----

O

|                                                                                                                                                                                                                         |  Page      No.             |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------|
| PART      I. FINANCIAL INFORMATION                                                                                                                                                                                           |                            |
| ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS      (UNAUDITED)                                                                                                                                                                   |                            |
| Consolidated Balance Sheet at March 31,      2008                                                                                                                                                                            |  F-1                       |
| Consolidated Statements of      Operations for the Three Months Ended March 31,      2007 and 2008                                                                                                                 |  F-2                       |
|         Consolidated Statements      of Operations for the Nine Months Ended March 31,      2007 and 2008                                                                                                |  F-3                       |
|                      Consolidated Statement of Stockholders'      Equity (Deficit) for the Nine Months      Ended March 31, 2008                  |  F-4                       |
|                      Consolidated      Statement of Cash Flows for the Nine Months      Ended March 31, 2007 and      2008    |        F-5                 |
| Notes      to Consolidated Financial Statements                                                                                                                                                                         |        F-6                 |
| ITEM 2. MANAGEMENT'S      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                                                                                                                                                       |        1    |
| ITEM 3. CONTROLS      AND PROCEDURES                                                                                                                                                                                         | 10                              |
|  PART II. OTHER INFORMATION                                                                                                                                                                                             |                            |
| ITEM 1. LEGAL      PROCEEDINGS                                                                                                                                                                                               | 11                              |
| ITEM 2. UNREGISTERED      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                                                                                                                | 11                              |
| ITEM 3. DEFAULTS      UPON SENIOR SECURITIES                                                                                                                                                                                 | 11                              |
| ITEM 4. SUBMISSION      OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                                                                                             | 11                              |
| ITEM 5. OTHER      INFORMATION                                                                                                                                                                                               | 11                              |
| ITEM 6. EXHIBITS                                                                                                                                                                                                             | 11                              |

|   |
|--------|

----

Table of Contents

|   | PART      I.  FINANCIAL INFORMATION |
|--------|-----------------------------------------------|

| ITEM      1.  CONSOLIDATED FINANCIALSTATEMENTS |
|----------------------------------------------------------|

IR

|                                                                    |   |   |         |
|-------------------------------------------------------------------------|--------|--------|--------------|
| ASSETS                                                                  |   |   |         |
|                                                                    |   |   |         |
| Current      assets                                                     |   |   |         |
| Cash      and cash equivalents                                          |   | $      | 151,150      |   |
| Restricted      cash                                                    |   |   | 597,331      |   |
| Accounts      receivable, net of allowance for doubtful                 |   |   |         |   |
| accounts      of $10,000                                                |   |   | 782,950      |   |
| Other      current assets                                               |   |   | 178,550      |   |
|                                                                    |   |   |         |   |
| Total      current assets                                               |   |   | 1,709,981    |   |
|                                                                    |   |   |         |   |
| Property      and equipment, net                                        |   |   | 67,968       |   |
| Debt      issuance costs                                                |   |   | 573,315      |   |
| Goodwill                                                                |   |   | 4,772,413    |   |
| Deposits      and other assets                                          |   |   | 52,321       |   |
|                                                                    |   |   |         |   |
| Total      assets                                                       |   | $      | 7,175,998    |   |
|                                                                    |   |   |         |   |
| LIABILITIES      AND STOCKHOLDERS' EQUITY (DEFICIT)                     |   |   |         |   |
|                                                                    |   |   |         |   |
| Current      liabilities                                                |   |   |         |   |
| Short-term      notes payable net of unamortized discount of $2,333,334 |   | $      | 6,427,455    |   |
| Accounts      payable                                                   |   |   | 852,365      |   |
| Accrued      liabilities                                                |   |   | 1,278,913    |   |
| Deferred      revenue                                                   |   |   | 1,884,961    |   |
|                                                                    |   |   |         |   |
| Total      current liabilities                                          |   |   | 10,443,694   |   |
|                                                                    |   |   |         |   |
| Non-current      deferred revenue                                       |   |   | 37,737       |   |
| Total      liabilities                                                  |   |   | 10,481,431   |   |
|                                                                    |   |   |         |   |
| Commitments      and contingencies                                      |   |   |         |   |
|                                                                    |   |   |         |   |
| Stockholders'      equity (deficit)                                     |   |   |         |   |
| Preferred      stock, $0.001 par value                                  |   |   |         |   |
| Authorized      - 5,000,000 shares                                      |   |   |         |   |
| Issued      and outstanding - none                                      |   |   | -            |   |
| Common      stock, $0.001 par value                                     |   |   |         |   |
| Authorized      - 100,000,000 shares                                    |   |   |         |   |
| Issued      and outstanding - 8,349,239 shares                          |   |   | 8,349        |   |
| Additional      paid-in capital                                         |   |   | 30,666,808   |   |
| Accumulated      deficit                                                |   |   | (33,966,240) |   |
| Deferred      compensation                                              |   |   | (14,350)     |   |
|                                                                    |   |   |         |   |
| Total      stockholders' equity (deficit)                               |   |   | (3,305,433)  |   |
|                                                                    |   |   |         |   |
| Total      liabilities and stockholders' equity (deficit)               |   | $      | 7,175,998    |   |

