firm is not
required for this annual report, but, under present rules, will be required for
our annual report for fiscal 2010




ITEM 9B.
            OTHER
      INFORMATION




Not
applicable.




-33-
 Index


PART
III




ITEM 10.
            DIRECTORS,
      EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE
      MATTERS




The
information concerning our directors, compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, and our code of ethics that applies
to our principal executive officer, principal financial officer and principal
accounting officer required by this Item are incorporated herein by reference to
information contained in the sections of the Proxy Statement entitled “Election
of Directors” and “Section 16(a) Beneficial Ownership Reporting
Compliance.”




The
information concerning our executive officers required by this Item is
incorporated by reference herein to the section of this Report in Part I,
entitled “Executive Officers of the Registrant.”




We have
adopted a Code of Conduct that applies to all employees, including our principal
executive officer, L. Bradlee Sheafe, principal financial and accounting
officer, William P. Stelt, and all other executive officers. The Code of
Conduct is available on our Web site at
http://firepond.com/company/investor/Business%20Ethics%20and%20Conduct.html.   A
copy may also be obtained without charge by contacting Investor Relations,
Firepond, Inc., 11 Civic Center Plaza, Suite 310, Mankato, Minnesota 56001 or by
calling (507) 388-0400.




We plan
to post on our Web site at the address described above any future amendments or
waivers of our Code of Conduct.




ITEM 11.
            EXECUTIVE
      COMPENSATION




The
information required by this Item is incorporated herein by reference to
information contained in the sections of the Proxy Statement entitled “Report of
the Compensation Committee of the Board of Directors,” “Election of
Directors” and “Executive Compensation and Other Information.”




ITEM 12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS




The
information required by this Item is incorporated herein by reference to
information contained in the sections of the Proxy Statement entitled “Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters” and “Equity Compensation Plan Information.”




ITEM 13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE




The
information required by this Item is incorporated herein by reference to
information contained in the section of the Proxy Statement entitled “Election
of Directors” and “Certain Relationships and Related Party
Transactions.”




ITEM 14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES




The
information required by this Item is incorporated herein by reference to
information contained in the section of the Proxy Statement entitled
“Ratification of Appointment of Independent Auditors.”










PART
IV




ITEM 15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES




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




1. Financial Statements: The
information concerning our financial statements, and Report of Independent
Registered Public Accounting Firm required by this Item is incorporated by
reference herein to the section of this Report in Item 8, entitled
“Consolidated Financial Statements and Supplementary Data.”




2. Financial Statement
Schedules: The Financial Statement Schedules have been omitted because
they are not applicable or are not required or the information required to be
set forth herein is included in the Consolidated Financial Statements or Notes
thereto.




3. Exhibits: See “Index to
Exhibits.”




(b) Exhibits. The exhibits listed
below in the accompanying “Index to Exhibits” are filed or incorporated by
reference as part of this Annual Report on Form 10-K.





-34-
 Index





SIGNATURES




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






Firepond, Inc.Dated:
      September 26, 2008
              By:
              /s/ William P.
      SteltWilliam P.
      SteltChief
      Financial Officer(Principal
      Financial Officer and Duly Authroized Officer)








POWER
OF ATTORNEY AND SIGNATURES




KNOW ALL
PERSONS BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints L. Bradlee Sheafe, William P. Stelt and Stephen
Peary, his or her attorney-in-fact, each with the power of substitution,
for him or her in any and all capacities, to sign any amendments to this
annual report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact, or
his or hers substitute or substitutes, may do or cause to be done by
virtue hereof.




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




Signature
            
            Title
            
            Date/S/    L.
      Bradlee Sheafe
              L.
      Bradlee Sheafe
            
            President  (Principal
      Executive Officer)
            
            September
      26, 2008/S/    William P.
      Stelt
              William P.
      Stelt
            
            Chief
      Financial Officer (Principal Financial & Accounting
      Officer)
            
            September
      26, 2008/S/    Audrey
      Spangenberg
              Audrey
      Spangenberg
            
            Chairman
      of the Board of Directors
            
            September
      26, 2008/S/    Scott
      Kline
              Scott
      Kline
            
            Director
            
            September
      26, 2008/S/    Francis
      Knuettel II
              Francis
      Knuettel II
            
            Director
            
            September
      26, 2008







-35-
 Index










Index to Exhibits





Exhibits
required to be filed are listed below and except where incorporated by
reference, immediately follow the Financial Statements.




ExhibitNumber
            
            Description of
      Exhibits.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
      (14)
            
            Amended
      and Restated Certificate of Incorporation, as amended.3
            .2(1)
            
            Amended
      and Restated Bylaws of the Registrant.4
            .1(3)
            
            Specimen
      Stock Certificate10
            .1(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
            .2(7)
            
            First
      Amendment, dated September 13, 2006, by and between the Registrant
      and Trident Growth Fund, L.P.10
            .3(4)
            
            Securities
      Purchase Agreement, dated as of September 12, 2005, by and among FP
      Technology Holdings, Inc. and Trident Growth Fund, L.P.10
            .4(4)
            
            Form
      of 12% Senior Secured Convertible Debenture of FP Technology
      Holdings, Inc. issued in initial principal amounts of
      $2,000,000.10
            .5(4)
            
            Form
      of Warrants issued to Trident Growth Fund, L.P.10
            .6(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
            .7(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
            .8(5)
            
            Credit
      Agreement, dated as of July 15, 2003, by and between AFG Enterprises
      USA, Inc. and Acclaim Financial Group Ventures II, LLC.10
            .9(4)
            
            Exchange
      Agreement, made as of March 29, 2006, by and between AFG Enterprises
      USA, Inc. and Benchmark Equity Group, Inc.10
            .10(7)
            
            Non-Exclusive
      Patent License Agreement, dated March 28, 2006, by and between Orion
      IP, LLC and FP Technology Holdings, Inc.10
            .11(11)*
            
            Employment
      Agreement, dated March 16, 2006, by and between Firepond, Inc. and
      William Santo.10
            .12(11)*
            
            Employment
      Agreement, effective as of March 16, 2006, by and between Firepond,
      Inc. and Stephen Peary.10
            .13(7)*
            
            Employment
      Agreement, effective as of March 30, 2006, by and between FP
      Technology, Inc. and Carol Ferrari.10
            .14(7)*
            
            Employment
      Agreement, effective as of March 30, 2006, by and between FP
      Technology, Inc. and Jerry Keefe.10
            .15(6)
            
            Form
      of Securities Purchase Agreement entered into by the Registrant in
      connection with the PIPE Financing.10
            .16(6)
            
            Form
      of Warrant issued by the Registrant in connection with the PIPE
      Financing.10
            .17(6)
            
            Form
      of Registration Rights Agreement entered into by the Registrant in
      connection with the PIPE Financing.10
            .18(7)*
            
            Form
      of Restricted Stock Grant for grants to William Santo, Stephen Peary, Mark
      Campion and Douglas Croxall.






-36-
 Index
  ExhibitNumber
              
              
              Description of
      Exhibits10
              .19(8)
              
              Consulting
      Agreement, dated as of September 1, 2006, by and between the
      Registrant and Trident Growth Fund L.P.10
              .20(9)(10)
              
              Master
      Exchange Agreement, dated as of January 24, 2007, by and among the
      Registrant and the Purchasers listed on Exhibit A
      thereto.10
              .21(9)
              
              Indenture,
      dated as of January 24, 2007, between the Registrant and The Bank of
      New York as Trustee.10
              .22(9)
              
              Form
      of Warrants issued by the Registrant as of January 24,
      2007.10
              .23(9)
              
              Security
      Agreement, dated as of January 24, 2007, between the Registrant and
      The Bank of New York, in its capacity as Collateral
  Agent.10
              .24(9)
              
              Registration
      Rights Agreement, dated as of January 24, 2007, by and among the
      Registrant and the Purchasers listed on Exhibit A to the Master
      Exchange Agreement.10
              .25(4)
              
              Indenture,
      dated as of March 29, 2006, between AFG Enterprises, Inc. and The
      Bank of New York.10
              .26(4)
              
              Form
      of Warrant, dated as of March 29, 2006.10
              .27(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 as of March 29, 2006 with the
      Registrant, and the Registrant.10
              .28(7)
              
              Amendment
      to Escrow Agreement, dated as of June 8, 2006, by and between the
      Registrant, The Bank of New York, as Escrow Agent, The Bank of New York,
      as Collateral Agent and, The Bank of New York, as Trustee for the holders
      of certain notes of the Registrant under the Indenture dated as of
      March 29, 2006.10
              .29(12)
              
              2006
      Stock Incentive Plan10
              .30(13)
              
              Securities
      Purchase Agreement, dated as of August 2, 2007, by and among the
      Registrant and the Purchasers.10
              .31(13)
              
              Form
      of Senior Secured Subordinated Note, dated as of August 2, 2007,
      between the Registrant and each respective Purchaser.10
              .32(13)
              
              Security
      Agreement, dated as of August 2, 2007, between the Registrant and
      Radcliffe SPC, Ltd. for and on behalf of the Class A Segregated
      Portfolio, a Cayman Islands segregated portfolio company, in its capacity
      as collateral agent for the holders of the Subordinated
    Notes.10
              .33(13)
              
              Supplemental
      Indenture No. 1, dated as of August 2, 2007, between the
      Registrant and The Bank of New York, as Trustee.10
              .34(13)
              
              Intercreditor
      and Subordination Agreement, dated as of August 2, 2007, between The
      Bank of New York, as collateral agent under the Indenture dated
      January 24, 2007, and Radcliffe SPC, Ltd. for and on behalf of the
      Class A Segregated Portfolio, a Cayman Islands segregated portfolio
      company, in its capacity as collateral agent for the holders of the
      Subordinated Notes.10
              .35(15)
              
              Lease
      Agreement between the Registrant and Atlantic – Philadelphia Realty
      LLC.10
              .36(16)
              
