UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





|X|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





For
the quarterly period ended December 31, 2008





OR





|
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES


EXCHANGE
ACT OF 1934





For
the transition period from ________________to ________________





Commission
file number: 000-28515








FIREPOND,
INC.


(Exact name of small business issuer
as specified in its charter)






Delaware                                                                         
  20-3446646


(State
or other jurisdiction
of                                 
                     (IRS
Employer


incorporation
or
organization)                                                      identification
no.)


----------------------------------------------------------------------------------------







11
Civic Center Plaza, Suite 310, Mankato, MN 56001


--------------------------------------------------------------------------------


(Address
of principal executive offices)


(507)
388 0400


--------------------------------------------------------------------------


(Issuer's
telephone number)





--------------------------------------------------------------


(Former
name, former address and former fiscal year,


if
changed since last report)





__________________________





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




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




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





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








The
number of shares outstanding of the issuer's common stock, par value $.001 per
share, as of February 3, 2008 is 16,263,822 shares.





Transitional
Small Business Disclosure Format (Check one): Yes |_| No |X|














FIREPOND, INC.


INDEX







Page
No.


PART
      I. FINANCIAL INFORMATIONITEM 1. CONSOLIDATED
      FINANCIAL STATEMENTS (UNAUDITED)Consolidated Balance Sheet at
      December 31, 2008
            F-1Consolidated Statements
      of Operations for the Three
      Months Ended December 31, 2007and
      2008
            F-2Consolidated Statements
      of Operations for the Six Months
      Ended December 31, 2007and
      2008
            F-3Consolidated Statement of
      Stockholders' Equity (Deficit) for the Six Months Ended December 31,
      2008
            F-4Consolidated
      Statement of Cash Flows for the Six Months Ended December 31,
      2007and2008
            F-5Notes to
      Consolidated Financial Statements
            F-6ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION
            1ITEM 3. CONTROLS AND PROCEDURES
            14PART
      II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
            16ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE
      OF PROCEEDS
            16ITEM 3. DEFAULTS UPON SENIOR SECURITIES
            16ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
            16


ITEM 5. OTHER INFORMATION
            16EM 6. EXHIBITS





Index




PART
      I.  FINANCIAL INFORMATION





ITEM
      1.  CONSOLIDATED FINANCIAL
STATEMENTS




FIREPOND, INC.
  CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2008
(Unaudited)


ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            550,897Accounts
      receivable, net of allowance for doubtfulaccounts
      of $10,000
            
            
            805,465Other
      current assets
            
            
            249,260Total
      current assets
            
            
            1,605,622Property
      and equipment, net
            
            
            178,854Deposits
      and other assets
            
            
            34,212Total
      assets
            
            $
            1,818,688LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)Current
      liabilitiesShort-term
      notes payable
            
            $
            8,601,500Accounts
      payable
            
            
            668,428Accrued
      liabilities
            
            
            1,529,158Deferred
      revenue
            
            
            2,326,775Total
      current liabilities
            
            
            13,125,861Non-current
      deferred revenue
            
            
            44,254Long-term
      debt
            
            
            152,420Total
      liabilities
            
            
            13,322,535Commitments
      and contingenciesStockholders'
      equity (deficit)Preferred
      stock, $0.001 par valueAuthorized
      - 5,000,000 sharesIssued
      and outstanding - none
            
            
            -Common
      stock, $0.001 par valueAuthorized
      - 100,000,000 sharesIssued
      - 10,272,223 shares
            
            
            10,272Treasury
      stock - 8,401 shares, at cost
            
            
            (10)Additional
      paid-in capital
            
            
            33,279,255Accumulated
      deficit
            
            
            (44,737,695)Deferred
      compensation
            
            
            (55,669)Total
      stockholders' equity (deficit)
            
            
            (11,503,847)Total
      liabilities and stockholders' equity (deficit)
            
            $
            1,818,688




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


F-1
 Index


FIREPOND, INC.
  CONSOLIDATED STATEMENT OF OPERATIONS
For the three months  ended December 31, 2007 and 2008
(Unaudited)


2007
            2008RevenuesOnDemand
      revenues
            $
            510,143
            $           737,564Enterprise
      revenues
            
            987,819
            351,699Total
      revenues
            
            
            1,497,962
            1,089,263Cost
      of revenuesOnDemand
      costs
            
            
            393,259
            495,535Enterprises
      costs
            
            
            57,581
            33,377Total
      cost of revenues
            
            450,840
            528,912Gross
      profit
            
            
            1,047,122
            560,351Operating
      expensesSales
      and marketing
            
            467,271
            425,852General
      and administrative
            
            861,069
            469,386Research
      and development
            
            451,093
            260,600Total
      operating expenses
            
            
            1,779,433
            1,155,838Loss
      from operations
            
            
            (732,311)
            (595,487)Other
      income (expense), netInterest
      expense
            
            
            (1,406,537)
            (2,689,827)Interest
      and other income
            
            10,826
            (8,220)Total
      other income (expense), net
            
            (1,395,711)
            (2,698,047)Net
      loss
            
            $
            (2,128,022)
            $      (3,293,534)Net
      loss per share - basic and dilutedNet
      loss per share
            
            $
            (0.27)
            ($0.32)Basic
      and diluted weighted averagecommon shares
      outstanding
            
            
            7,971,229
            10,263,822




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


F-2
 Index





PO




2007
            2008RevenuesOnDemand
      revenues
            $        1,059,808
            $        1,519,585Enterprise
      revenues
            1,604,240
            881,553Total
      revenues
            
            2,664,048
            2,401,138Cost
      of revenuesOnDemand
      costs
            
            773,935
            1,016,335Enterprises
      costs
            
            135,747
            78,714Total
      cost of revenues
            909,682
            1,095,049Gross
      profit
            
            
            1,754,366
            1,306,089Operating
      expensesSales
      and marketing
            1,021,785
            752,218General
      and administrative
            1,874,611
            932,235Research
      and development
            921,386
            504,713Restructuring
      charges
            -
            7,524Total
      operating expenses
            
            3,817,782
            2,196,690Loss
      from operations
            
            (2,063,416)
            (890,601)Other
      income (expense), netInterest
      expense
            
            
            (2,721,372)
            (3,420,593)Interest
      and other income
            34,937
            8,491Total
      other income (expense), net
            (2,686,435)
            (3,412,102)Net
      loss
            
            $
            (4,749,851)
            $      (4,302,703)Net
      loss per share - basic and dilutedNet
      loss per share
            $
            (0.61)
            $               (0.42)Basic
      and diluted weighted averagecommon shares
      outstanding
            
            7,814,360
            10,174,537






F-3
 Index





FIREPOND, INC.
  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the six months ended December 31, 2008
(Unaudited)


Common Stock
            
            
            
            
            
            
            
            
            Retained
      Earnings$
            0.001
            
            
            Additional
      Paid
            
            
            Treasury
            
            
            (Accumulated
            
            
            Deferred
            
            
            Stockholders'Shares
            
            
            Par Value
            
            
            In Capital
            
            
            Stock
            
            
            Deficit)
            
            
            Compensation
            
            
            Equity (Deficit)Balance,
      June 30, 2008
            
            
            9,915,080
            
            
            $
            9,915
            
            
            $
            32,695,863
            
            
            $
            (10)
            
            
            $
            (40,434,992)
            
            
            $
            (88,002)
            
            
            $
            (7,817,226)Imputed
      executive compensation
            
            
            
            
            
            
            
            
            
            
            93,750
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            93,750Sale
      of common stock net of expenses
            
            
            357,143
            
            
            
            357
            
            
            
            489,642
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            489,999Net
      loss for the six months ended December 31, 2008
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,302,703)
            