----

Table of Contents

RE

|                                        |                                    |                                      |                            |                                        |                                  |           | 2007                | 2008   |
|---------------------------------------------|-----------------------------------------|-------------------------------------------|---------------------------------|---------------------------------------------|---------------------------------------|----------------|---------------------|--------|
|                                        |                                    |                                      |                            |                                        |                                  |           |                |   |
| Revenues                                    |                                    |                                      |                            |                                        |                                  |           |
|                                        | OnDemand      revenues                  |                                      |  $      692,280            |  $      605,264                        |
|                                        | Enterprise      revenues                |                                      |     780,608 | 425,200                                     |
|                                        | Total      revenues                     |                                      |                            | 1,472,888                                   |   1,030,464                 |
|                                        |                                    |                                      |                            |                                        |                                  |           |                |   |
| Cost      of revenues                       |                                    |                                      |                            |                                        |                                  |
|                                        |  OnDemand      costs               |                                      |                            |     307,540             |      424,415 |
|                                        |  Enterprises      costs            |                                      |                            |   146,689                         |      43,759  |
|                                        |  Total      cost of revenues       |                                      | 454,229                         |  468,174                               |
|                                        |                                    |                                      |                            |                                        |                                  |           |                |   |
| Gross      profit                           |                                    |                                      |                            |                                        | 1,018,659                             | 562,290        |
|                                        |                                    |                                      |                            |                                        |                                  |           |                |   |
| Operating      expenses                     |                                    |                                      |                            |                                        |
|                                        | Sales      and marketing                |                                      | 394,984                         | 503,209                                     |
|                                        | General      and administrative         | 1,183,476                                 | 1,334,772                       |
|                                        | Research      and development           |    574,859                 |   463,591             |
|                                        |                                    |                                      |                            |                                        |                                  |           |                |   |
|                                        |                                    |                                      | Total      operating expenses   |  2,153,319                             | 2,301,572                             |
|                                        |                                    |                                      |                            |                                        |                                  |           |                |   |
| Loss      from operations                   |                                    |                                      |  (1,134,660)               |  (1,739,282)                           |
|                                        |                                    |                                      |                            |                                        |                                  |           |                |   |
| Other      income (expense), net            |                                    |                                      |                            |
| Interest      expense                       |                                    |                                      |                            |  (778,827)                             |  (1,416,548)                     |
| Extinguishment      of debt                 |                                    |                                      |  (13,705,000)              | -                                           |
| Other      income expense                   |                                    |                                      | 67,658                          | 20,770                                      |
| Total      other income (expense), net      |  (14,416,169)                      |  (1,395,778)                         |
|                                        |                                    |                                      |                            |                                        |                                  |           |                |   |
|                                        |                                    |                                      |                            |                                        |                                  |           |                |   |
| Net      Loss                               |                                    |                                      |                            |                                        |                                  | $ (15,550,829) |  $ (3,135,060) |
|                                        |                                    |                                      |                            |                                        |                                  |           |                |   |
| Net      loss per share - basic and diluted |                                    |                                      |
|                                        |                                    |                                      |                            |                                        |                                  |           |                |   |
|                                        | Net      loss per share                 |                                      |                            |  $     (2.65) |  $ (0.39)                        |
|                                        |                                    |                                      |                            |                                        |                                  |           |                |   |
|                                        | Basic      and diluted weighted average |                                      |                            |
|                                        |                                    | common  shares      outstanding | 5,867,815                       | 8,124,012                                   |