              Amendment
      and Exchange Agreement, dated as of April 24, 2008, by and among the
      Registrant and the various Investors listed on Exhibit A attached
      thereto.10
              .37(16)
              
              Form
      of New CAP Warrants issued by registrant as of April 24,
    2008.10
              .38(16)
              
              CAP
      Security Agreement, dated as of April 24, 2008, by and between the
      Registrant and The Bank of New York, in its capacity as Collateral
      Agent.10
              .39(16)
              
              Bridge
      Security Agreement, dated as of April 24, 2008, by and between the
      Registrant and Radcliffe SPC, Ltd., for and on behalf of the Class A
      Segregated Portfolio, in its capacity as Collateral
  Agent.10
              .40(16)
              
              Stock
      Purchase Agreement, dated as of April 24, 2008 by and between the
      Registrant and FP Tech Holdings, LLC.10
              .41(16)
              
              CWC
      Operating Agreement, dated as of April 24, 2008 by and between the
      Registrant and TechDev Holdings, LLC.10
              .42(17)
              
              Funding
      Agreement, dated as of August 7, 2008, by and among the Registrant and the
      various Investors listed on Exhibit A attached thereto31
              .1
              
              Certificate of President pursuant to Section 302 of the
      Sarbanes – Oxley Act of 200231
              .2
              
              Certificate of Chief Financial Officer pursuant to
      Section 302 of the Sarbanes – Oxley Act of 200232
              .1
              
              Certificate of President and Chief Financial Officer
      pursuant to Section 906 of the Sarbanes – Oxley Act of
      2002




-37-
 Index


(1)
              Previously
      filed by AFG Enterprises USA, Inc. on Schedule 14C on June 9,
      2006, and incorporated herein by reference.(2)
              Previously
      filed by AFG Enterprises USA, Inc. on Form 8-K on April 4, 2006
      (reporting the Registrant’s change in shell company status) and
      incorporated herein by reference.(3)
              Previously
      filed on the Registration Statement on Form 10-12G/A, as amended, of
      In Store Media Systems, Inc. on January 28, 2000.(4)
              Previously
      filed by AFG Enterprises USA, Inc. on Form 8-K on April 4, 2006
      (reporting completion of the Registrant’s CAP Financing) and incorporated
      herein by reference.(5)
              Previously
      filed on Form 10-KSB of In Store Media Systems, Inc. for the year
      ended December 31, 2002, on April 20, 2005 and incorporated
      herein by reference.(6)
              Previously
      filed by the Registrant on Form 8-K on September 7, 2006 and
      incorporated herein by reference.(7)
              Previously
      filed by the Registrant on Form 10-KSB on September 28, 2006 and
      incorporated herein by reference.(8)
              Previously
      filed by the Registrant on Form 8-K on January 24, 2007 and
      incorporated herein by reference.(9)
              Previously
      filed by the Registrant on Form 8-K on January 25, 2007 and
      incorporated herein by reference.(10)
              Previously
      filed by the Registrant on Form 8-K/A on May 17, 2007 and
      incorporated herein by reference.(11)
              Previously
      filed by the Registrant on Form SB-2/A on April 3, 2007 and
      incorporated herein by reference.(12)
              Previously
      filed by the Registrant on Form DEF 14C on June 4, 2007 and
      incorporated herein by reference.(13)
              Previously
      filed by the Registrant on Form 8-K on August 7, 2007 and
      incorporated herein by reference.(14)
              Previously
      filed by the registrant on Form SB-2 filed with the Securities and
      Exchange Commission on August 14, 2007, and incorporated herein by
      reference.(15)
              Previously
      filed by the Registrant on Form 10-KSB on September 18, 2007 and
      incorporated herein by reference.(16)
              Previously
      filed by the Registrant on Form 8-K on April 29, 2008 and
      incorporated herein by reference.(17)
              Previously
      filed by the Registrant on Form 8-K on August 12, 2008 and
      incorporated herein by
reference.


*
              Indicates
      management contract or compensatory plan or
  arrangement.





-38-


FIREPOND,
INC.


CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEARS


ENDED
JUNE 30, 2007 and 2008









































FIREPOND, INC.


CONTENTS


June
30, 2008





CONSOLIDATED
FINANCIAL STATEMENTS






Page No.REPORT OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM
            
            F-2ConsolidatedBalance
      Sheet
            
            F-3Consolidated
      Statements of Operations
            
            F-4Consolidated
      Statements of Stockholders’ Equity (Deficit)
            
            F-5Consolidated
      Statements ofCash
      Flows
            
            F-6Notes to
      Consolidated Financial Statements
            
            F-7
      - F-22








Contents





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











To the
Board of Directors and Stockholders


Firepond,
Inc.





We have
audited the accompanying consolidated balance sheet of Firepond, Inc. as of June
30, 2007 and 2008 and the related consolidated statements of operations,
stockholders’ equity (deficit), and cash flows for the years ended June 30, 2007
and 2008.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements.  An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Firepond, Inc. as of June
30, 2007 and 2008 and the results of their operations and their cash flows for
the years ended June 30, 2007 and 2008 in conformity with accounting principles
generally accepted in the United States of America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 2 to the financial
statements, the Company has suffered recurring losses from operations that raise
substantial doubt about its ability to continue as a going concern. 
Management’s plans in regard to these matters are also described in Note
2.   The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.











Denver,
Colorado


September
25,
2008                                                                                                       Causey
Demgen & Moore Inc.


Contents


FIREPOND, INC.


CONSOLIDATED
BALANCE SHEET


June 30,
2007 and 2008








ASSETSCurrent
      assets
            2007
            
            2008Cash
      and cash equivalents
            $        689,972
            
            $        112,895Restricted
      cash
            1,162,590
            
            -Accounts
      receivable, net of allowance for doubtfulaccounts
      of $10,000
            801,206
            
            1,016,460Other
      current assets
            120,160
            
            514,915Total
      current assets
            2,773,928
            
            1,644,270Property
      and equipment, net
            66,638
            
            57,289Debt
      issuance costs
            1,093,455
            
            720,390Goodwill
            
            
            4,772,413
            
            -Deferred
      offering costs, deposits and other assets
            13,449
            
            45,438Total
      assets
            
            $     8,719,883
            
            $     2,467,387LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)Current
      liabilitiesShort-term
      notes payable
            $     1,100,945
            
            $          34,986Accounts
      payable
            570,307
            
            714,930Accrued
      liabilities
            1,280,503
            
            1,128,542Deferred
      revenue
            1,497,264
            
            1,636,265Total
      current liabilities
            4,449,019
            
            3,514,723Non-current
      deferred revenue
            53,784
            
            48,390Long-term
      debt net of unamortized discount of $4,433,333 in 2007and
      $1,880,000 in 2008
            1,368,358
            
            6,721,500Total
      liabilities
            
            5,871,161
            
            10,284,613Commitments
      and contingenciesStockholders'
      equity (deficit)Preferred
      stock, $0.001 par valueAuthorized
      - 5,000,000 sharesIssued
      and outstanding - none
            -
            
            -Common
      stock, $0.001 par valueAuthorized
      - 100,000,000 sharesIssued
      and outstanding 8,224,239 shares at 2007Issued
      - 9,915,080 shares at 2008
            8,224
            
            9,915Treasury
      Stock - 0 shares in 2007 and 8,401 shares in 2008, at cost
            -
            
            (10)Additional
      paid-in capital
            29,898,183
            
            32,695,863Accumulated
      deficit
            (26,081,329)
            
            (40,434,992)Deferred
      compensation
            (976,356)
            
            (88,002)Total
      stockholders' equity (deficit)
            2,848,722
            
            (7,817,226)Total
      liabilities and stockholders' equity (deficit)
            
            $     8,719,883
            
            $     2,467,387





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




F-3
 Contents





FIREPOND, INC.


CONSOLIDATED
STATEMENT OF OPERATIONS


For the
fiscal years ended June 30, 2007 and 2008





Revenues
            
            
            2007
            
            2008OnDemand
      revenues
            $
            2,170,106
            
            $         2,328,919Enterprise
      revenues
            
            2,454,657
            
            2,375,024Total
      revenues
            
            
            4,624,763
            
            4,703,943Cost
      of revenuesOnDemand
      costs
            
            
            1,208,845
            
            1,748,090Enterprises
      costs
            
            
            572,858
            
            234,937Total
      cost of revenues
            
            1,781,703
            
            1,983,027Gross
      profit
            
            
            2,843,060
            
            2,720,916Operating
      expensesSales
      and marketing
            
            1,795,447
            
            1,934,979General
      and administrative
            
            4,913,719
            
            3,699,977Research
      and development
            
            2,113,841
            
            1,766,556Impairment
      of goodwill expense
            
            -
            
            4,772,413Restructuring
      charges
            
            (14,285)
            
            85,657Settlement
      of claims
            
            (147,500)
            
            -Total
      operating expenses
            
            
            8,661,222
            
            12,259,582Loss
      from operations
            
            
            (5,818,162)
            
            (9,538,666)Other
      income (expense), netInterest
      expense
            
            
            (5,039,513)
            
            (4,866,707)Interest
      and other income
            
            1,292,538
            
            51,710Extinguishment
      of debt
            
            
            (13,705,000)
            
            -Total
      other income (expense), net
            
            (17,451,975)
            
            (4,814,997)Net
      Loss
            
            $
            (23,270,137)
            
            $     (14,353,663)Net
      loss per share - basic and dilutedNet
      loss per share
            
            $
            (4.36)
            
            $                (1.72)Basic
      and diluted weighted averagecommon shares
      outstanding
            
            5,340,563
            
            8,357,962





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




F-4
 Contents





FIREPOND, INC.


CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)


For the
fiscal years ended June 30, 2007 and 2008





Common Stock
            
            
            
            
            
            
            
            
            Retained
      Earnings$
            0.001
            
            
            Additional
      Paid
            
            
            Treasury
            
            
            (Accumulated
            
            
            Deferred
            
            
            Stockholders'Shares
            
            
            Par Value
            
            
            In Capital
            
            
            Stock
            
            
            Deficit)
            
            
            Compensation
            
            
            Equity (Deficit)Balance,
      June 30,  2006
            
            
            5,100,441
            
            
            $
            5,100
            
            
            $
            2,182,237
            
            
            $
            -
            
            
            $
            (2,811,192)
            
            
            $
            (487,291)
            
            
            $
            (1,111,146)Sale
      of common stock
            
            
            1,000,000
            
            
            
            1,000
            
            
            
            6,999,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,000,000Expenses
      recorded in connection withstock
      sale
            
            
            
            
            
            
            
            
            
            
            (899,924)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (899,924)Issuance
      of convertible debt with warrants
            
            
            
            
            
            
            
            
            
            
            5,000,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,000,000Issuance
      of warrants to purchase commonstock
      in exchange for services
            
            
            
            
            
            
            
            
            
            
            670,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            670,000Issuance
      of common stock in connectionwith
      debt retirement
            
            
            1,650,000
            
            
            
            1,650
            
            
            
            13,703,350
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,705,000Issuance
      of common stock in exchangefor
      services and retirement of previouslyoutstanding
      warrants
            
            
            413,798
            
            
            
            414
            
            
            
            1,793,580
            
            
            
            
            
            
            
            
            
            
            
            (1,255,255)
            
            
            
            538,739Issuance
      of common stock to new director
            
            
            60,000
            
            
            
            60
            
            
            
            449,940
            
            
            
            
            
            
            
            
            
            
            
            (450,000)Net
      loss for the year ended June
      30, 2007
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (23,270,137)
            
            
            
            1,216,190
            
            
            
            (22,053,947)Balance,
      June 30, 2007
            
            
            8,224,239
            
            
            $
            8,224
            
            
            $
            29,898,183
            
            
            $
            -
            
            
            $
            (26,081,329)
            
            
            $
            (976,356)
            
            
            $
            2,848,722Issuance
      of common stock under bridge loan
            
            
            125,000
            
            
            
            125
            
            
            
            768,625
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            768,750Issuance
      of common stock under sale transaction net
      of expenses
            
            
            1,071,429
            
            
            
            1,071
            
            
            
            1,404,499
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,405,570Issuance
      of common stock under bridge loan restructuring
            
            
            180,000
            
            
            
            180
            
            
            
            107,820
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            108,000Issuance
      of options to new directors
            
            
            
            
            
            
            
            
            
            
            65,000
            
            
            
            
            
            
            
            
            
            
            
            (65,000)
            
            
            
            -Issuance
      of options to management
            
            
            
            
            
            
            
            
            
            
            32,000
            
            
            
            
            
            
            
            
            
            
            
            (32,000)Issuance
      of common stock in exchange for debt
            
            
            241,840
            
            
            
            242
            
            
            
            198,334
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            198,576Issuance
      of common stock in settlement of lease agreement
            
            
            72,572
            
            
            
            73
            
            
            
            101,528
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            101,601Expense
      associated with extention of warrants previously
      issued under CAPfinancing
            
            
            
            
            
            
            
            
            
            
            127,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            127,000Purchase
      of treasury stock
            
            
            
            
            
            
            
            
            
            
            (7,126)
            
            
            
            (10)
            
            
            
            
            
            
            
            7,126
            
            
            
            (10)Net
      loss for the fiscal year endedJune
      30, 2008
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (14,353,663)
            
            
            
            978,228
            
            
            
            (13,375,435)Balance,
      June 30, 2008
            
            
            9,915,080
            
            
            $
            9,915
            
            
            $
            32,695,863
            
            
            $
            (10)
            
            
            $
            (40,434,992)
            
            
            $
            (88,002)
            
            
            $
            (7,817,226)





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


F-5
 Contents


FIREPOND, INC.


CONSOLIDATED
STATEMENT OF CASH FLOWS


For the
fiscal years ended June 30, 2007 and 2008








2007
            
            
            2008Cash
      flows from operating activitiesNet
      loss
            
            $
            (23,270,137)
            
            
            $
            (14,353,663)Adjustments
      to reconcile net loss to net cash used in operating
    activitiesLoss
      on disposition of fixed assets
            
            
            20,912
            
            
            
            192Depreciation
      and amortization
            
            
            3,363,364
            
            
            
            3,801,364Impairment
      of goodwill
            
            
            -
            
            
            
            4,772,413Stock
      issued in extinguishment of debt
            
            
            13,705,000
            
            
            
            -Amortization
      of stock based compensation
            
            
            1,216,190
            
            
            
            978,229Changes
      in assets and liabilitiesAccounts
      receivables
            
            
            (686,000)
            
            
            
            (215,254)Other
      current assets
            
            
            481,796
            
            
            
            (394,755)Accounts
      payable
            
            
            46,136
            
            
            
            144,623Accrued
      liabilities
            
            
            (263,217)
            
            
            
            189,718Deferred
      revenue
            
            
            (58,609)
            
            
            
            133,607Net
      cash used in operating activities
            
            
            (5,444,565)
            
            
            
            (4,943,526)Cash
      flows from investing activitiesPurchase
      of property and equipment
            
            
            (26,165)
            
            
            
            (40,423)Restricted
      cash
            
            
            46,337,410
            
            
            
            1,162,590Other
      assets
            
            
            41,767
            
            
            
            (31,999)Net
      cash provided by investing activities
            
            
            46,353,012
            
            
            
            1,090,168Cash
      flows from financing activitiesProceeds
      from sale of stock net of expenses
            
            
            6,100,076
            
            
            
            1,405,568Borrowings
      under notes payable
            
            
            -
            
            
            
            3,100,000Payments
      under notes payable
            
            
            (46,447,364)
            
            
            
            (1,267,648)Debt
      issuance costs
            
            
            (702,371)
            
            
            
            38,361Net
      cash provided by (used in) financing activities
            
            
            (41,049,659)
            
            
            
            3,276,281Net
      decrease in cash and cash equivalents
            
            
            (141,212)
            
            
            
            (577,077)Cash
      and cash equivalents, on June 30, 2006 and 2007
            
            
            831,184
            
            
            
            689,972Cash
      and cash equivalents, on June 30, 2007 and 2008
            
            $
            689,972
            
            
            $
            112,895Supplemental
      cash flow information:Interest
      paid
            
            $
            1,791,338
            
            
            $
            1,046,042Non
      cash investing and financing activities:During
      the fiscal year ended June 30, 2008, the Company issued 125,000 sharesof
      common stock valued at $768,750 in connection with
      the bridge loan.During
      the fiscal year ended June 30, 2008, the Company issued 180,000 shares ofcommon
      stock valued at $108,000 in connection with extending the
      term of the Bridge Loan.During
      the fiscal year ended June 30, 2008, the Company extended the term of the
      warrants issuedin
      connection with the CAP Master Exchange Agreement
      and recorded a cost of $127,000.During
      the fiscal year ended June 30, 2008, the Company converted
      $336,000in
      debt plus accrued interest to equity by issuing 241,840 shares of common
      stock.During
      the fiscal year ended June 30, 2008, the Company converted $100,000 plus
      accruedinterest
      under its lease obligation to equity by issuing 72,572 shares
      of common stock.During
      the fiscal year ended June 30, 2007, the Company issued stock in
      retirement ofcertain
      debt and outstanding warrants resulting in the recording of $670,000 in
      debtissuance
      costs.  Additionally, the Company issued convertible debt with
      warrantsthat
      resulted in a debt discount of $5,600,000.





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


F-6
 Contents




NOTE 1 - ORGANIZATION AND LINES OF BUSINESS





Firepond,
Inc. (the "Company”) is a pioneer in software solutions that help companies with
complex products to convert more leads into accurate
orders.  Companies with complex products may achieve measurable and
meaningful returns on investment using the Company’s technology by reducing
total cost of sales, whether sales are generated through a direct sales force,
an indirect channel network or via the web.





The
Company generates revenue from its new OnDemand, multi-tenant, subscription
based software as well as legacy license and service revenue.  The
OnDemand product was launched in commercial form in January 2006 and we are
strategically transitioning from an historic enterprise software model to a web
based delivery model.   License revenue is generated from
licensing the rights to the use of Company’s packaged software
products.  Service revenue is generated from sales of maintenance;
consulting and training services performed for customers that license the
Company’s products.





Prior to
September 13, 2005, our assets were owned and operated by a predecessor
company also named Firepond, Inc., or Old Firepond, which was subsequently
liquidated. Its remaining assets and liabilities are being administered by the
Firepond Liquidating Trust.  See Note 2 Significant Accounting
Policies.





NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles of
Consolidation





Pursuant
to FIN 46(R), the financial statements presented herein for the fiscal years
ended June 30, 2007 and 2008 include the consolidated financial statements of
Firepond, Inc. and the Firepond Liquidating Trust.







Basis of Presentation and
Continuance of Operations




The
accompanying consolidated financial statements have been prepared by the Company
on a going concern basis. As such, the statements anticipate the realization of
assets and the liquidation of liabilities in the normal course of
business.   Notwithstanding this fact, the Company has, for some
time, been incurring losses and negative cash flow from operations. For the
fiscal year ended June 30, 2008, the Company incurred a net loss of
approximately $14.4 million and negative cash flows from operations of
approximately $4.9 million. Moreover, while demand for the Company’s OnDemand
applications seems to be growing, it is not clear at this point that future
operational cash flow will be sufficient to sustain present operations without
continuous sales growth over the next twelve months.  In the absence
of such sales growth, the Company is, therefore, likely to require additional
capital either in the form of new debt or equity infusions.