            
            
            32,333
            
            
            
            (4,270,370)Balance,
      December 31, 2008
            
            
            10,272,223
            
            
            
            10,272
            
            
            
            33,279,255
            
            
            
            (10)
            
            
            
            (44,737,695)
            
            
            
            (55,669)
            
            
            
            (11,503,847)










F-4
 Index




IREP


2007
              
              
              2008Cash
      flows from operating activitiesNet
      loss
              
              $
              (4,749,851)
              
              
              $
              (4,302,703)Adjustments
      to reconcile net loss to net cash used in operating
    activitiesImputed
      executive compensation
              
              
              -
              
              
              
              93,750Depreciation
      and amortization
              
              
              2,196,768
              
              
              
              2,631,246Amortization
      of stock based compensation
              
              
              570,940
              
              
              
              32,333Changes
      in assets and liabilitiesAccounts
      receivables
              
              
              (728,094)
              
              
              
              210,995Other
      current assets
              
              
              (29,576)
              
              
              
              265,655Accounts
      payable
              
              
              62,512
              
              
              
              (46,501)Accrued
      liabilities
              
              
              (179,002)
              
              
              
              400,614Deferred
      revenue
              
              
              515,649
              
              
              
              686,374Net
      cash used in operating activities
              
              
              (2,340,654)
              
              
              
              (28,237)Cash
      flows from investing activitiesPurchase
      of property and equipment
              
              
              (36,683)
              
              
              
              (152,421)Restricted
      cash
              
              
              368,264
              
              
              
              -Other
      assets
              
              
              (24,978)
              
              
              
              11,226Net
      cash provided by or used in investing activities
              
              
              306,603
              
              
              
              (141,195)Cash
      flows from financing activitiesProceeds
      from sale of stock net of expenses
              
              
              -
              
              
              
              490,000Borrowings
      under notes payable
              
              
              1,783,581
              
              
              
              152,420Payments
      under notes payable
              
              
              (300,573)
              
              
              
              (34,986)Debt
      issuance costs
              
              
              112,145
              
              
              
              -Net
      cash provided by financing activities
              
              
              1,595,153
              
              
              
              607,434Net
      increase (decrease) in cash and cash equivalents
              
              
              (438,898)
              
              
              
              438,002Cash
      and cash equivalents, on June 30, 2008
              
              
              689,972
              
              
              
              112,895Cash
      and cash equivalents, on December 31, 2008
              
              $
              251,074
              
              
              $
              550,897Supplemental
      cash flow information:Interest
      paid
              
              $
              361,970
              
              
              $
              439Non
      cash investing and financing activities:During
      the six months ended December 31, 2007, the Company issued125,000
      shares of common stock valued at $768,750 in connectionwith
      the bridge loan.
 
  F-5
 Index


NOTE 1 – ORGANIZATION AND LINES OF BUSINESS





Description of
Business







Firepond,
Inc. is a leading pioneer of multi-tenant, on-demand software that automates and
simplifies the process companies use to sell complex products and services. Our
Configure, Price, Quote, or CPQ, software-as-a-service automates complex sales
processes, improves order accuracy, and accelerates sales cycles. Companies with
complex products may achieve measurable and meaningful returns on investment
using the Company’s technology by reducing total cost of sales, whether sales
are generated through a direct sales force, an indirect channel network or via
the web.





The
Company generates revenue from its Software-as-a-Service or OnDemand,
multi-tenant, subscription based software as well as legacy enterprise license
and service revenue.  Our Software-as-a-Service product was launched
in commercial form in January 2006 and the Company is transitioning from its
historic enterprise software model to a web based delivery model to access new
markets and broaden the base of end users.   License revenue is
generated from licensing the rights to use of the Company’s software
products.  Service revenue is generated from the sale of maintenance,
consulting and training services performed for customers that license the
Company’s products.  Reported revenue is delineated between our
OnDemand business segment and our legacy enterprise software business
segment.





Prior to
September 13, 2005, the Company’s assets were owned and operated by a
predecessor company also named Firepond, Inc., or Old Firepond, which was
subsequently liquidated.  Its remaining assets and liabilities are
being administered by a trust.


F-6
 Index


Principles of
Consolidation





Pursuant
to FIN 46(R), the financial statements presented herein for the fiscal periods
ended December 31, 2007 and 2008 include the consolidated financial statements
of Firepond and the Firepond liquidating trust.





Basis of Presentation and
Continuance of Operations





The
accompanying unaudited, consolidated financial statements have been
pre­pared by the Company in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
pursuant to Article 10 of Regulation S-X of the Securities and Exchange
Commission.  Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. The results for the three and six months ended
December 31, 2008 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2009, or for any future period.
These unaudited consolidated financial statements and notes should be read in
conjunction with the consolidated financial statements included in the Company's
Form 10-K for the fiscal year ended June 30, 2008.






Furthermore,
these unaudited, consolidated financial statements have been prepared by the
Company on a going concern basis. As such, the statements anticipate the
realization of assets and the liquidation of liabilities in the normal course of
business.





Notwithstanding
this fact, the Company has for some time been incurring losses and negative cash
flow from operations. For the fiscal year ended June 30, 2008, we incurred
a net loss of approximately $14.4 million and negative cash flows from
operations of approximately $4.9 million. For the six month period ended
December 31, 2008 we incurred a net loss of approximately $4.3 million and a
negative cash flow from operations of approximately $28,000.  The Company
does not believe operational cash flows over the ensuing weeks will be
sufficient either to sustain present operations or service its
indebtedness.  Given the recent turmoil in the financial markets, its
recent financial performance and its present cash position, the Company does not
believe it will be able to access the financial markets to fund capital
requirements.


F-7
 Index


On
January 5, 2009, the Company certified that an Event of Default occurred
pursuant to the Company’s Amended and Restated Senior Secured Convertible Notes
due December 2009 (the “Exchanged CAP Notes”) and the Company’s Amended and
Restated Senior Secured Subordinated Notes due July 2009 (the “Exchanged Bridge
Notes”).  The Company’s January 5, 2009 certification of an Event of
Default under the Exchanged CAP Notes and the Exchanged Bridge Notes is not
changed in any way by the financial information contained in this
Report.





As a
result of the default, the Company has written off to interest expense debt
issuance costs of $452,469, debt discounts of $1,253,333 and accelerated
interest under the Exchanged Bridge Notes of $250,393.





On
January 8, 2009, the Company received a letter from counsel for FP Tech
Holdings, LLC (“FP Tech”), an affiliate of Acclaim Financial Group (“AFG”), and,
in conjunction with affiliates of AFG and companies related to AFG, the holder
of approximately 72% of the Company’s common stock and approximately 60% of the
Exchanged CAP Notes, declaring an Event of Default has occurred under the
Exchanged CAP Notes due to, among other things, the Company’s failure to meet
the minimum “Consolidated EBITDA” as set forth in Section (4)(a)(xi) of the
Exchanged CAP Notes at December 31, 2008.   As a consequence, FP
Tech declared all amounts due and owing under the Exchanged CAP Notes
immediately due and payable.  FP Tech also stated that it may exercise
any and all of its rights and remedies including, without limitation, proceeding
to foreclose on its collateral pursuant to Article 9 of the Uniform Commercial
Code.





As of the
date of this report, the outstanding principal amount of the Exchanged CAP Notes
is $5,264,000.  The outstanding principal amount of the Exchanged
Bridge Notes is $3,921,643 (including accrued interest of
$584,143).





Since
April 2008, the Company has been dependent upon its majority shareholder to
provide funding.    However, the majority shareholder has
indicated that it is unlikely to provide additional equity
financing.