----

Table of Contents

EP

|                                        |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |                                                                                                                                                                            |                                                                                          |         2007 |        2008 |
|---------------------------------------------|----------------------------------------------|----------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|------------------------|------------------|
| Revenues                                    |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |                                                                                                                                                                            |                                                                                          |
|                                        | OnDemand      revenues                       |                                                                                                           |  $           1,628,919                                                                                              |  $           1,665,072                            |
|                                        | Enterprise      revenues                     |                                                                                                           |               2,016,695                                                                                   |               2,029,440                 |
|                                        | Total      revenues                          |                                                                                                           |                                                                                                                                                                            |               3,645,614                 |               3,694,512                                                                                   |
|                                        |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |                                                                                                                                                                            |                                                                                          |                   |             |
| Cost      of revenues                       |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |                                                                                                                                                                            |
|                                        |  OnDemand      costs                    |                                                                                                           |                                                                                                                                                                            |                  909,805 |               1,198,350                                                                                   |
|                                        |  Enterprises      costs                 |                                                                                                           |                                                                                                                                                                            |                  411,897 |                  179,506                                                                   |
|                                        |  Total      cost of revenues            |                                                                                                           |               1,321,702                                                                                   |               1,377,856                 |
|                                        |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |                                                                                                                                                                            |                                                                                          |                   |             |
| Gross      profit                           |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |               2,323,912                                                                                   |               2,316,656 |
|                                        |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |                                                                                                                                                                            |                                                                                          |                   |             |
| Operating      expenses                     |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |
|                                        | Sales      and marketing                     |                                                                                                           |               1,290,425                                                                                   |               1,524,994                 |
|                                        | General      and administrative              |                                                                                                           |               3,499,786                                                                                   |               3,209,383                 |
|                                        | Research      and development                |                                                                                                           |               1,609,076                                                                                   |               1,384,977                 |
|                                        | Restructuring      and other special charges |                  (14,285) |                              - |
|                                        | Settlement      of claim                     |                                                                                                           |                                                                                                                                                                            |                (147,500)           |                              - |
|                                        |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |                                                                                                                                                                            |                                                                                          |                   |             |
|                                        |                                         |                                                                                                           | Total      operating expenses                                                                                                                                                   |                                                                                                          |               6,237,502                                                                                   |               6,119,354 |
|                                        |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |                                                                                                                                                                            |                                                                                          |                   |             |
| Loss      from operations                   |                                         |                                                                                                           |             (3,913,590)                                                                                             |             (3,802,698)                           |
|                                        |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |                                                                                                                                                                            |                                                                                          |                   |             |
| Other      income (expense), net            |                                         |                                                                                                           |                                                                                                                                                                            |
| Interest      expense                       |                                         |                                                                                                           |                                                                                                                                                                            |             (3,977,001)                           |             (4,137,920)                                                                                             |
| Extinguishment      of debt expense         |                                         |           (13,705,000)                                       |                              - |
| Interest      and other income              |                                         |               1,273,376                  |                    55,707                                                        |
| Total      other income (expense), net      |                                         |           (16,408,625)                                       |             (4,082,213)                                                                                             |
|                                        |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |                                                                                                                                                                            |                                                                                          |                   |             |
| Net      Loss                               |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |                                                                                                                                                                            |  $  (20,322,215)                                                          |  $ (7,884,911)    |
|                                        |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |                                                                                                                                                                            |                                                                                          |                   |             |
| Net      loss per share - basic and diluted |                                         |                                                                                                           |                                                                                                                                                                            |
|                                        |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |                                                                                                                                                                            |                                                                                          |                   |             |
|                                        | Net      loss per share                      |                                                                                                           |                                                                                                                                                                            |  $ (4.37)                                                                                      |  $ (1.00)                                                                                                                                                                  |
|                                        |                                         |                                                                                                           |                                                                                                                                                                            |                                                                                                          |                                                                                                                                                                            |                                                                                          |                   |             |
|                                        | Basic      and diluted weighted average      |                                                                                                           |                                                                                                                                                                            |                                                                                                          |
|                                        |                                         | common  shares      outstanding                                                                      |                                                                                                                                                                            | 4,646,549                                                                                           | 7,908,715                                                                                                                                                                       |