In the
past, the Company has been successful in completing numerous rounds of
financing, including the sale of $1,500,000 of its common stock in April, 2008
and subsequent to June 30, 2008 transacted an additional sale of $500,000 of its
common stock (See Note 13 – Subsequent Events).  However, no
assurances can be given that additional financing will be available, if
required, in which case, the Company’s ability to achieve its business
objectives may be adversely affected.  The accompanying consolidated
financial statements do not include any adjustments that might result from such
adverse outcomes.


F-7
 Contents




Reclassifications





The
Company has chosen to report the expenses associated with its sales and
marketing efforts as a separate line item in its current fiscal year ended June
30, 2008 and accordingly has restated the fiscal year ended June 30, 2007 to
provide comparability.  Previously such expenses were combined with
the general and administrative expenses and such costs and expenses were
reported as a single line item.  Additionally, the Company restated
certain prior fiscal year Cost of Revenues, Sales and
Marketing,  General and Administrative and Research and Development
expenses to conform to current year classifications.





Estimates





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








Revenue
Recognition





OnDemand
Revenue





Firepond
CPQ OnDemand enables a company’s sales force and supporting organizations to
configure complex products, and accurately price those products.  For
Firepond CPQ OnDemand contracts, the Company does not actually deliver a
software product to a customer for installation on the customer’s in-house
systems but rather makes the software available to the customer through a
Company hosting arrangement. In this case the Company installs and runs the
software application either on its own or a third-party’s server giving
customers access to the application via the Internet or a dedicated
line.  Accordingly, the Company evaluates its revenue recognition in
consideration of the American Institute of Certified Pubic Accountants (AICPA)
Statement of Position, No. 97-2, “Software Revenue Recognition”
(“SOP 97-2”), as amended, and Statement of Position No. 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts” (“SOP
81-1”).





An
Emerging Issues Task Force was tasked with assessing the applicability of SOP
97-2


to such
hosting arrangements and considering how a vendor’s hosting obligation would
impact revenue recognition. This discussion resulted in the issuance of Emerging
Issues Task Force 00-03, “Application of AICPA Statement of
Position 97-2 to Arrangements That Include the Right to Use Software Stored on
Another Entity’s Hardware” (“EITF 00-03”).  Under EITF 00-03,
the Task Force reached a consensus that a hosting arrangement is within the
scope of SOP 97-2 if:





·
            the
      customer has the contractual right to take possession of the software at
      any


time
during the hosting period without significant penalty; and





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





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





·
            Persuasive
      evidence of an arrangement exists;


·
            Delivery
      has occurred or services have been
rendered;


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


·
            Collectibility
      is reasonably assured.





Once
these conditions have been met, revenue can be recognized.  SAB 101
was amended by Securities and Exchange Commission’s Staff Accounting Bulletin
No. 104 (“Revenue Recognition,
corrected copy” (“SAB
104”), which codified current and existing revenue recognition
issues.    In consideration of the above criteria, in
general terms, revenue from product-related hosted solutions is recognized
ratably over the term of the contract after payment has been
received.


F-8
 Contents


Enterprise
Software Revenue Recognition





The
Company generates enterprise software revenue from both licenses and
services.  The Company recognizes enterprise software revenue based on
the provisions of SOP 97-2.





Enterprise
software license revenue is generated by licensing the rights to the use of the
Company’s packaged software products.  Service revenue is generated
from sales of maintenance, consulting and training services performed for
customers that license the Company’s packaged software products.





The
Company has concluded that generally, where the Company is responsible for
implementation services for the enterprise product and components, the
implementation services are essential to the customer’s use of the
products.  In such arrangements, the Company recognizes revenue
following the percentage-of-completion method over the implementation
period.  Percentage of completion is computed on the basis of the
number of implementation hours incurred to date compared to estimated total
implementation hours.   Management has determined from past
experience that expended
hours to be the best measure of progress with respect to these types of
arrangements.





In
situations where the Company is not responsible for implementation services for
the enterprise product, the Company recognizes revenue on delivery of the
packaged software provided (i) there is persuasive evidence of an arrangement,
(ii) collection is probable and (iii) the fee is fixed or
determinable.  In situations where the Company is not responsible for
implementation services for the enterprise product, but is obligated to provide
unspecified additional software products in the future, the Company recognizes
revenue as a subscription over the term of the commitment period.





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





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





The
Company has recorded deferred revenue on amounts billed or collected by the
Company before satisfying the above revenue recognition criteria.





Deferred
revenue at June 30, 2007 and 2008 consisted of the following:





Year
      Ended
            
            
            Year
      EndedJune 30, 2007
            
            
            June 30, 2008OnDemand
      revenue
            
            $
            886,534
            
            
            $
            974,375Product
      license and related services
            
            
            22,400
            
            
            
            -Product-related
      maintenance
            
            
            642,114
            
            
            
            710,280$
            1,551,048
            
            
            $
            1,684,655Less
      current portion of deferred revenues:
            
            
            1,497,264
            
            
            
            1,636,265Non-current
      portion of deferred revenues:
            
            $
            53,784
            
            
            $
            48,390





Cost of
Revenue





Cost of
licenses includes royalties, media, documentation, and other production
costs.





Cost of
product-related services and maintenance and cost of custom development services
revenue consist primarily of salaries, and costs for development, consulting,
training and customer support personnel, including cost of services provided by
third-party consultants engaged by the Company.  Cost of revenue at
June 30, 2007 and 2008 consisted of the following:





Year
      Ended
            
            
            Year
      EndedJune 30, 2007*
            
            
            June 30, 2008OnDemand
      cost of revenue
            
            $
            1,208,845
            
            
            $
            1,748,090Product
      license and related services
            
            
            337,038
            
            
            
            173,091Product-related
      maintenance
            
            
            235,820
            
            
            
            61,846$
            1,781,703
            
            
            $
            1,983,027





*As adjusted to provide
comparability between fiscal periods as a result of the Company’s decision to
not allocate certain administrative costs among its operating
departments.





Advertising
Costs





Advertising
costs are expensed as incurred.  Advertising expense for the periods
ended June 30, 2007 and 2008 were $26,391 and $39,209 respectively.





Allowance for Doubtful
Accounts





The
allowance for doubtful accounts was $10,000 at June 30, 2007 and
2008.





Fair Value of Financial
Instruments





Financial
instruments consist of cash and cash equivalents, accounts receivable and
accounts payable, and debt. The carrying values of cash and cash equivalents and
accounts receivable and accounts payable approximate fair value.  The
Company believes the fair values and the carrying value of the Company’s debt
would not be materially different due to the instruments’ interest rates and
maturity dates.





Income
Taxes





The
Company has adopted FIN No. 48, Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109 ("FIN No. 48").
FIN No. 48 clarifies the accounting for uncertainty in income taxes by
prescribing the recognition threshold a tax position is required to meet before
being recognized in the financial statements. It also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition.


F-9
 Contents




We
account for income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes, as amended. Deferred income taxes are provided for the temporary
difference between the financial reporting basis and tax basis of our assets and
liabilities. Deferred income taxes are measured using the enacted tax rates that
are assumed to be in effect when the differences reverse. Deferred tax assets
result principally from recording certain expenses in the financial statements
which are not currently deductible for tax purposes, including employee
stock-based compensation expense and from differences between the tax and book
basis of assets and liabilities recorded, as well as tax loss and credit
carryforwards. Deferred tax liabilities result principally from prepaid
expenses  which are currently deductible for tax purposes but have not
been expensed in the financial statements.






We
maintain a 100% valuation allowances as the Company believes that it is more
likely than not that all or a portion of a deferred tax asset will not be
realized. Changes in valuation allowances are included in our tax provision in
the period of change. In determining whether a valuation allowance is warranted,
we evaluate factors such as prior earnings history, expected future earnings,
carry-back and carry-forward periods and tax strategies that could potentially
enhance the likelihood of the realization of a deferred tax asset.







Cash and Cash
Equivalents





The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.  The
Company maintains its cash deposits at banks located throughout the United
States, which at times, may exceed federally insured limits.  The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant risk on cash and cash equivalents.  Cash
equivalents, which may consist of money market, commercial paper and U.S.
federal agency securities are classified as available-for-sale and therefore
carried at fair market value.  As of June 30, 2007 and 2008, cash
equivalents were $0.





Property and
Equipment





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




Computer equipment and software
              2
      to 5 yearsFurniture and fixtures
              5
      yearsLeasehold improvements
              5
      years


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





Goodwill





Prior to
the January 1, 2002 implementation 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 to periodic impairment tests in accordance with SFAS
142.





The
Company identifies and records impairment losses on long-lived assets, including
goodwill that is not identified with an impaired asset, when events and
circumstances indicate that an asset might be impaired.  Events and
circumstances that may indicate that an asset is impaired include significant
decreases in the market value of an asset, a change in the operating model or
strategy and competitive forces.  If events and circumstances indicate
that the carrying amount of an asset may not be recoverable and the expected
undiscounted future cash flow attributable to the asset is less than the
carrying amount of the asset, an impairment loss equal to the excess of the
asset’s carrying value over its fair value is recorded.  Fair value is
determined based on the present value of estimated expected future cash flows
using a discount rate commensurate with the risk involved, quoted market prices
or appraised values, depending on the nature of the assets.





The
Company has determined that the goodwill existing at June 30, 2008 is fully
impaired and the Company has recorded an impairment expense of $4,772,413 to
recognize such impairment as of June 30, 2008.





F-10
 Contents


Concentration of Credit
Risk





Statement
of Financial Accounting Standards No. 105, “Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk,” (“SFAS No. 105”) requires
disclosure of any significant off-balance sheet risks and credit risk
concentrations.  The Company has no significant off-balance-sheet
risks.  Financial instruments that potentially subject the Company to
concentrations of credit risk are principally cash and cash equivalents,
short-term investments, and accounts receivable.  The Company
maintains its cash and cash equivalents with established financial institutions.
The Company's credit risk is managed by investing its cash in high quality money
market instruments and high quality corporate issuers.