The
Company is in communication with the holders of the Exchanged CAP Notes
regarding its state of financial affairs.  However, the Company has
been informed by representatives of FP Tech, holder of approximately 60% of the
Exchanged Bridge Notes, that it intends to direct the collateral agent for the
Exchanged Bridge Notes to proceed with a nonjudicial foreclosure and public sale
of the Company’s assets.  Under this process, unless a higher or
better offer for the Company’s assets is received at the public sale, the
participating holders of the Exchanged CAP Notes will credit bid their secured
indebtedness under the Exchanged CAP Notes to acquire all or substantially all
of the Company’s assets via an entity formed for the purpose of such transaction
(“FirepondX”).  Such a transaction would have serious impact on the
value of the Company’s existing common stock as well as any obligations ranking
junior to the Exchanged CAP Notes. The Company is not presently aware of any
other viable alternatives likely to preserve and maximize value for its
stakeholders.


F-8
 Index


In
connection with such a transaction, FP Tech has stated it will provide up to $10
million additional financing to support the operations of FirepondX’s business
going forward, including up to $500,000 of near term financing if the foregoing
foreclosure and sale process can be successfully
implemented.    However, there can be no assurance that any
such transaction or any other transaction can or will be
consummated.





The
Company completed a financial restructuring in April 2008 that included from FP
Tech (1) an investment of $1,500,000 cash, (2) conversion of $336,000 senior
secured convertible notes plus accrued interest held by it to common stock, and
(3) conversion of $100,000 of other debt plus accrued interest held by it to
common stock. The financial restructuring also included extension of the
maturity dates of the Exchanged CAP Notes and Exchanged Bridge Notes to December
31, 2009 and July 1, 2009, respectively.





Furthermore,
in August 2008, as provided in the April 2008 financial restructuring, FP Tech
contributed an additional $500,000 in equity to the Company. (See, Management
Discussion and Analysis, Liquidity and Capital Resources, Funding Agreement –
August 2008).





Some
aspects of the Company’s operational restructuring commenced in May 2008 are
beginning to be reflected in its Statement of Operations for the six months
ended December 31, 2008, but are not sufficient to permit the Company to
continue to fund losses, attract new equity investment or service its
indebtedness.





Operations
have been severely affected as a result of continuing losses, the Company’s high
levels of indebtedness and inability to access the financial
markets.   While the Company may conduct further discussions with the
holders of its Exchanged CAP Notes, the Notice of Default and the Company’s
present financial condition leaves the Company with very limited
alternatives.  As proposed by FP Tech, a foreclosure on the Company’s
assets will have severe impact on the value of the Company’s common stock and
any obligations ranking junior to the Exchanged CAP Notes.





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


F-9
 Index




NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





The
Company’s significant accounting policies are disclosed in its Annual Report on
Form 10-K for the fiscal year ended June 30, 2008 and have not changed as of
December 31, 2008.




NOTE
3 - INCOME TAXES





No
provision for income taxes is required at December 31, 2008, because, in
management’s estimation the Company will not recognize any taxable income
through the fiscal year ended June 30, 2009.





As a
result of the issuance of common stock to FP Tech and its affiliate in April
2008, a change of control may have occurred pursuant to Section 382 of the
Internal Revenue Code of 1986 which could limit the Company’s ability to utilize
its net operating loss in future periods.






NOTE
4 – LEASE AGREEMENT





Equipment Lease
Agreement





On February 11, 2008, the Company
entered into an equipment lease agreement with FP Tech, wherein the Company
established a credit facility of up to $200,000 to be used for capital purchases
and general corporate purposes.  The agreement has a twenty four month
lease commitment term.  Outstanding principal accrues interest at the
rate of 8% per annum during the first twelve months, 9% per annum during months
13-24 and 20% thereafter. There is no minimum monthly repayment
required.  Accrued interest is due and payable at the earlier of the
end of the lease commitment term or upon optional repayment of
Principal.  Principal may be repaid in full or in part at any time
without penalty, but in no case later than expiration of the lease commitment
term.   Outstanding principal and accrued interest at April 25,
2008 was converted to common stock of the Company.  In October 2008
the Company drew down approximately $152,000 under the equipment lease agreement
for the purchase of new computers, monitors, servers, storage capacity and
related technology equipment.    At December 31, 2008, principal
outstanding on the equipment lease agreement was approximately
$152,000.


F-10
 Index


NOTE
5 – NOTES PAYABLE





Senior Secured Convertible
Notes due December 2009





As part
of the Funding Agreement (described below), the Company and the holders of its
Exchanged CAP Notes agreed to extend the maturity of the Exchanged CAP Notes
under certain conditions described below.  For a more complete
discussion of the Exchanged CAP Notes, see Note 5 of the Company’s Form 10-K for
the fiscal 2008.





The
Required Holder (as defined in the Exchanged CAP Notes) has sent the Company a
Notice of Default, declaring all amounts due and owing under the Exchanged CAP
Notes immediately due and payable.  The Required Holder also stated
that it may exercise any and all of its rights and remedies including, without
limitation, proceeding to foreclose on its collateral pursuant to Article 9 of
the Uniform Commercial Code.  See Note 8, Subsequent
Events.








Senior Secured Subordinated
Notes due July 2009





As part
of the Funding Agreement (described below), the Company and the holders of its
Exchanged Bridge Notes agreed additional shares of common stock would be issued
such holders and to extend the maturity of the Exchanged Bridge Notes under
certain conditions described below.   For a more complete
discussion of the Exchanged Bridge Notes, see Note 5 of the Company’s Form 10-K
for the fiscal year 2008.




Funding
Agreement – August 2008





Pursuant
to the Common Stock Purchase Agreement, dated as of April 25, 2008, FP
Tech, an affiliate member of the Company’s majority shareholder group, was
granted by Firepond an option to purchase approximately 357,143 shares of Common
Stock at a purchase price of no more than $1.40 per share with gross cash
proceeds to the Company of at least $500,000 (the "Subject
Financing").  The Subject Financing was completed as of August 13,
2008, with the Company receiving $500,000 in cash from FP Tech and the Company
issuing 357,143 shares of common stock to FP Tech.  See the Company’s
Form 10-Q for the three month period ended September 30, 2009 for a more
detailed discussion of the Funding Agreement – August 2008.


F-11
 Index




NOTE
6 – LITIGATION





In August
2001, Old Firepond was named as a defendant in a securities’ class action
lawsuit filed in United States District Court for the Southern District of New
York related to its initial public offering (“IPO”) in February, 2000.  The
lawsuit also named certain of t he
underwriters of the IPO, including FleetBoston, Dain Rauscher, and SG Cowen, as
well as officers and directors of Old Firepond, Klaus P. Besier and Paul K.
McDermott, as defendants.  Approximately 300 other issuers and their
underwriters have had similar suits filed against them, all of which have been
included in a single coordinated proceeding in the Southern District of New York
(the “IPO Litigations”).  The complaints allege that the prospectus and the
registration statement for the IPO failed to disclose that the underwriters
allegedly solicited and received “excessive” commissions from investors and that
some investors in the IPO allegedly agreed with the underwriters to buy
additional shares in the aftermarket in order to inflate the price of Old
Firepond’s stock.  An amended complaint was filed on April 19, 2002. 
Old Firepond and the officers and directors identified above were named in the
suits pursuant to Section 11 of the Securities Act, Section 10(b) of
the Securities Exchange Act of 1934 (the “Exchange Act”), and other related
provisions.  The complaints seek unspecified damages, attorney and expert
fees, and other unspecified litigation costs.