----

Table of Contents

O

|                         |                                            |                                                    |                                                                                                                |                                                                                                                |                                                                                                                                                          |                                                                                                                                  |                                                                                              |
|------------------------------|-------------------------------------------------|---------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|
|                         |                                            |                                                    |  Common Stock                                                                                                  |                                                                                                                | Retained      Earnings                                                                                                                                        |                                                                                                                                  |                                                                                              |
|                         |                                            |                                                    |                                                                                                                | $0.001                                                                                                              |  Additional      Paid                                                                                                                                    |  (Accumulated                                                                                                                    |  Deferred                                                                                    |  Stockholders' |
|                         |                                            |                                                    |  Shares                                                                                                        |  Par Value                                                                                                     |  In Capital                                                                                                                                              |  Deficit)                                                                                                                        |  Compensation                                                                                |  Equity |
|                         |                                            |                                                    |                                                                                                                |                                                                                                                |                                                                                                                                                          |                                                                                                                                  |                                                                                              |   |
| Balance,      June 30, 2007  |      8,224,239         |  $      8,224                                      |  $      29,898,183                                                                                             |  $      (26,081,329)                                                                                           |  $      (976,356)                                                                                                                                        |  $2,848,722                                                                                                                      |
|                         |                                            |                                                    |                                                                                                                |                                                                                                                |                                                                                                                                                          |                                                                                                                                  |                                                                                              |   |
|                         | Issuance      of common stock under bridge loan |         125,000 | 125                                                                                                                 |                768,625                   |                          -       |                       - |                768,750 |
|                         |                                            |                                                    |                                                                                                                |                                                                                                                |                                                                                                                                                          |                                                                                                                                  |                                                                                              |   |
|                         | Net      loss for the nine months ended         |                                                    |                                                                                                                |                                                                                                                |                                                                                                                                                          |                                                                                                                                  |                                                                                              |
|                         |                                            | March      31, 2008                                     |                    - |                    - |                           - |           (7,884,911)                                                               |             962,006                   |             (6,922,905) |
|                         |                                            |                                                    |                                                                                                                |                                                                                                                |                                                                                                                                                          |                                                                                                                                  |                                                                                              |   |
| Balance,      March 31, 2008 | 8,349,239                                       |  $ 8,349                                           |  $  30,666,808                                                                                       |  $ (33,966,240)                                                                                                |  $ (14,350)                                                                                                                                              |  $  (3,305,433)                                                                                                                  |