Concentration
of credit risk related to accounts receivable and unbilled services is limited
to several customers to whom the Company makes substantial sales.  The
Company performs periodic credit evaluations of its customers and has recorded
allowances for estimated losses.  The Company has not experienced any
material losses related to receivables from individual customers, geographic
regions or groups of customers.





During
the period ended June 30, 2007, the Company conducted business with one customer
whose sales made up 22.5% of revenues and as a percentage of sales, domestic
sales were approximately 65% and foreign sales were approximately
35%.  In the current period ended June 30, 2008, there were two
customers whose sales made up 15.9% and 12.2% of net revenues
respectively.  As a percentage of total revenues, domestic sales were
approximately 69.7% and foreign sales were approximately 30.3%.





Net Income (Loss) Per
Share





Net
income (loss) per share is computed based on the guidance of SFAS No. 128,
“Earnings per Share” (“SFAS No. 128”).  SFAS No. 128 requires
companies to report both basic income (loss) per share, which is computed by
dividing the net income (loss) by the weighted average number of common shares
outstanding, and diluted income (loss) per share, which is computed by dividing
the net income (loss) by the weighted average number of common shares
outstanding plus the weighted average dilutive potential common shares
outstanding using the treasury stock method.  In periods of losses,
diluted loss per share is computed on the same basis as basic loss per share as
the inclusion of any other potential shares outstanding would be
anti-dilutive.





Foreign Currency
Translation





Gains and
losses arising from transactions denominated in foreign currencies are included
in other income.





Computer Software
Development Costs and Research and Development Expenses





The
Company incurs software development costs associated with its licensed products
as well as new products.  The Company has determined that
technological feasibility occurs upon the successful development of a working
model, which happens late in the development cycle and close to general release
of the products.  Because the development costs incurred between the
time technological feasibility is established and general release of the product
are not material, the Company expenses these costs as incurred.





Stock-Based
Compensation





We
account for stock-based compensation under Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), referred to as SFAS 123R. We
recognize the fair value of our stock awards on a straight-line basis over the
requisite service period of the award, which can vary from 18 to 60 months, the
vesting term.




We
recognized stock-based expense of $978,000, or 20.8% percent of revenue, during
fiscal 2008 as compared to $1,216,000 or 26.3% in the prior fiscal period. The
requirement to expense stock-based awards will continue to reduce our reported
results of operations. As of June 30, 2008, we had an aggregate of $88,000 of
stock compensation remaining to be amortized to expense over the remaining
requisite service period of the underlying awards. We expect to issue
share-based awards to our employees in future periods.




The
impact of SFAS 123R in the future is dependent upon, among other things, the
timing of when we hire additional employees, the effect of long-term incentive
strategies involving stock awards in order to continue to attract and retain
employees, the total number of stock awards granted, the fair value of the stock
awards at the time of grant, changes in estimated forfeiture assumption rates
and the tax benefit that we may or may not receive from stock-based expenses.
Additionally, the application of SFAS 123R requires the use of an
option-pricing model to determine the fair value of stock option awards. This
determination of fair value is affected by our stock price as well as
assumptions regarding a number of highly complex and subjective variables. These
variables include, but are not limited to, our expected stock price volatility
over the term of the awards.


F-11
 Contents




Recently Issued Accounting
Pronouncements








In
February, 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid
Financial Instruments—an amendment of FASB Statements No. 133 and 140 (‘SFAS No.
155”). The Company adopted SFAS No. 155 and it had no material impact on
its financial statements.








In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157
provides guidance for using fair value to measure assets and liabilities. It
also responds to investors' requests for expanded information about the extent
to which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on
earnings.  SFAS No. 157 applies whenever other standards require
(or permit) assets or liabilities to be measured at fair value, and does not
expand the use of fair value in any new circumstances. The Company adopted SFAS
No. 157 and it had no material impact on its financial statements.





In
February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities—including an amendment of FASB
Statement No. 115.  This Statement permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. This Statement is expected to expand the use of fair
value measurement, which is consistent with the Board’s long-term measurement
objectives for accounting for financial instruments.  Management does
not believe that the adoption of this pronouncement will have a material impact
on its financial statements.





In
December 2007, the FASB issued FASB Statement No. 160 – Non-controlling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51. This
Statement amends ARB 51 to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements.  This Statement is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008 (that is, January 1, 2009, for entities with calendar
year-ends). Earlier adoption is prohibited.  Management does not
believe that the adoption of this pronouncement will have a material impact on
its financial statements.





In March
2008, the FASB issued FASB Statement No. 161 - Disclosures about
Derivative


Instruments
and Hedging Activities—an amendment of FASB Statement No. 133.  This
Statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows.  This Statement is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. This Statement encourages, but does not
require, comparative disclosures for earlier periods at initial
adoption.  Management has not evaluated the impact of this
statement.





In May
2008, the FASB issued FASB Statement No. 162 - The Hierarchy of Generally
Accepted Accounting Principles.  This Statement identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP  hierarchy).  This Statement
is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles. Management
does not believe that the adoption of this pronouncement will have an impact on
its financial statements.


F-12
 Contents


NOTE
3 - PROPERTY AND EQUIPMENT





Property
and equipment at June 30, 2007 and 2008 consisted of the following:





Property
      and equipment
            
            2007
            
            
            2008Computer
      equipment and software
            
            $
            1,632,900
            
            
            $
            1,596,803Furniture
      and fixtures
            
            
            114,678
            
            
            
            84,771Leasehold
      improvements
            
            
            21,375
            
            
            
            31,6231,768,953
            
            
            
            1,713,197Less
      accumulated depreciation and amortization
            
            
            1,702,315
            
            
            
            1,655,908Property and equipment,
      net
            
            $
            66,638
            
            
            $
            57,289





Depreciation
expense was $129,696 and $49,580 for the periods ended June 30, 2007 and June
30, 2008 respectively.





NOTE
4 - ACCRUED LIABILITIES





Accrued
liabilities at June 30, 2007 and 2008 consisted of the following:





Year
      Ended
            
            
            Year
      EndedJune 30, 2007
            
            
            June 30, 2008Accrued
      interest
            
            $
            -
            
            
            $
            87,122Consulting
      and professional fees
            
            
            234,809
            
            
            
            49,430Compensation
      and benefits
            
            
            265,674
            
            
            
            266,169Sales,
      use and other taxes
            
            
            217,725
            
            
            
            171,668Restructuring
            
            
            203,333
            
            
            
            203,333Other
            
            
            358,962
            
            
            
            350,820$
            1,280,503
            
            
            $
            1,128,542





NOTE
5 –NOTES PAYABLE





On April
24, 2008, the Company entered into an Amendment and Exchange Agreement (the
“Amendment and Exchange Agreement”) with each of the Investors listed on Exhibit
A attached thereto (the “Investors”). Pursuant to the Amendment and Exchange
Agreement, effective April 25, 2008, the Company exchanged with the Investors
all of its outstanding (i) Senior Secured Convertible Notes Due January
2009 (the “CAP Notes”), in the aggregate principal amount of $5,264,000, issued
under an Indenture with The Bank of New York, dated January 24, 2007, as amended
(the “Indenture”); (ii) Warrants to purchase an aggregate of 1,214,285 shares of
common stock, par value $0.001 per share, of the Company (the “Common Stock”) at
an exercise price of $7.00 per share through January 24, 2012; and (iii) Senior
Secured Subordinated Notes Due May 2008 (the “Bridge Notes”), in the aggregate
principal amount of $3,337,500, for the following aggregate
consideration:





CAP
NOTES:





·
            A
      new issue of Amended and Restated Senior Secured Convertible Notes Due
      December 2009 in the aggregate principal amount of $5,264,000 (the
      “Exchanged CAP Notes”);·
            Termination
      of the Indenture and related Registration Rights
  Agreement;·
            Termination
      of the Letter of Credit from Wells Fargo Bank, National Association, in
      favor of The Bank of New York, as trustee under the Indenture, securing
      interest payments on the CAP Notes and  payment of pre-paid
      interest on the Exchanged CAP Notes through January 23, 2009
      in the aggregate amount of $514,117 from the account underlying the Letter
      of Credit; and·
            Amended
      and Restated Warrants to purchase an aggregate of 1,214,285 shares of
      Common Stock at an exercise price of $7.00 per share through January 23,
      2014 (“New CAP Warrants”).





The
indebtedness evidenced by the Exchanged CAP Notes is senior secured indebtedness
of the Company, and ranks superior to the Company’s other indebtedness. As
security for the Company’s obligations under the Exchanged CAP Notes, the
Company executed an Amended and Restated Collateral and Security Agreement
dated as of April 24, 2008 (the “CAP Security Agreement”), pursuant to which the
Company granted a security interest in substantially all assets of the Company
in favor of The Bank of New York, in its capacity as collateral agent for the
holders of the Exchanged CAP Notes.


F-13
 Contents




Additional
Terms of the Exchanged CAP Notes





The
following are certain additional material terms of the Exchanged CAP Notes
(capitalized terms used but not defined in the following discussion have the
meanings ascribed to such terms in the Exchanged CAP Notes):




1.
            Interest
      Rate. Interest on the Exchanged CAP Notes accrues at a rate of 12% per
      annum.  Interest accruing after January 23, 2009 is due at
      maturity.




2.
            Redemption
      at the Option of the Investor. The Company may become obligated, at the
      option of each Investor, to redeem the Exchanged CAP Notes upon the
      request of such Investor after an Event of
      Default.   Events of Default include failure to (i) attain
      EBITDA Thresholds, and (ii) close timely the July Financing (as defined
      below).




3.
            Repurchase
      at the Option of the Investor Upon a Fundamental Change. The Company may
      become obligated, at the option of each Investor, to repurchase the
      Exchanged CAP Notes if a Fundamental Change occurs at any time prior to
      the stated maturity of the Exchanged CAP Notes at the Change in Control
      Redemption Price.