In June
2003, a proposed settlement of this litigation was structured between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies.    In July 2003, a committee of Old Firepond’s Board
of Directors conditionally approved the proposed partial settlement. The
settlement would have provided, among other things, a release of Old Firepond
and the individual defendants for the alleged wrongful conduct in the amended
complaint in exchange for a guarantee from Old Firepond’s insurers regarding
recovery from the underwriter defendants and other consideration from the
company regarding its underwriters.





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





On
August 14, 2007, plaintiffs filed a second consolidated amended class
action complaint for violations of the federal securities laws against Old
Firepond and others. The Court has directed the issuer defendants to answer
by January 30, 2009.  The parties presently are engaged
in discovery with regard to focus cases that include Old
Firepond.





Recent
news articles indicate settlement discussions in this matter are occurring.
The Company cannot predict whether the parties will conclude a
settlement that complies with the Second Circuit’s mandate or what the
result of the litigation will be if no settlement is agreed upon and
approved.




The
Company is currently involved in other litigation with service
providers, the outcome of which is uncertain.   However, a
finding of material liability in any Company litigation or the incurrence of
significant expense in defending or prosecuting such litigation would be
material and adverse to the Company.  In addition, we may from time to
time be subject to various other claims and legal actions arising in the
ordinary course of business.  The ultimate disposition of these matters can
not be determined at this time.


F-12
 Index





NOTE
7 - STOCKHOLDERS' EQUITY





Equity
Contribution





On August
13, 2008, the Company issued 357,143 shares of common stock to FP Tech for a
purchase price of $500,000, or $1.40 per share.





NOTE
8 – SUBSEQUENT EVENTS





Senior Secured Convertible
Notes due December 2009





On
January 5, 2009, the Company certified that an Event of Default occurred
pursuant to the Company’s Exchanged CAP Notes and the Company’s Exchanged Bridge
Notes.  The Company’s January 5, 2009 certification of an Event of
Default under the Exchanged CAP Notes and the Exchanged Bridge Notes is not
changed in any way by the financial information contained in this
Report.





As a
result of the default, the Company has written off to interest expense debt
issuance costs of $452,469, debt discounts of $1,253,333 and accelerated
interest under the Exchanged Bridge Notes of $250,393.





On
January 8, 2009, the Company received a letter from counsel for FP Tech, an
affiliate of AFG, and, and in conjunction with affiliates of AFG and companies
related to AFG, the holder of approximately 72% of the Company’s common stock
and approximately 60% of the Exchanged CAP Notes, declaring an Event of Default
has occurred under the Exchanged CAP Notes due to, among other things, the
Company’s failure to meet the minimum “Consolidated EBITDA” as set forth in
Section (4)(a)(xi) of the Exchanged CAP Notes at December 31,
2008.   As a consequence, FP Tech declared all amounts due and
owing under the Exchanged CAP Notes immediately due and payable.  FP
Tech also stated that it may exercise any and all of its rights and remedies
including, without limitation, proceeding to foreclose on its collateral
pursuant to Article 9 of the Uniform Commercial Code.


F-13
 Index




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





Our
discussion includes forward-looking statements, which involve certain risks and
uncertainties.  Certain statements in the “Management’s Discussion and
Analysis of Financial Condition or Plan of Operations” are forward-looking
statements that involve risks and uncertainties. Words such as anticipates,
expects, intends, plans, believes, seeks, estimates, and similar expressions
identify such forward-looking statements. The forward-looking statements
contained herein are based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those set forth under “Executive
Summary,” “Corporate Overview” and “Liquidity and Capital Resources”
included in these sections and those appearing elsewhere in this Form 10-Q.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management’s analysis only as of the date
hereof.  We assume no obligation to update these forward-looking
statements to reflect actual results or changes in factors or assumptions
affecting forward-looking statements. Rounding of figures for presentation
purposes sometimes results in inconsistent results for comparison
purposes.  We believe these inconsistencies to be
immaterial.  As used in this report, the terms “we”, “us”, “our” or
“the Company” mean Firepond, Inc.


-1-
 Index







Executive
      Summary





The
Company does not believe operational cash flows over the ensuing weeks will be
sufficient either to sustain present operations or service its
indebtedness.  Given the recent turmoil in the financial markets, its
recent financial performance and its present cash position, the Company does not
believe it will be able to access the financial markets to fund capital
requirements.





On
January 5, 2009, the Company certified that an Event of Default occurred
pursuant to the Exchanged CAP Notes and the Company’s Exchanged Bridge
Notes.   The Company’s January 5, 2009 certification of an Event
of Default under the Exchanged CAP Notes and the Exchanged Bridge Notes is not
changed in any way by the financial information contained in this
Report.





As
a result of the default, the Company has written off to interest expense debt
issuance costs of $452,469, debt discounts of $1,253,333 and accelerated
interest under the Exchanged Bridge Notes of $250,393.


On
January 8, 2009, the Company received a letter from counsel for FP Tech, an
affiliate of AFG, and, in conjunction with affiliates of AFG and companies
related to AFG, the holder of approximately 72% of the Company’s common stock
and approximately 60% of the Exchanged CAP Notes, declaring an Event of Default
has occurred under the Exchanged CAP Notes due to, among other things, the
Company’s failure to meet the minimum “Consolidated EBITDA” as set forth in
Section (4)(a)(xi) of the Exchanged CAP Notes at December 31,
2008.   As a consequence, FP Tech declared all amounts due and
owing under the Exchanged CAP Notes immediately due and payable.  FP
Tech also stated that it may exercise any and all of its rights and remedies
including, without limitation, proceeding to foreclose on its collateral
pursuant to Article 9 of the Uniform Commercial Code.





As
of the date of this report, the outstanding principal amount of the Exchanged
CAP Notes is $5,264,000.  The outstanding principal amount of the
Exchanged Bridge Notes is $3,921,643 (including accrued interest of
$584,143).





The
Exchanged CAP Notes are now classified as current obligations of the
Company.  All interest associated with the Exchanged Bridge Notes has
been accelerated and all deferred issuance costs associated with both the
Exchanged CAP Notes and the Exchanged Bridge Notes have been written off as of
December 31, 2008.





Since
April 2008, the Company has been dependent upon its majority shareholder to
provide funding.      However, the majority shareholder
has indicated that it is unlikely to provide additional equity
financing.





The
Company is in communications with the holders of the Exchanged CAP Notes
regarding its state of financial affairs.  However, the Company has
been informed by representatives of FP Tech, holder of approximately 60% of the
Exchanged Bridge Notes, that it intends to direct the collateral agent for the
Exchanged Bridge Notes to proceed with a nonjudicial foreclosure and public sale
of the Company’s assets.  Under this process, unless a higher or
better offer for the Company’s assets is received at the public sale, the
participating holders of the Exchanged CAP Notes will credit bid their secured
indebtedness under the Exchanged CAP Notes to acquire all or substantially all
of the Company’s assets via FirepondX.  Such a transaction would have
serious impact on the value of the Company’s existing common stock as well as
any obligations ranking junior to the Exchanged CAP Notes.   The
Company is not presently aware of any other viable alternatives likely to
preserve and maximize value for its stakeholders.








In connection with such a
transaction, FP Tech has stated it will provide up to $10 million additional
financingto support the
operations of FirepondX’s business going forward, including up to $500,000 of
near term financing if the foregoing foreclosure and sale process can be
successfully implemented.     However, there can
be no assurance that any such transaction or any other transaction can or will
be consummated.  See, "Liquidity adn Capital Resources,"
below.