----

Table of Contents

EP

|                                                       |                                                                                         |                                                                                    |                                                                                                   |                                                                                              | 2007                            | 2008            |
|------------------------------------------------------------|----------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|---------------------------------|-----------------|
| Cash      flows from operating activities                  |                                                                                         |                                                                                    |
|                                                       | Net      loss                                                                                |                                                                                    |                                                                                                   |  $  (20,322,216)                                                                   |  $      (7,884,911)        |
|                                                       | Adjustments      to reconcile net loss to net cash used in operating    activities           |                                                                                    |                                                                                                   |
|                                                       |                                                                                         | Depreciation      and amortization                                                      | 2,503,460                                                                                              | 3,344,809                                                                                         |
|                                                       |                                                                                         | Extinguishment      of debt                                                             |  13,705,000                                                                                       |                 - |
|                                                       |                                                                                         | Amortization      of stock based compensation                                           |    662,718                                                                              |    962,006                                                                         |
|                                                       | Changes      in assets and liabilities                                                       |                                                                                    |                                                                                                   |
|                                                       |                                                                                         | Accounts      receivables                                                               |    (922,617)                                                                            |      18,256                                                              |
|                                                       |                                                                                         | Other      current assets                                                               |   508,484                                                                                    |    (58,390)                                                                        |
|                                                       |                                                                                         | Accounts      payable                                                                   |   (323,080)                                                                                  |     282,058                                                                   |
|                                                       |                                                                                         | Accrued      liabilities                                                                |   129,853                                                                                    |         (1,590)                                           |
|                                                       |                                                                                         | Deferred      revenue                                                                   |     193,082                                                                        |   371,650                                                                               |
|                                                       |                                                                                         |                                                                                    |                                                                                                   |                                                                                              |                            |            |
|                                                       |                                                                                         |                                                                                    | Net      cash used in operating activities                                                             |   (3,865,316)                                                                           |   (2,966,112)         |
|                                                       |                                                                                         |                                                                                    |                                                                                                   |                                                                                              |                            |            |
| Cash      flows from investing activities                  |                                                                                         |                                                                                    |
|                                                       | Purchase      of property and equipment                                                      |  (26,164)                                                                          |       (40,423)                                                           |
|                                                       | Restricted      cash                                                                         | 46,184,848                                                                              |      565,259                                                                  |
|                                                       | Other      assets                                                                            |                                                                                    | 41,767                                                                                                 |   (38,872)                                                                              |
|                                                       |                                                                                         |                                                                                    |                                                                                                   |                                                                                              |                            |            |
|                                                       |                                                                                         |                                                                                    | Net      cash provided by investing activities                                                         | 46,200,451                                                                                        |     485,964 |
|                                                       |                                                                                         |                                                                                    |                                                                                                   |                                                                                              |                            |            |
| Cash      flows from financing activities                  |                                                                                         |                                                                                    |
|                                                       | Proceeds      from sale of stock net of expenses                                             |  6,000,076                                                                         |                 -      |
|                                                       | Borrowing      and payments under notes payable                                              |  (46,173,073)                                                                      | 1,858,154                                                                                              |
|                                                       | Debt      issuance costs                                                                     |              (537,594) |                 83,172 |
|                                                       |                                                                                         |                                                                                    |                                                                                                   |                                                                                              |                            |            |
|                                                       |                                                                                         |                                                                                    | Net      cash provided by (used in) financing activities                                               |  (40,710,591)                                                                                | 1,941,326                       |
|                                                       |                                                                                         |                                                                                    |                                                                                                   |                                                                                              |                            |            |
|                                                       |                                                                                         |                                                                                    |                                                                                                   | Net      increase (decrease) in cash and cash equivalents                                         |  1,624,544                 |  (538,822) |
|                                                       |                                                                                         |                                                                                    |                                                                                                   |                                                                                              |                            |            |
| Cash      and cash equivalents, on June 30, 2006 and 2007  | 831,184                                                                                      |    689,972                                                               |
|                                                       |                                                                                         |                                                                                    |                                                                                                   |                                                                                              |                            |            |
| Cash      and cash equivalents, on March 31, 2007 and 2008 |  $ 2,455,728                                                                            |  $ 151,150                                                                         |
|                                                       |                                                                                         |                                                                                    |                                                                                                   |                                                                                              |                            |            |
| Supplemental      cash flow information:                   |                                                                                         |                                                                                    |
|                                                       |                                                                                         |                                                                                    |                                                                                                   |                                                                                              |                            |            |
|                                                       | Interest      paid                                                                           |                                                                                    |  $ 1,581,037                                                                                      |  $ 531,135                                                                                   |
|                                                       |                                                                                         |                                                                                    |                                                                                                   |                                                                                              |                            |            |
| Non      cash investing and financing activities:          |                                                                                         |                                                                                    |
|                                                       |                                                                                         |                                                                                    |                                                                                                   |                                                                                              |                            |            |
|                                                       | During      the nine months ended March 31, 2008, the Company issued                         |                                                                                    |                                                                                                   |
|                                                       | 125,000      shares of common stock valued at $768,750 in connection                         |                                                                                    |                                                                                                   |
|                                                       | with      the Bridge Loan.                                                                   |                                                                                    |                                                                                                   |
|                                                       |                                                                                         |                                                                                    |                                                                                                   |                                                                                              |                            |            |
|                                                       | During      the nine months ended March 31, 2007, the Company issued                         |                                                                                    |                                                                                                   |
|                                                       | stock      in retirement of certain debt and outstanding warrants resulting in      the      |                                                                                    |                                                                                                   |
|                                                       | recording      of $670,000 in debt issuance costs.  Additionally, the      Company |                                                                                    |                                                                                                   |
|                                                       | issued      convertible debt with warrants that resulted in a debt discount      of          |                                                                                    |                                                                                                   |
|                                                       | $5,600,000.                                                                                  |                                                                                    |                                                                                                   |                                                                                              |
|                                                       |                                                                                         |                                                                                    |                                                                                                   |                                                                                              |                            |            |