4.
            Optional
      Conversion. Subject to certain terms and conditions, an Investor may
      optionally convert at any time the Conversion Amount of an Exchanged CAP
      Note into shares of Common Stock at a conversion price of $7.00 per share,
      subject to adjustment as provided in the Exchanged CAP
    Note.





5.
            Prepayment.  The
      Exchanged CAP Notes may be prepaid upon notice to the
      Investors.





6.
            Event
      of Default. If an Event of Default will occur and be continuing, the
      Principal plus accrued and unpaid interest, and Late Charges, if any,
      through such date on all the Exchanged CAP Notes may be declared due and
      payable in the manner and with the effect provided in the Exchanged CAP
      Notes.





7.
            CWC
      Distributions.  The net cash proceeds of any CWC Distributions
      (defined below) will be paid pro rata to the holders of the Exchanged CAP
      Notes and the Exchanged Bridge Notes (defined below) until all such notes
      are paid in full.





8.
            Subsequent
      Financings. The net cash proceeds of any Subsequent Financings will be
      paid to the holders of the Exchanged Bridge Notes until such obligations
      are paid in full and then to the holders of the Exchanged CAP Notes until
      such obligations are paid in full.





Related Party
Transactions





The
Company converted $336,000 in principal CAP Notes plus interest into 241,840
fully paid shares of the Company’s common stock at a conversion price $1.40 per
share with its single largest
shareholder.  Post conversion, FP Tech continues to hold $280,000 of
CAP Notes and $166,875 of Bridge Notes.





Additionally,
the Company also converted indebtedness of $100,000 plus interest under an
equipment leasing arrangement into 72,572 fully paid shares of the Company’s
common stock also at $1.40 per share also with its single largest
shareholder.


F-14
 Contents





BRIDGE
NOTES:





·
            A
      new issue of Amended and Restated Senior Secured Subordinated Notes Due
      July 2009 in the aggregate principal amount of $3,921,563 (the “Exchanged
      Bridge Notes”); and·
            180,000
      fully-paid shares of Common Stock (the “New
  Shares”).





The
indebtedness evidenced by the Exchanged Bridge Notes is senior secured
indebtedness of the Company, and ranks superior to the Company’s other
indebtedness except for the Exchange CAP Notes. As security for the Company’s
obligations under the Exchanged Bridge Notes, the Company executed an Amended
and Restated Security Agreement dated as of April 24, 2008 (the “Bridge Security
Agreement”), pursuant to which the Company granted a security interest in
substantially all assets of the Company in favor of Radcliffe SPC, Ltd., for and
on behalf of the Class A Segregated Portfolio, in its capacity as collateral
agent for the holders of the Exchanged Bridge Notes.





Additional
Terms of the Exchanged Bridge Notes:


The
following are certain additional material terms of the Exchanged Bridge Notes
(capitalized terms used but not defined in the following discussion have the
meanings ascribed to such terms in the Exchanged Bridge Notes):




1.
            Interest
      Rate. Interest on the Exchanged Bridge Notes accrues at a rate of 15% per
      annum. Interest is reflected in the face value of the note through the
      date of maturity.




2.
            Redemption
      at the Option of the Investor. The Company may become obligated, at the
      option of each Investor, to redeem the Exchanged Bridge Notes upon the
      request of such Investor after an Event of
      Default.   Events of Default include failure to (i) attain
      EBITDA Thresholds, and (ii) close timely the July
    Financing.




3.
            Repurchase
      at the Option of the Investor Upon a Fundamental Change. The Company may
      become obligated, at the option of each Investor, to repurchase the
      Exchanged Bridge Notes if a Fundamental Change occurs at any time prior to
      the stated maturity of the Exchanged Bridge Notes at the Change in Control
      Redemption Price.





4.
            Prepayment.
      The Exchanged Bridge Notes may be prepaid, subject to the terms of the
      Exchanged CAP Notes.





5.
            Event
      of Default. If an Event of Default will occur and be continuing, the
      Principal plus accrued and unpaid interest, and Late Charges, if any,
      through such date on all the Exchanged Bridge Notes may be declared due
      and payable in the manner and with the effect provided in the Exchanged
      Bridge Notes.





6.
            CWC
      Distributions.  The net cash proceeds of any CWC Distributions
      will be paid pro rata to the holders of the Exchanged CAP Notes and the
      Exchanged Bridge Notes until all such notes are paid in
    full.





7.
            Subsequent
      Financings. The net cash proceeds of any Subsequent Financings will be
      paid to the holders of the Exchanged Bridge Notes until such obligations
      are paid in full.





Master
Exchange Agreement




On
January 24, 2007, we entered into a Master Exchange Agreement (the
“Exchange Agreement”) with the holders of the Company’s Senior Secured
Nonconvertible Notes (the “CAP Financing”). Under the Exchange Agreement, we
exchanged with the investors in the CAP Financing all of the Nonconvertible
Notes (with an aggregate principal balance of $50,000,000) and all of the
outstanding CAP Warrants (exercisable for an aggregate of 6,250,000 shares
of common stock at an initial exercise price of $8.00 per share) originally
issued in the CAP Financing for the following aggregate
consideration:




•
            $45.0 million
      in principal repayment of the Nonconvertible Notes, plus accrued interest
      thereon;•
            a
      new issue of 12% Senior Secured Convertible Notes due January 2009 in
      the aggregate principal amount of $5.6 million, or the New
      Convertible Notes, issued under an indenture with The Bank of New York, or
      the New Indenture;•
            warrants
      to purchase an aggregate of 1,214,285 shares of common stock at an
      initial exercise price of $7.00 per share, or the New Warrants,
      exercisable for five years, and containing customary pro-rata
      anti-dilution protections; and•
            1,500,000
      fully paid shares of common stock, or the New
  Shares.





Under the
terms of the New Indenture, we obtained a letter of credit from Wells Fargo
Bank, National Association in a stated amount of $1.3 million in respect of
approximately two years of interest payments payable under the New Convertible
Notes.




The
$45.0 million principal repayment on the Nonconvertible Notes and the
$5.0 million gross proceeds to us were obtained from the $50.0 million
CAP escrow account plus the accrued interest on the Nonconvertible Notes. After
payment of associated fees and expenses and securing the letter of credit, net
proceeds to us from the New Convertible Notes were approximately
$3.5 million. The Convertible Noteholders have certain rights in the event
of a sale of our company and may require the repurchase of the Convertible Notes
in certain circumstances.




Many of
the terms and conditions of the Master Exchange Agreement have been
substantially superseded by the terms of the Amendment and Exchange Agreement,
described above, and the Funding Agreement described in Note 13 – Subsequent
Events.





Financings
with Trident Growth Fund




In 2005,
Trident Growth Fund, L.P. loaned the Company
$2.5 million.    The outstanding indebtedness to
Trident Growth Fund, L.P. was repaid as of August 31, 2007.  F-15
 Contents


Notes
payable at June 30, 2007 and 2008 consisted of the following:







2007
            
            
            2008Unsecured
      note payable to General Motors, 5.00%
            
            $
            135,969
            
            
            $
            34,986Trident
      secured note payable, 12%
            
            
            1,166,667
            
            
            
            -Senior
      secured convertible notes, 12%
            
            
            5,600,000
            
            
            
            5,264,000Less
      discount
            
            
            (4,433,333)
            
            
            
            (1,880,000)Bridge
      notes payable, 15%
            
            
            -
            
            
            
            3,337,500Total
      notes payable
            
            
            2,469,303
            
            
            
            6,756,486Less
      current portion
            
            
            1,100,945
            
            
            
            34,986Non-current
      portion
            
            $
            1,368,358
            
            
            $
            6,721,500(Weighted
      average interest rate - 11.86% for 2007 and 13.13% for
    2008)





NOTE
6 – OTHER AGREEMENTS





On
January 24, 2007, the Company agreed to exchange with Rodman & Renshaw LLC
(“Rodman”) outstanding warrants previously issued to Rodman to purchase an
aggregate of 625,000 shares of Common Stock at an exercise price of $8.00 per
share for (i) new warrants
to purchase 71,428 shares of Common Stock at an exercise price $7.00 per share
and (ii) 150,000 fully-paid shares of Common Stock.





On April
25, 2008, the Company exchanged with Rodman & Renshaw LLC (the “Warrant
Holder”) outstanding warrants previously issued to the Warrant Holder to
purchase an aggregate of 71,428 shares of Common Stock at an exercise price of
$7.00 per share through January 24, 2012 for new Amended and Restated Warrants
to purchase 71,428 shares of Common Stock at an exercise price $7.00 per share
through January 23, 2014.





In
addition, on January 24, 2007, we entered into a Registration Rights
Agreement with the holders of the New Convertible Notes and New Warrants. Under
this agreement, we agreed to register for resale the shares of common stock
issued in the Exchange and certain shares held by Rodman and Trident, 130% of
the common stock underlying the New Convertible Notes (or
1,040,000 shares), and 130% of common stock issuable upon exercise of the
New Warrants (or 1,650,000 shares). Under this agreement, we filed a
registration statement with the Securities and Exchange Commission covering the
resale of these shares. Effective April 24, 2007, the holders of the
registration rights executed a waiver to the Registration Rights Agreement,
waiving their rights to have all but 1,432,000 shares of common stock
registered. The registration of these shares became effective on May 24,
2007.


The
Company entered into a consulting agreement, dated as of September 1, 2006 (the
“Trident Consulting Agreement”), with Trident pursuant to which Trident agreed
to provide consulting services to the Company. As part of the Trident Consulting
Agreement, which was terminated as of August 31, 2007, the Company issued an
option (the “Trident Option”) to purchase up to 1,000,000 shares of Common Stock
of the Company at an exercise price of $7.00 per share. The option was later
reduced to  600,000 shares.