-2-
 Index


Corporate
Overview





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





We offer
our solutions on an annual or multi-year subscription basis. We sell our
products by targeting selected vertical markets, currently consisting of high
technology, transportation, construction machinery, agricultural equipment, and
service companies selling complex products and
services.   Unrecognized revenue for existing contracts totals
approximately $7.4 million at December 31, 2008. Our current customers
include Bell Helicopter, Alcan Cable (Division of Alcan Products), Cummins,
Inc., Deere & Co., G.E. Equipment Services Europe BV, Redback Networks,
Rolls Royce Motor Cars, SRI Surgical, and Symantec
Corporation.




The
Company’s predecessor, Old Firepond, founded in 1983, was focused on providing
enterprise software solutions.  We inherited the legacy portion of
that business which continues to generate revenue from maintenance and service
contracts. However, our resources are no longer focused on producing new
enterprise revenue.





Industry
Background





The
Enterprise Application Software Market





Over the
last thirty-five years, there have been several shifts in the way vendors
deliver enterprise software applications. In the 1970s and 1980s, vendors
delivered application software through centralized mainframe based systems. This
evolved in the 1990s to client/server computing. Historically, only large
businesses could afford to make investments in enterprise applications to gain
an enterprise-wide view and automate and improve basic processes. In addition,
large businesses often attempted to customize and connect various incompatible
packaged applications through lengthy and costly integration
efforts.  Many large enterprises never realized the benefits of these
applications for a variety of reasons, including the difficulty of deployment,
low user adoption rates, lack of ubiquitous access, high total cost of ownership
and a relatively low return on investment.


-3-
 Index





In an
attempt to address these challenges, many enterprise software application
vendors adapted their products to be accessible over the Internet. However, as
these products were not designed originally to be delivered over the Internet as
a service and were limited in their ability to serve all sizes of business
across many industries, they often failed to address many of the shortcomings of
traditional business application software. In addition, because these
applications were not easy to use, users were hesitant to adopt these complex,
non-intuitive installed applications.







On-Demand
Application Services





The
pervasiveness of the Internet, along with the dramatic declines in the pricing
of computing technology and network bandwidth, have enabled a new generation of
enterprise computing in which substantial components of information technology,
or IT, infrastructure can be provisioned and delivered dynamically over the
Internet on an outsourced basis. This new computing paradigm is sometimes
referred to as utility computing or cloud computing, while the outsourced
software applications are referred to as on-demand application
services.





Software-as-a-Service
(“SaaS”), which is an on-demand application service, enables businesses to
subscribe to a wide variety of application services that are developed
specifically for, and delivered over, the Internet on an as-needed basis with
little or no implementation services required and without the need to install
and manage third-party software in-house.





SaaS
application services contrast with the traditional enterprise software model,
which requires each customer to install, configure, manage and maintain the
hardware, software and network services to implement the software application
in-house. Moreover, traditional enterprise software vendors must maintain
support for numerous legacy versions of their software and compatibility with a
wide array of hardware devices and operating environments. As a result, they
dedicate fewer resources to innovation and incur higher research and development
expenses as a percentage of revenue than on-demand application service
providers.





SaaS
applications are typically multi-tenant in nature, leveraging a common
infrastructure and software code among all customers. With multi-tenancy,
customers benefit from access to the latest release of the application,
automated upgrades, more rapid innovation and the economies of a shared
infrastructure.





Businesses
are able to realize many of the benefits offered by traditional enterprise
software vendors, such as a comprehensive set of features and functionality and
the ability to customize and integrate with other applications, while at the
same time reducing the risks and lowering the total costs of owning enterprise
software. As a result, we believe the continued emergence of SaaS applications
is bringing about a fundamental transformation in the enterprise software
industry as businesses will be able to replace their purchased software with
subscriptions to a wide range of application services.


-4-
 Index


Partners





Firepond
partners with other solution providers adding value to our comprehensive
solution for optimizing the sales process. We partner with global leaders in
their respective fields to extend and enhance our product offering, provide
consulting and leverage complementary solutions, including industry-specific
solutions.




salesforce.com
- Firepond has partnered with salesforce.com, the leading provider, based on
revenues and market share, of SaaS offerings. Salesforce.com has more than
51,000 customers. Salesforce.com provides comprehensive customer relationship
management, or CRM, service to businesses of all sizes and industries
worldwide.    Firepond CPQTM OnDemand provides an
out-of-the-box seamless integration, single sign-on experience with
salesforce.com’s sales force automation (SFA) application as well as
salesforce.com’s partner relationship management (PRM) application,
salesforce.com’s principal offerings. Now both direct and indirect sales channel
users can take full advantage of salesforce.com’s SFA and PRM applications and
Firepond’s configuration and quoting application as if the user were utilizing a
single application.





Kozo
Keikaku Engineering, Inc., or KKE, is one of the largest engineering firms in
Japan providing consulting services to manufacturers throughout Japan and Asia.
KKE resells and implements our products, on a non-exclusive basis, in the
Japanese market.




Financial
Condition





At
December 31, 2008, the Company had net assets of negative $11.5 million as
compared to negative $561,000 at December 31, 2007. Accounts payable at December
31, 2008 were $668,000 as compared to $633,000 at December 31, 2007. Accrued
liabilities were $1.5 million at December 31, 2008 as compared to $1.1 million
at December 31, 2007. Notes payable (exclusive of accrued interest of $584,000
on the Exchanged Bridge Notes) were $8.8 million at December 31, 2008 as
compared to $5.7 million at December 31, 2007. The increase in notes payable was
due primarily to the reclassification of the Exchanged CAP Notes as current
obligations.   (See Note 4 to the Consolidated Financial
Statements). The Company had a working capital deficit of $11.5 million as of
December 31, 2008 as compared to working capital deficit of $4.1 million at
December 31, 2007 which resulted largely from the reclassification of the
Exchanged CAP Notes as current obligations.


-5-
 Index


Results
of Operations







Three
Months Ended December 31, 2007 and December 31, 2008





Revenues
            
            2007
            %
      of Revenue
            2008
            %
      of Revenue


ON
      Demand revenues
            $       510,143
            34.06%
            $       737,564
            67.71%Enterprise
      revenues
            987,819
            65.94%
            351,699
            32.29%Total
      revenues
            1,497,962
            100.00%
            1,089,263
            100.00%Cost
      of goods soldON
      Demand costs
            393,259
            26.25%
            495,535
            45.49%Enterprises
      costs
            57,581
            3.84%
            33,377
            3.06%Total
      cost of goods sold
            450,840
            30.10%
            528,912
            48.56%Gross
      profit
            
            1,047,122
            69.90%
            560,351
            51.44%Operating
      expensesSales
      and marketing
            467,271
            31.19%
            425,852
            39.10%General
      and administrative
            861,069
            57.48%
            469,386
            43.09%Research
      and development
            451,093
            30.11%
            260,600
            23.92%Total
      operating expenses
            1,779,433
            118.79%
            1,155,838
            106.11%Income/(loss)
      from operations
            (732,311)
            -48.89%
            (595,487)
            -54.67%Other
      income (expense), netInterest
      (expense)
            (1,406,537)
            -93.90%
            (2,689,827)
            -246.94%Other
      income (expense)
            10,826
            0.72%
            (8,220)
            -0.75%Total
      other income (expense), net
            (1,395,711)
            -93.17%
            (2,698,047)
            -247.69%Net
      loss from continuing operations
            (2,128,022)
            -142.06%
            (3,293,534)
            -302.36%Net
      Loss
            
            $   (2,128,022)
            -142.06%
            $   (3,293,534)
            -302.36%




-6-
 Index




Revenues





Revenues
for the three months ended December 31, 2008 were approximately $1.1 million as
compared to revenues of approximately $1.5 million for the three months ended
December 31, 2007, a decrease of $407,000 or 27.3%. This decrease in revenues
resulted primarily from extending renewal of an enterprise license normally
scheduled in the second fiscal quarter of each year into the third fiscal
quarter 2009.  This same shift accounts for 75% of the decrease in
revenues for prior year quarter to the current year
quarter.    We continue to assist existing customers with
maintenance issues in our Enterprise business segment, but do not expend any
resources for new Enterprise clients. OnDemand revenues totaling $738,000 during
the quarter ended December 31, 2008 increased by approximately $227,000, or
44.6%, from approximately $510,000 in the prior year fiscal quarter ended
December 31, 2007.  Due to the recurring nature of our OnDemand
revenue we anticipate that this segment of our business will continue to
grow.    Enterprises revenues for the three months ended
December 31, 2008 were approximately $352,000 as compared to Enterprise revenues
of approximately $988,000 for the three months ended December 31, 2007, a
decrease of $636,000 due to the declining focus on this business segment and the
extension of an Enterprise license renewal from the quarter ended December 31,
2007 to the quarter ending March 31, as noted above.  Enterprise
revenues are expected to decrease in future periods due to the Company’s
continuing focus on its OnDemand segment.