----

Table of Contents

TE

----

Table of Contents

----

Table of Contents

----

Table of Contents

| •     | $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 (the “CAP Notes”),      issued under an indenture with The Bank of New York (the “      Indenture”);     |
| •     | warrants      to purchase an aggregate of 1,214,285 shares of common stock at an      initial exercise price of $7.00 per share (the “CAP Warrants), exercisable      for five years, and containing customary pro-rata anti-dilution      protections; and |
| •     | 1,500,000      fully paid shares of common stock (the “New  Shares”).                                                                                                                                                                                           |

----

Table of Contents

----

Table of Contents

| ·    | 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”).                                                                                                                                                                                                           |
|                     |                                                                                                                                                                                                                                                                                                                                                                                                                   |

----

Table of Contents

| 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 infull. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

Table of Contents

| ·         | 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”).                                                                                                                     |
|                     |                                                                                                                                                                                               |

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

| 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 pershare. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| 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 CapNotes. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Table of Contents

|                                            |   | As      of March 31, 2008 |    |
|-------------------------------------------------|--------|---------------------------|---------|
| Balance      Sheet Data (in thousands):         |   | Actual                    |    |   | As      Adjusted |   |
| (unaudited)                                     |   |                      |    |   |   |   |
| Cash      and cash equivalents                  |   | $                         | 151     |   |   | $ | 1,596 |   |
| Working      capital (deficit)                  |   |                      | (8,734) |   |   |   | (620) |   |
| Total      assets                               |   |                      | 7,176   |   |   |   | 12,449 |   |
| Long      term debt                             |   |                      | 0       |   |   |   | 6,231 |   |
| Total      stockholders’ equity (deficit) |   |                      | (3,305) |   |   |   | 2,408 |   |

----

Table of Contents

|  ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN      OF OPERATION |
|-----------------------------------------------------------------------------------------|

|   | Executive      Summary |
|--------|------------------------|

----

Table of Contents

----

Table of Contents

|                                                           |   | Three      Months Ended March 31 |        |
|----------------------------------------------------------------|--------|----------------------------------|-------------|
|                                                           |   | 2007                             |        |   | 2008 |   |
|                                                           |   | Amount                           |        |   | %      of Revenues |   |   | Amount |   |   | %      of Revenues |   |
|                                                           |   |                             |        |   |   |   |   |   |   |   |   |   |
| Revenues                                                       |   |                             |        |   |   |   |   |   |   |   |   |   |
|      OnDemand      revenues           |   | $                                | 692,280     |   |   |   |   |   |   | 605,264 |   |   |   |   |
|      Enterprise      revenues         |   |                             | 780,608     |   |   |   |   |   |   | 425,200 |   |   |   |   |
| Total      revenues                                            |   |                             | 1,472,888   |   |   |   | 100.0 |   |   |   | 1,030,464 |   |   |   | 100.0 |   |
|                                                           |   |                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost      of revenues                                          |   |                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      OnDemand      cost of revenues   |   |                             | 307,540     |   |   |   |   |   |   |   | 424,415 |   |   |   |   |   |
|      Enterprise      cost of revenues |   |                             | 146,689     |   |   |   |   |   |   |   | 43,759 |   |   |   |   |   |
| Total      cost of revenues                                    |   |                             | 454,229     |   |   |   | 30.8 |   |   |   | 468,174 |   |   |   | 45.4 |   |
| Gross      profit                                              |   |                             | 1,018,659   |   |   |   | 69.2 |   |   |   | 562,290 |   |   |   | 54.6 |   |
|                                                           |   |                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating      expenses                                        |   |                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      Sales      and marketing         |   |                             | 394,984     |   |   |   | 26.8 |   |   |   | 503,209 |   |   |   | 48.8 |   |
|      General      and administrative  |   |                             | 1,183,476   |   |   |   | 80.4 |   |   |   | 1,334,772 |   |   |   | 129.5 |   |
|      Research      and development    |   |                             | 574,859     |   |   |   | 39.0 |   |   |   | 463,591 |   |   |   | 45.0 |   |
|                                                           |   |                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total      operating expenses                                  |   |                             | 2,153,319   |   |   |   | 146.2 |   |   |   | 2,301,572 |   |   |   | 223.3 |   |
|                                                           |   |                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss      from operations                                      |   |                             | (1,134,660) |   |   |   | (77.0) |   |   |   | (1,739,282) |   |   |   | (168.7) |   |
|                                                           |   |                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other      income (expense), net                               |   |                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |

|      Interest      expense       |   |   | (778,827)    |   |   |   | (52.9)    |   |   |   | (1,416,548) |   |   |   | (137.5) |   |
|-----------------------------------------------------------|--------|--------|--------------|--------|--------|--------|-----------|--------|--------|--------|-------------|--------|--------|--------|---------|--------|
|      Extinguishment      of debt |   |   | (13,705,000) |   |   |   | (930.5)   |   |   |   | -           |   |   |   | -       |   |
|      Other      income expense   |   |   | 67,658       |   |   |   | 4.6       |   |   |   | 20,770      |   |   |   | 2.0     |   |
| Total      other income (expense), net                    |   |   | (14,416,169) |   |   |   | (978.8)   |   |   |   | (1,395,778) |   |   |   | (135.5) |   |
|                                                      |   |   |         |   |   |   |      |   |   |   |        |   |   |   |    |   |
| Net      loss                                             |   |   | (15,550,829) |   |   |   | (1,055.8) |   |   |   | (3,135,060) |   |   |   | (304.2) |   |

----

Table of Contents

|                                                           |   | Nine      Months Ended March 31 |      |
|----------------------------------------------------------------|--------|---------------------------------|-----------|
|                                                           |   | 2007                            |      |   | 2008 |   |
|                                                           |   | Amount                          |      |   | %      of Revenues |   |   | Amount |   |   | %      of Revenues |   |
|                                                           |   |                            |      |   |   |   |   |   |   |   |   |   |
| Revenues                                                       |   |                            |      |   |   |   |   |   |   |   |   |   |
|      OnDemand      revenues           |   | $                               | 1,628,919 |   |   |   |   |   |   | 1,665,072 |   |   |   |   |
|      Enterprise      revenues         |   |                            | 2,016,695 |   |   |   |   |   |   | 2,029,440 |   |   |   |   |
| Total      revenues                                            |   |                            | 3,645,614 |   |   |   | 100.0 |   |   |   | 3,694,512 |   |   |   | 100.0 |   |
|                                                           |   |                            |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost      of revenues                                          |   |                            |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      OnDemand      cost of revenues   |   |                            | 909,805   |   |   |   |   |   |   |   | 1,198,350 |   |   |   |   |   |
|      Enterprise      cost of revenues |   |                            | 411,897   |   |   |   |   |   |   |   | 179,506 |   |   |   |   |   |
| Total      cost of revenues                                    |   |                            | 1,321,702 |   |   |   | 36.3 |   |   |   | 1,377,856 |   |   |   | 37.3 |   |
| Gross      profit                                              |   |                            | 2,323,912 |   |   |   | 63.7 |   |   |   | 2,316,656 |   |   |   | 62.7 |   |