The value
of the Trident Consulting Agreement was estimated at $1,613,994 net of expense
previously recorded.  The Company recorded $1,480,180 through June 30,
2007 as consulting expense.  The remaining amount was expensed in
fiscal 2008.  In February 2007, Trident received 179,579 shares of
common stock in exercise of the Trident options.


F-16
 Contents




NOTE
7 - INTEREST EXPENSE





During
the periods ended June 30, 2007 and 2008, the Company recorded interest expense
of $5,039,513 and $4,866,707 respectively.  Included in interest
expense is amortization of debt issuance costs and debt discount related to the
CAP Financing, the Exchanged CAP Notes, the Bridge Notes and Exchanged Bridge
Notes totaling $1,912,751 and $3,751,788 respectively.





NOTE
8 - CWC OPERATING AGREEMENT





Effective
April 25, 2008, the Company and TechDev Holdings, LLC, a Texas limited liability
company (“TechDev”) and an affiliate of FP Tech, entered into the Company
Agreement (the “CWC Operating Agreement”) of CWC Holdings, LLC (“CWC”), as
members of CWC.  Capitalized terms used but not defined in the
following discussion have the meanings ascribed to such terms in the CWC
Operating Agreement. The CWC Operating Agreement was amended and restated as of
June 30, 2008.





TechDev,
as sole Class A member, is entitled to receive 100% of the Distributable Cash of
CWC (the “Class A Interest”).   The Distributable Cash is all the
cash proceeds generated by the property contributed to CWC by the Class A
Interest.   The Class A Interest may forego the receipt of all or
any portion of its share of the Distributable Cash (the “Declined Distribution”)
in favor of exercising its Common Stock Option to Purchase.  The
Common Stock Option to Purchase is an option provided the Class A Interest to
purchase the number of shares of common stock of Firepond, Inc. initially
contributed (the “Initial Shares”) by the Class B Member to CWC.





The
Company, as sole Class B member, is entitled to receive 100% of the Declined
Distributions (the “Class B Interest”).   In return, the Company
issued 6,000,000 shares of common stock to CWC.  The Class B Interest
is a non-voting interest.





TechDev
will receive from CWC the Common Stock Distribution in return for the Declined
Distribution or exercise of the Common Stock Option to Purchase.  The
Common Stock Distribution will be equal to the quotient of (i) the total amount
of the Declined Distribution divided
by (ii) for any time prior to the Exchanged Bridge Notes and Exchanged
Cap Notes being paid in full, 1.40 and thereafter, the higher of (A) the product
of (x) 0.8 times (y) the arithmetic average of the closing price for the common
stock for each of the twenty (20) trading days ending on the trading day
immediately preceding the date of the Declined Distribution and (B)
1.40.  Proceeds received by the Company from CWC shall be used to pay
principal to the holders of the Exchanged CAP Notes and the Exchanged Bridge
Notes pro rata.





CWC holds
the Initial Shares in trust for the Class B Member for the purpose of carrying
out the Common Stock Option to Purchase.





Failure
by the Company to accept the Declined Distribution during a period that either
any of the Exchanged CAP Notes or Exchanged Bridge Notes remains outstanding
will result in an Event of Default pursuant to both the Exchanged CAP Notes and
the Exchanged Bridge Notes.





Profits
and losses (and, to the extent necessary, individual items of income, gain,
loss, deduction or credit) are allocated among the Members in accordance with
the profits and losses generated by the property contributed by such
Member.





CWC shall
be dissolved upon the occurrence of any of the following events: (1) the written
consent of a majority of the outstanding Class A Interests;  (2) an
event specified under applicable law; or (3) upon the earlier of (a) one year
beyond the maturity of the later maturity date of either the CAP Notes or the
Bridge Notes, (b) 90 days after repayment in full of both the CAP Notes and
Bridge Notes prior to maturity, or (c) a change in control of any
Member.





Upon
dissolution of CWC, the assets of CWC shall be distributed in the following
manner and order:  (a) first, to the claims of all creditors of the
CWC, and (b) second, to the Class A Member, the Distributable Cash and the
property contributed to CWC by the Class A member, and to the Class B Member any
proceeds representing a Declined Distribution and any Remaining Shares, the
Initial Shares minus the aggregate number of such shares issued to the Class A
Member pursuant to the Common Stock Option to Purchase.


F-17
 Contents


NOTE
9 - INCOME TAXES





Due to a
second change of control in ownership which occurred as a result of the April
25, 2008 transaction described in Note 11 – Stockholders’ Equity, the Company
believes that the deferred tax assets and deferred tax liabilities identified
below as of June 30, 2008 are the result of a new Internal Revenue Code Section
382 limitation arising from the transaction.





The
Company has operated at a loss in recent periods and had a nominal combined
federal and state income tax provision for the fiscal years ended June 30, 2007
and 2008.   No significant taxes were currently payable in these
years and, as explained below, no net tax provision or benefit was recorded for
deferred taxes in these periods.


Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.  Significant components of
our deferred tax assets (liabilities) are as follows:





Year
      Ended
            
            
            Year
      EndedJune
      30, 2007
            
            
            June
      30, 2008Deferred Tax Assets and
      LiabilitiesNet
      operating losses and credit carryforwards
            
            $
            10,024,286
            
            
            $
            337,199Nondeductible
      reserves and accruals
            
            
            294,011
            
            
            
            766,200Depreciation
      and amortization
            
            
            (467,367)
            
            
            
            138,768Amortization
      of debt discount
            
            
            -
            
            
            
            (206,733)Capitalized
      research and development
            
            
            2,660,359
            
            
            
            79,252Other
            
            
            -
            
            
            
            (10,262)Temporary
      timing difference from debt extinguishment
            
            
            (615,450)
            
            
            
            -Stock
      options
            
            
            (203,325)
            
            
            
            3,730Gross
      deferred tax assets
            
            $
            11,692,514
            
            
            $
            1,108,154Valuation
      allowance
            
            
            (11,692,514)
            
            
            
            (1,108,154)Net
      deferred tax assets
            
            
            -
            
            
            
            -





Statement
of Financial Accounting Standards No. 109, “Accounting for Income Taxes”
provides for the recognition of deferred tax assets if realization of the
deferred tax assets is more likely than not.  Based upon the weight of
available evidence, which includes the Company and its predecessors’ historical
operating performance and the reported cumulative net losses in prior years, the
Company has provided a full valuation allowance against it net deferred tax
assets.





The
Company had a federal net operating loss carryover of approximately $150 million
at December 3, 2003, at which time an ownership change occurred within the
meaning of Section 382 of the Internal Revenue Code (and corresponding
provisions of state tax law).  Under that provision of the Code, net
operating losses incurred prior to the ownership change are subject to limited
availability in the post change period.





Including
only that portion of the pre ownership change net operating loss that is
recognized for financial accounting purposes, the federal net operating loss
carry forward expires as follows:





2028
            
            
            $
            904,018





F-18
 Contents


NOTE
10 - COMMITMENTS AND CONTINGENCIES





Litigation





In August
2001, Old Firepond was named as a defendant in a securities class action filed
in United States District Court for the Southern District of New York related to
its initial public offering (“IPO”) in February, 2000.  The lawsuit also
named certain of the underwriters of the IPO, including FleetBoston, Dain
Rauscher, and SG Cowen, as well as officers and directors of Old Firepond, Klaus
P. Besier and Paul K. McDermott, as defendants.  Approximately 300 other
issuers and their underwriters have had similar suits filed against them, all of
which have been included in a single coordinated proceeding in the Southern
District of New York (the “IPO Litigations”).  The complaints allege that
the prospectus and the registration statement for the IPO failed to disclose
that the underwriters allegedly solicited and received “excessive” commissions
from investors and that some investors in the IPO allegedly agreed with the
underwriters to buy additional shares in the aftermarket in order to inflate the
price of Old Firepond’s stock.  An amended complaint was filed on April 19,
2002.  Old Firepond and the officers and directors identified above were
named in the suits pursuant to Section 11 of the Securities Act,
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 litigation was structured between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies.    In July 2003, a committee of Old Firepond’s Board
of Directors conditionally approved the proposed partial settlement. The
settlement would have provided, among other things, a release of Old Firepond
and the individual defendants for the alleged wrongful conduct in the amended
complaint in exchange for a guarantee from Old Firepond’s insurers regarding
recovery from the underwriter defendants and other consideration from the
company regarding its underwriters.





The
plaintiffs have continued to litigate against the underwriter defendants. The
district court directed that the litigation proceed within a number of “focus”
cases” rather than in all of the 300 cases that have been consolidated. Old
Firepond’s case is one of the focus cases. On October 13, 2004, the
district court certified six focus cases as class actions. The underwriter
defendants appealed that ruling, and on December 5, 2006, the Court of
Appeals for the Second Circuit reversed the district court’s class certification
decision, which had the effect of de-certifying the classes involved in the
focus cases. In light of the Second Circuit opinion, the district court has been
informed that the overall settlement cannot be approved because the defined
settlement class, like the litigation class, cannot be certified.





On
August 14, 2007, plaintiffs filed a second consolidated amended class
action complaint for violations of the federal securities laws against Old
Firepond and others. The Court has directed the issuer defendants to answer by
October 30, 2008.  The parties presently are engaged in
active discovery with regard to focus cases that include Old
Firepond.  The plaintiffs' motion for class certification has been fully
briefed and is pending before the Court.  The Company cannot predict
whether a settlement that complies with the Second Circuit’s mandate or
what the result of the litigation will be if no settlement is agreed upon
and approved.





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


F-19
 Contents


Leases





The
Company leases its office space under operating leases expiring at various dates
through 2011.  For the periods ended June 30, 2007 and 2008, rent
expense under these agreements totaled approximately $253,202 and $267,374
respectively.