Cost
of Revenues





Cost of
revenues, which consist of license costs, maintenance costs, hosting costs and
service costs were $528,000 for the three months ended December 31, 2008 as
compared to $451,000 for the three months ended December 31, 2007, an increase
of $78,000, or 17.3%.  Specifically, OnDemand cost of revenues
increased $102,000 or approximately 26.0% during the three months ended December
31, 2008 over the prior year fiscal quarter end, while Enterprise cost of
revenues declined $24,000, or 42.0%, in comparison to the prior year three month
period.  The increase in OnDemand costs was primarily characterized by
increased hosting and support costs attributable to the growth in the recurring
revenue portion of our OnDemand business as well as a temporary shift of
personnel from our research and development department to assist in implementing
our OnDemand product and supporting customer enhancement projects. The decline
in Enterprise costs was attributable to our shifting focus to the OnDemand
segment and a continuing decline in support requirements to the Enterprise
segment.




Operating
Expenses





Operating
expenses were $1.2 million in the three months ended December 31, 2008 as
compared to $1.8 million for the three months ended December 31, 2007, a
decrease of $624,000, or 35.0%. The decrease was primarily the result of the
operational restructuring implemented in May 2008 that included closing our
Boston-area headquarters and related operations.   Sales and
marketing expenses decreased by $41,000, or 8.9%.   The decrease
is directly attributable to the May 2008 operational restructuring that included
elimination of the marketing department in our former Boston-area headquarters;
offset in part by increased costs associated with the Company’s participation at
Dreamforce, salesforce.com’s annual national conference, and the engagement of
an independent sales and marketing firm.  General and administrative
expenses decreased by $392,000, or 45.5%, again primarily the result of the
closing of our Boston-area headquarters in May 2008 that included resignation of
our former Chief Executive Officer and other members of executive
management.  Research and development costs decreased in the three
months ended December 31, 2008 to $260,000 from $451,000 in the prior year three
month period, a decrease of $191,000, or 42.2%.  The decrease is
primarily attributable to a temporary shift of personnel to an increased focus
on customer service, including implementations for our new customers and
enhancements for existing customers.


-7-
 Index


Other
Income (Expense)





Other
expense was approximately $2.7 million for the three months ended December 31,
2008 as compared to approximately $1.4 million for the three months ended
December 31, 2007, an increase of $1.3 million, or
93.3%.   Interest expense was $2.7 million during the three
months ended December 31, 2008, including amortization of certain debt issuance
and debt discount costs of $2.2 million.  During the three months
ended December 31, 2007 interest expense was $1.4 million, including
amortization of certain debt issuance costs equal to $1.1 million, a difference
of $1.3 million.  The increase between compared periods was primarily
due to the Notice of Default received from the required Holder of our Exchanged
CAP Notes requiring recognition of all unamortized debt issuance costs; offset
in part by the conversion of approximately $400,000 of our previously issued
secured debt to equity.  Interest and other income was a negative
$8,000 for the three months ended December 31, 2008 as compared to $11,000 for
the three months ended December 31, 2007.





Six
Months Ended December 31, 2007 and December 31, 2008





Revenues
            
            2007
            %
      of Revenue
            2008
            %
      of RevenueON
      Demand revenues
            $    1,059,808
            39.78%
            $    1,519,585
            63.29%Enterprise
      revenues
            1,604,240
            60.22%
            881,553
            36.71%Total
      revenues
            2,664,048
            100.00%
            2,401,138
            100.00%Cost
      of goods sold


ON
      Demand costs
            773,935
            29.05%
            1,016,335
            42.33%Enterprises
      costs
            135,747
            5.10%
            78,714
            3.28%Total
      cost of goods sold
            909,682
            34.15%
            1,095,049
            45.61%Gross
      profit
            
            1,754,366
            65.85%
            1,306,089
            54.39%Operating
      expensesSales
      and marketing
            1,021,785
            38.35%
            752,218
            31.33%General
      and administrative
            1,874,611
            70.37%
            932,235
            38.82%Research
      and development
            921,386
            34.59%
            504,713
            21.02%Restructuring
      and other special charges
            -
            0.00%
            7,524
            0.31%Total
      operating expenses
            3,817,782
            143.31%
            2,196,690
            91.49%Income/(loss)
      from operations
            (2,063,416)
            -77.45%
            (890,601)
            -37.09%Other
      income (expense), netInterest
      (expense)
            (2,721,372)
            -102.15%
            (3,420,593)
            -142.46%Other
      income (expense)
            34,937
            1.31%
            8,491
            0.35%Total
      other income (expense), net
            (2,686,435)
            -100.84%
            (3,412,102)
            -142.10%Net
      loss from continuing operations
            (4,749,851)
            -178.29%
            (4,302,703)
            -179.19%Net
      Loss
            
            $   (4,749,851)
            -178.29%
            $   (4,302,703)
            -179.19%


-8-
 Index




Revenues





Revenues
for the six months ended December 31, 2008 were approximately $2.4 million as
compared to revenues of approximately $2.7 million for the six months ended
December 31, 2007, a decrease of approximately $263,000, or
9.9%.  OnDemand revenues
increased approximately $460,000, or 43.4%, as a result of continuing growth in
the recurring revenue portion of our OnDemand business.  Enterprise
revenue decreased approximately $723,000, or 45.0% since Company resources are
no longer committed to building the Enterprise segment.  As previously
noted, the extension in the renewal date of an Enterprise license negatively
impacted the aggregate Enterprise revenue as of December 31,
2008.   Enterprise revenues are expected to decrease further in
future periods due to the Company’s continuing focus on its OnDemand segment. As
such, future results should reflect increasing OnDemand revenue versus
Enterprise revenue.





Cost
of Revenues





Costs of
revenues, which consist of license costs, maintenance costs, hosting costs and
service costs, were approximately $1.1 million in the six months ended December
31, 2008 as compared to approximately $910,000 in the same prior year period, an
increase of approximately $185,000 or 20.4%.  OnDemand cost of
revenues increased approximately $242,000, or 31.3%, due to increased hosting
and support costs attributable to the growth in the recurring revenue portion of
our OnDemand business and increased service costs associated with the
on-boarding of an increased number of new customers during the
period.  Enterprise cost of revenues declined approximately $57,000,
or 42.0%.   The decrease is primarily attributable to staff
attrition and reduced use of third party contractors for Enterprise related
matters.