|                                                          |   |   |         |   |   |   |    |   |   |   |              |   |
|---------------------------------------------------------------|--------|--------|--------------|--------|--------|--------|---------|--------|--------|--------|-------------------|--------|
| Operating      expenses                                       |   |   |         |   |   |   |    |   |   |   |              |   |
|      Sales      and marketing        |   |   | 1,290,425    |   |   |   | 35.4    |   |   |   | 1,524,994         |   |   |   | 41.3 |   |
|      General      and administrative |   |   | 3,499,786    |   |   |   | 96.1    |   |   |   | 3,209,383         |   |   |   | 86.8 |   |
|      Research      and development   |   |   | 1,609,076    |   |   |   | 44.1    |   |   |   | 1,384,977         |   |   |   | 37.5 |   |
|      Restructuring                   |   |   | (14,285)     |   |   |   | (.4)    |   |   |   | -                 |   |   |   |   |   |
|      Settlement      of claim        |   |   | (147,500)    |   |   |   | (4.1)   |   |   |   | -                 |   |   |   |   |   |
| Total      operating expenses                                 |   |   | 6,237,502    |   |   |   | 171.1   |   |   |   | 6,119,354         |   |   |   | 165.6 |   |
|                                                          |   |   |         |   |   |   |    |   |   |   |              |   |   |   |   |   |
| Loss      from operations                                     |   |   | (3,913,590)  |   |   |   | (107.4) |   |   |   | (3,      802,698) |   |   |   | (102.9) |   |
|                                                          |   |   |         |   |   |   |    |   |   |   |              |   |   |   |   |   |
| Other      income (expense), net                              |   |   |         |   |   |   |    |   |   |   |              |   |   |   |   |   |
|      Interest      expense           |   |   | (3,977,001)  |   |   |   | (109.1) |   |   |   | (4,137,920)       |   |   |   | (112.0) |   |
|      Extinguishment      of debt     |   |   | (13,705,000) |   |   |   | (375.8) |   |   |   | -                 |   |   |   | - |   |
|      Other      income expense       |   |   | 1,273,376    |   |   |   | 34.9    |   |   |   | 55,707            |   |   |   | 1.5 |   |
| Total      other income (expense), net                        |   |   | (16,408,625) |   |   |   | (450.0) |   |   |   | (4,082,213)       |   |   |   | (110.5) |   |
|                                                          |   |   |         |   |   |   |    |   |   |   |              |   |   |   |   |   |
| Net      loss                                                 |   |   | (20,322,215) |   |   |   | (557.4) |   |   |   | (7,884,911)       |   |   |   | (213.4) |   |

----

Table of Contents

----

Table of Contents

----

Table of Contents

| ·         | 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.                                                                                                                                                                                                                                                         |

----

Table of Contents

| ·    | A      new issue of the “Exchanged Bridge Notes; and |
|--------------------------|------------------------------------------------------------|
|                     |                                                       |
| ·         | the      New Shares.                                       |

| 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 pershare. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| 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 CapNotes. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Table of Contents

----

Table of Contents

| ITEM 3.  CONTROLS AND  PROCEDURES |
|----------------------------------------|

----

Table of Contents

| PART      II.  OTHER INFORMATION |
|--------------------------------------------|

| ITEM      1.  | LEGAL PROCEEDINGS |
|--------------------|-------------------|

| ITEM      2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE      OF PROCEEDS |
|-------------------------------------------------------------------------------------|

DE

UB

HE

H

Certification of Principal Executive Officer pursuant toRule 13a-14(a) 

or Rule15d-14(a)

Certification of Principal Financial Officer pursuant toRule 

13a-14(a) or Rule 15d-14(a)

Certifications pursuant to 18 U.S.C. Section 1350, asadopted pursuant 

ToSection 906 of the Sarbanes-Oxley Act Of 2002

----

Table of Contents

| Date:      May | May      15, 2008  | Firepond,      Inc. (Registrant) |
|----------------|-------------------------|----------------------------------|

|   |
|--------|

|   |
|--------|

|                                   |   |   |                      |
|----------------------------------------|--------|--------|---------------------------|
| /s/ L.      Bradlee Sheafe        |   |   | /s/      William P. Stelt |
| L.      Bradlee Sheafe, President |   |   | William      P. Stelt,CFO |