At June
30, 2008, the minimum future obligations under operating leases, exclusive of
sublease income are as follows:





For the
Fiscal Year Ended June 30,








2009
            $237,0002010
            216,0002011
            95,000$548,000




NOTE
11 - STOCKHOLDERS' EQUITY




Effective
April 25, 2008, the Company entered into an Amendment and Exchange Agreement as
previously described in Note 5 above, wherein the Company sold 1,071,429 of its
common stock at a price of $1.40 per share, exchanged certain notes in the
principal amount of $336,000 plus interest for 241,840 shares of common stock at
a price of $1.40 per share, exchanged indebtedness owed under an equipment
leasing arrangement of $100,000 plus interest for 72,572 shares of common stock
at $1.40 per share and issued 180,000 shares of common stock to the Bridge
Noteholders.




Bridge
Loan




On August
2, 2007, the Company entered into a Securities Purchase Agreement (the “Bridge
Loan”) with the holders of the CAP Notes. As part of the Securities Purchase
Agreement, we sold for $3.0 million in gross proceeds the Bridge Notes in the
face amount of approximately $3.3 million, resulting in an original issue
discount of 15% per annum calculated for the nine-month term.  After
maturity, interest will accrue at the rate of 15% per annum.  We also
issued the note holders 125,000 shares of common stock.





Master Exchange
Agreement




On
January 24, 2007, pursuant to the terms of the Exchange Agreement, the Company
issued 1,500,000 fully paid shares of common stock.  Additionally, the
Company issued 150,000 fully paid shares of common stock to Rodman and Renshaw,
LLC.  (See Note 5)




PIPE
Financing




In August
2006, we completed a private placement, or the PIPE Financing, of an aggregate
of 1,000,000 Units at $7.00 per Unit, with each Unit consisting of one share of
our common stock and a warrant to purchase one additional share of our common
stock at $7.00 per share, exercisable for five years after issuance. The
aggregate gross proceeds from the PIPE Financing totaled $7.0 million.
After payment of fees and expenses of the offering, net proceeds were used for
working capital and repayment of debt. The registration statement for the Units
became effective on October 20, 2006.




In
February 2007, the Company issued 413,798 shares of common stock to Trident
pursuant to (1) the cashless exercise of certain warrants held by Trident and
(2) the Trident Option.




Restricted Stock
Awards





On
January 5, 2006, in connection with the employment of the Chief Executive
Officer and the Chief Financial Officer, the Company issued restricted common
stock awards for 302,419 and 201,622 respectively.  The shares vested
monthly through June 15, 2008 and May 15, 2008, respectively.  In May
2008, the Chief Executive Officer resigned his position with the
Company.  8,401 unvested shares of the restricted common stock granted
the Chief Executive Officer were repurchased for $10 in the aggregate and
returned to the Treasury.





Pursuant
to the March 2006 CAP Financing the Company awarded 1,250,000 common shares to
certain officers, and a director which shares vested in their entirety on March
29, 2008.





In March,
2006 a non-employee director was appointed to the Board of Directors and issued
60,484 (post merger) shares of restricted common stock which vested in March
2008.  The aggregate value of the 2006 stock awards was
$564,342.





In May,
2007 a non-employee director was appointed to the Board of Directors and issued
60,000 shares of restricted common stock which were originally scheduled to vest
over a 24 month period.  The vesting schedule of the restricted common
stock was accelerated in March 2008 such that all 60,000 shares became vested.
The stock award was valued at $450,000.  In connection with the
issuance, the Company booked a liability for reimbursement of taxes in the
amount of $84,000.


F-20
 Contents


Warrants





The following is a summary of warrant
activity through June 30, 2008:





Balance
      June 30, 2006
            
            $
            4.00
      to $8.00
            
            
            $
            7.78
            
            
            
            7,265,625Granted
            
            $
            7.00
            
            
            $
            7.00
            
            
            
            3,385,714Exercised
            
            $
            4.00-$7.00
            
            
            $
            5.81
            
            
            
            (990,625)Retired
            
            $
            8.00
            
            
            
            -
            
            
            
            (6,875,000)Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -Balance
      June 30, 2007
            
            $
            7.00
            
            
            $
            7.00
            
            
            
            2,785,714Granted
            
            $
            4.37
            
            
            $
            4.37
            
            
            
            661,436Exercised
            
            
            -
            
            
            
            -
            
            
            
            -Forfeited
            
            $
            7.00
            
            
            $
            7.00
            
            
            
            (400,000)Warrants
      exercisable at June 30, 2008
            
            $
            7.00
            
            
            $
            7.00
            
            
            
            3,047,150








The following is a summary
of warrants outstanding at June 30,2008:





Exercise
            
            
            Number
      ofprice
            
            
            sharesIssued
      in connection with PIPE Offering as adjusted
            
            $
            4.37
            
            
            
            1,100,000Issued
      in connection with Master Exchange agreement
            
            $
            7.00
            
            
            
            1,285,714Additional
      Issue to PIPE
            
            $
            4.37
            
            
            
            661,436Balance
      at June 30, 2008
            
            
            
            
            
            
            3,047,150








The
following is additional information related to warrants:





Weighted average remaining contractual life in
      years
            
            
            Weighted average exercise
    price
            
            
            Number of sharesBalance
      June 30, 2008
            
            
            4.15
            
            
            $
            5.48
            
            
            
            3,047,150Warrants
      exercisable at June 30, 2008
            
            
            4.15
            
            
            $
            5.48
            
            
            
            3,047,150





F-21
 Contents


NOTE
12 - PROFIT-SHARING PLAN





The
Company sponsors a defined contribution profit-sharing plan for US employees
which conforms to Internal Revenue Service provisions for 401(k) plans.
Employees must be at least 21 years of age to be eligible to participate in the
plan.  Participants may contribute up to 100% of their
earnings.  The Company has the option to match 50% of the first 2% and
25% of the next 4% of employee contributions and may make additional
contributions as determined by the board of directors.  There were no
employer matching contributions in the periods ended June 30, 2007 and June 30,
2008.





NOTE
13 - SUBSEQUENT EVENTS





FUNDING
AGREEMENT





Pursuant
to the Common Stock Purchase Agreement, dated as of April 25, 2008 (the "Stock
Purchase Agreement"), FP Tech Holdings, LLC, a Texas limited liability company
(“FP Tech”) and  an affiliate and member of the Registrant’s majority
shareholder group was granted by Firepond, Inc. (the “Company”) an option to
purchase approximately 357,143 shares of Common Stock at a purchase price of no
more than $1.40 per share with gross cash proceeds to the Company of at least
$500,000 (the "Subject Financing").  The Subject Financing was
completed as of August 13, 2008, with the Registrant receiving $500,000.00 in
cash from FP Tech and the Registrant issuing 357,143 shares of Common Stock to
FP Tech.





As part
of an agreement entered into as of August 7, 2008 (the “Funding Agreement”)
among the Registrant, FP Tech and the holders (“Investors”) of the Company’s
secured notes (“Secured Notes”), the Investors agreed to exchange their Secured
Notes in certain circumstances which circumstances include exercise by FP Tech
of an option to invest additional equity in the Company and the Company’s
election to extend the maturity of its Secured Notes (the “Transaction”) as
follows:





(i)
            Additional
      Funding.  Effective the business day after the closing of the
      Subject Financing and for a period expiring on June 30, 2009, the Company
      grants to FP Tech or its assigns an option to purchase, at an exercise
      price of $1.40 per share of Common Stock (such amount, the "AF Purchase
      Price"), on or before June 30, 2009, a total of $1.5 million in aggregate
      amount of Common Stock (the "Additional
  Funding").




(ii)
            Exchange
      Election.  During the period commencing on the closing of the
      Additional Funding and ending on the earlier to occur of (a) June 30, 2009
      and (b) the fifth (5th) Business Day following the closing of the
      Additional Funding, the Company may, by written notice to each of the
      Investors during such period, elect to consummate the Exchange (as defined
      below) (the "Exchange Election").




(iii)
            Exchanged
      CAP Notes.  Upon the exercise of the Exchange Election, the
      Company shall exchange (the "CAP Note Exchange") the Exchanged CAP Notes
      of each CAP Investor for senior secured convertible notes (the "New
      Exchanged CAP
      Notes"), which are convertible into Common Stock (as converted, the "New
      Exchanged CAP Conversion Shares") and are identical to the Exchanged CAP
      Notes except as follows:




a.
            Maturity.  The
      Maturity Date (as defined in the New Exchanged CAP Notes) shall be
      December 31, 2010.




b.
            Interest.  Interest
      on the principal balance outstanding from time to time of the New Exchange
      CAP Notes accruing at the rate of 12% per annum after December 31, 2009
      shall be due and payable quarterly in arrears on the second business day
      following the end of each fiscal quarter end beginning March 31, 2010
      through the Maturity Date.




c.
            Conversion
      Price.  The Conversion Price of the New Exchanged CAP Notes
      shall be $2.00 per share of Common
Stock.




(iv)
            Exchanged Bridge Notes. Upon exercise of
      the Exchange Election, the
      Company shall exchange the Exchanged Bridge Notes  for a
      number of shares of Common Stock (the "New Exchanged Common Shares")
      determined according to the following
  formula:


Original
      Principal Amount of the Exchanged Bridge Notes of each Exchanged
      Bridge Note holder / (AF Purchase Price X 1.1) X 0.1and
      senior secured notes identical to the Exchanged Bridge Notes (the "New
      Exchanged Bridge Notes"), except as
follows:


a.
            Maturity Date  The Maturity
      Date in the New Exchanged Bridge Notes shall be July 1,
    2010.b .
            Interest. Interest accruing on
      the principal balance of the New Exchanged Bridge Notes at the rate of 15%
      per annum beginning July 2, 2009 shall be due and payable quarterly in
      arrears on the second business day following the end of each fiscal
      quarter end beginning September 30, 2009 through the Maturity
      Date.





(v)
            Waiver of Existing Defaults.  Upon
      closing the Subject Financing all existing defaults under the Exchanged
      CAP Notes and the Exchanged Bridge Notes were
      waived.






F-22