Operating
Expenses





Operating
expenses were approximately $2.2 million in the six month period ended December
31, 2008 as compared to approximately $3.8 million for the six month period
ended December 31, 2007. The decrease of approximately $1.6 million, or 42.5%,
was primarily the result of the operational restructuring implemented in May
2008 that included closing our Boston-area headquarters and related operations
as well as a temporary shift of personnel from our research and development
center to assist in implementing our OnDemand product and supporting customer
enhancement projects.  Sales and marketing expenses decreased period
to period by approximately $270,000, or 26.4%.  The decrease is
directly attributable to the May 2008 operational restructuring that included
elimination of the marketing department in our former Boston-area headquarters;
offset in part by increased costs associated with the Company’s participation at
Dreamforce, salesforce.com’s annual national conference, and the engagement of
an independent sales and marketing firm.  General and administrative
expenses decreased by approximately $942,000, or 50.3%, again primarily the
result of the closing of our Boston-area headquarters in May 2008 that included
resignation of our former Chief Executive Officer and other executive
management.  Research and development costs declined by approximately
$417,000, or 45.2% due primarily to a temporary shift of personnel to an
increased focus on customer service, including implementations for our new
customers and enhancements for existing customers which costs shifted to cost of
revenue in the six month period ended December 31, 2008.


-9-
 Index


Other
Income (Expense)





Other
expense was approximately $3.4 million for the six months ended December 31,
2008 as compared to approximately $2.7 million for the six months ended December
31, 2007, an increase of $726,000, or 27.0%.  Interest expense was
$3.4 million during the six months ended December 31, 2008, including
amortization of certain debt issuance and debt discount costs of $2.6
million.  During the six months ended December 31, 2007 interest
expense was $2.7 million, including amortization of certain debt issuance costs
equal to $2.2 million, a difference of $699,000.  The increase between
compared periods was primarily due to the Notice of Default received from the
required Holder of our Exchanged CAP Notes requiring recognition of all
unamortized debt issuance costs; offset in part by the conversion of
approximately $300,000 of our previously issued secured debt to
equity.  Interest and other income was $8,000 for the six months ended
December 31, 2008 as compared to $35,000 for the six months ended December 31,
2007.








Cash
Used in Operating Activities





Cash used
in operating activities for the six months ended December 31, 2008 was
approximately $28,000 as compared to approximately $2.3 million for the six
months ended December 31, 2007. The cash used in operating activities for the
six months ended December 31, 2008 period was primarily attributable to a net
loss of approximately $4.3 million, offset by non-cash charges of approximately
$2.6 million related to depreciation and amortization, non-cash imputed
executive compensation of $94,000, amortization of stock-based compensation of
$32,000 and changes in the amount of current assets and current
liabilities.   The cash used in operating activities for the six
months ended December 31, 2007 period was primarily attributable to a net loss
of approximately $4.7 million adjusted for non-cash charges for depreciation and
amortization expenses of approximately $2.2 million, amortization of stock-based
compensation of $571,000 and changes in the amounts of current assets and
current liabilities.  The significant reduction in cash used in
operating activities for the six months ended December 31, 2008 period versus
the six months ended December 31, 2007 was primarily attributable to a $1.9
million change in our current assets and the operational restructuring
implemented in May 2008 that included closing our Boston-area headquarters and
related operations and changes in accounts receivable totaling approximately
$724,000.





Cash
Provided by/Used in Investing Activities





For the
six months ended December 31, 2008, the Company used approximately $141,000 net
from investing activities resulting from the purchase of approximately $152,000
in new computers, servers and related peripherals offset by an adjustment to
others assets of approximately $11,000. For the six months ended December 31,
2007, cash provided by investing activities was approximately $307,000 arising
from the release of $368,000 in restricted cash under the former escrow
agreement and letter of credit to the Exchanged CAP Notes offset by the purchase
of property and equipment totaling $37,000 and an adjustment to other assets of
approximately $25,000.


-10-
 Index


Cash
Provided by Financing Activities




For the
six months ended December 31, 2008, the Company generated approximately $607,000
from financing activities.   In August, the Company received
$490,000, net, from the sale of common stock to its majority stockholder and
borrowed $152,000 in October under the February 2008 Equipment Lease Agreement
while making principal payments totaling approximately $35,000 under notes
payable. For the six months ended December 31, 2007, the Company generated
approximately $1.6 million from financing activities as the result of receiving
$3.0 million in cash from new borrowings (the Bridge Loan), offset by repayment
of $1.2 million of notes payable, payment of deferred offering costs of $301,000
and other payments under notes payable of $300,000.  During this later
period the Company also experienced a positive net adjustment to debt issuance
costs of approximately $112,000.





Liquidity
and Capital Resources





Our
primary liquidity and capital requirements have been for working capital,
repayment of debt, and general corporate needs. Our main sources of liquidity
and capital have been a variety of debt and equity financings (see
below).   As of December 31, 2008, cash and cash equivalents were
approximately $551,000 as compared with cash and cash equivalents of
approximately $251,000 as of December 31, 2007.    (See,
“Financial Condition,” above). Our working capital at December 31, 2008
represented a working capital deficit of approximately $11.5 million compared to
a working capital deficit of approximately $4.1 million at December 31,
2007.  The increase in our working capital deficit was primarily
attributable to the declared Event of Default resulting in the classification of
the Exchanged CAP Notes as current obligations.





On
January 5, 2009, the Company certified that an Event of Default occurred
pursuant to the Exchanged CAP Notes and the Exchanged Bridge
Notes.  The Company’s January 5, 2009 certification of an Event of
Default under the Exchanged CAP Notes and the Exchanged Bridge Notes is not
changed in any way by the financial information contained in this
Report.





As a
result of the default, the Company has written off to interest expense debt
issuance costs of $452,469, debt discounts of $1,253,333 and accelerated
interest under the Exchanged Bridge Notes of $250,393.





On
January 8, 2009, the Company received a letter from counsel for FP Tech, an
affiliate of AFG, and, and in conjunction with affiliates of AFG and companies
related to AFG, the holder of approximately 72% of the Company’s common stock
and approximately 60% of the Exchanged CAP Notes, declaring an Event of Default
has occurred under the Exchanged CAP Notes due to, among other things, the
Company’s failure to meet the minimum “Consolidated EBITDA” as set forth in
Section (4)(a)(xi) of the Exchanged CAP Notes at December 31,
2008.   As a consequence, FP Tech declared all amounts due and
owing under the Exchanged CAP Notes immediately due and payable.  FP
Tech also stated that it may exercise any and all of its rights and remedies
including, without limitation, proceeding to foreclose on its collateral
pursuant to Article 9 of the Uniform Commercial Code.


-11-
 Index




The
Company is facing a critical cash crisis at a time of general economic downturn
and turmoil.  Sustaining operations in the context of the Firepond
corporate structure through the end of March 2009 or sooner is dependent on (1)
forbearance of the foreclosure process noted in the Notice of Default received
from the Required Holder of the Exchanged CAP Notes, (2) timely collection of
all accounts receivable, (3) generation of new business, and (4) non-occurrence
of unexpected events or circumstances.  The failure of any one of
these factors will adversely affect cash balances and our ability to maintain
operations in the Firepond corporate structure.





While
alternative solutions have been sought from its senior secured noteholders, the
Company has been informed that the non-affiliated Exchanged CAP Noteholders (all
Exchanged CAP Noteholders other than FP Tech) have no interest in lending
additional, large sums to the Company.  Moreover, other than the
proposal received from FP Tech to restructure operations in conjunction with
a  foreclosure, the Company has received no other proposals that could
reasonably be expected to result in meaningful value for the Company’s relevant
constituencies, including its senior creditors.   See Note 1.
 If unable to achieve the proposal as outlined by FP Tech or a similar
transaction, the Company’s strategic and financial alternatives will be
extremely limited.





The
Company has for some time been incurring losses and negative cash flow from
operations. For the fiscal year ended June 30, 2008, we incurred a net loss
of approximately $14.4 million and negative cash flows from operations of
approximately $4.9 million. For the six month period ended December 31, 2008 we
incurred a net loss of approximately $4.3 million and a negative cash flow from
operations of approximately $28,000.  The Company does not believe
operational cash flows over the ensuing weeks will be sufficient either to
sustain present operations or service its indebtedness.  Given the recent
turmoil in the financial markets and the limited transferability of the
Company’s intellectual property without the consent of an FP Tech affiliate, the
Company does not believe it will be able to sell itself or access the financial
markets to fund capital requirements.




Since
April 2008, the Company has been dependent upon its majority shareholder to
provide funding.    However, the majority shareholder has
indicated that it is unlikely to provide additional equity
financing.





The
Company is in communication with the holders of the Exchanged CAP Notes
regarding its state of financial affairs. However, the Company has been
informed by representatives of FP Tech, holder of approximately 60% of the
Exchanged Bridge Notes, that it intends to direct the collateral agent for the
Exchanged Bridge Notes to proceed with a nonjudicial foreclosure and public sale
of the Company’s assets.  Under this process, unless a higher or
better offer for the Company’s assets is received at the public sale, the
participating holders of the Exchanged CAP Notes will credit bid their secured
indebtedness under the Exchanged CAP Notes to acquire all or substantially all
of the Company’s assets via FirepondX.   Such a transaction would
have serious impact on the value of the Company’s existing common stock as well
as any obligations ranking junior to the Exchanged CAP Notes.  The
Company is not presently aware of any other viable alternatives likely to
preserve and maximize value for its stakeholders.


-12-
 Index


In
connection with such a transaction, FP Tech has stated it will provide up to $10
million additional financingto support the
operations of FirepondX’s business going forward, including up to $500,000 of
near term financing if the foregoing foreclosure and sale process can be
successfully implemented. However, there can be no assurance that any such
transaction or any other transaction can or will be consummated.





The
Company completed a financial restructuring in April 2008 that included from FP
Tech Holdings, LLC, a member of the affiliated group that owns a majority of the
Company’s outstanding common stock, (1) an investment of $1,500,000 cash, (2)
conversion of $336,000 senior secured convertible notes plus accrued interest
held by it to common stock, and (3) conversion of $100,000 of other debt plus
accrued interest held by it to common stock. The financial restructuring also
included extension of the maturity dates of the Company’s senior secured debt
facilities (Exchanged CAP Notes and Exchanged Bridge Notes) to December 31, 2009
and July 1, 2009, respectively.





Furthermore,
in August 2008, as provided in the April 2008 financial restructuring, FP Tech
contributed an additional $500,000 in equity to the Company. (See, Management
Discussion and Analysis, Liquidity and Capital Resources, Funding Agreement –
August 2008).





Some
aspects of the Company’s operational restructuring commenced in May 2008 are
beginning to be reflected in its Statement of Operations for the six months
ended December 31, 2008, but are not sufficient to permit the Company to
continue to fund losses, continue operations, attract new equity investment or
service its indebtedness.





Operations
have been severely affected as a result of continuing losses, the Company’s high
levels of indebtedness and inability to access the financial
markets.   While the Company may conduct further discussions with the
holders of its Exchanged CAP Notes, the Notice of Default and the Company’s
present financial condition leaves the Company with very limited
alternatives.  As proposed by FP Tech, a foreclosure on the Company’s
assets will have severe impact on the value of the Company’s common stock and
any obligations ranking junior to the Exchanged CAP Notes.





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





Funding
Agreement – August 2008


Pursuant
to the Common Stock Purchase Agreement, dated as of April 25, 2008 (the "Stock
Purchase Agreement"), FP Tech, an affiliate member of the Company’s
majority shareholder group, was granted by Firepond an option to purchase
approximately 357,143 shares of Common Stock at a purchase price of no more than
$1.40 per share with gross cash proceeds to the Company of at least $500,000
(the "Subject Financing").  The Subject Financing was completed as of
August 13, 2008, with the Company receiving $500,000 in cash from FP Tech and
the Company issuing 357,143 shares of common stock to FP Tech.  See
the Company’s Form 10-Q for the three month period ended September 30, 2009 for
a more detailed discussion of the Funding Agreement – August 2008.





February
2008 Equipment Lease Agreement





On
February 11, 2008, the Company entered into an equipment lease agreement with FP
Tech, wherein the Company established a credit facility of up to $200,000 to be
used for capital purchases and general corporate purposes.  The
agreement has a twenty four month lease commitment term.  Outstanding
principal accrues interest at the rate of 8% per annum during the first twelve
months, 9% per annum during months 13-24 and 20% thereafter. Accrued interest is
due and payable at the earlier of the end of the lease commitment term or upon
optional repayment of Principal.  Principal may be repaid in full or
in part at any time without penalty, but in no case later than expiration of the
lease commitment term.  In February 2008, the Company borrowed
$100,000 on this facility. The outstanding principal and accrued interest was
converted to common stock of the Company on April 25, 2008.  The
Company borrowed $152,000 in October 2008 for the purchase of new computers,
monitors, servers, storage capacity and related technology
equipment.





At
December 31, 2008, principal outstanding on the equipment lease agreement was
$152,000.   At the date of this report, approximately $152,000
principal is outstanding under this credit facility.


-13-
 Index


ITEM
3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Foreign
currency exchange risk





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


Interest
rate sensitivity





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





At
December 31, 2008, we had cash and cash equivalents totaling approximately
$551,000.   We do not believe our short term investments are
subject to interest rate risk.








ITEM 4.  CONTROLS AND
  PROCEDURES





(a)  Evaluation of Disclosure Controls
and Procedures.




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




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





(b)           
Management’s responsibility
for financial statements





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




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


-14-
 Index


Based on
the results of our evaluation, our management concluded that our internal
control over financial reporting was not effective at June 30,
2008.  In that regard, we identified two weaknesses in our internal
control over financial reporting as of June 30, 2008 and the remedial action
taken.  See our Form 10-K for the fiscal year ended June 30, 2008 and
our Form 10-Q for the three months ended September 30,
2008.  Management believes the newly implemented procedures remediate
the noted material weaknesses.







(c)           Changes in internal control over
financial reporting





Except as
identified above, there have been no changes in our internal control over
financial reporting during the quarter ended December 31, 2008 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.





(d)           Inherent Limitations on
Effectiveness of Controls




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


-15-
 Index




PART
II.  OTHER INFORMATION





ITEM 1.
            LEGAL
      PROCEEDINGS




The
Company is currently involved in litigation with vendors, the outcome of
which is uncertain.   However, a finding of material liability in
any Company litigation or the incurrence of significant expense in defending or
prosecuting such litigation would be material and adverse to the
Company.  In addition, we may from time to time be subject to various
other claims and legal actions arising in the ordinary course of business. 
The ultimate disposition of these matters can not be determined at this
time.





Please
refer to Note 6 to our financial statements included elsewhere in this Report
for a discussion of a litigation matter involving a predecessor company to us,
whose assets are being administered by a trust.








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




Please
refer to ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION, Liquidity and Capital Resources, Funding Agreement – August
2008.    Also see Form 8-K filed by the Company with the SEC
on August 12, 2008.




ITEM 3.  DEFAULTS UPON SENIOR SECURITIES




See,
Forms 8-K filed on January 5, 2009 and January 13, 2009.




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





None.





ITEM 5.  OTHER INFORMATION





None.





ITEM 6.  EXHIBITS





31.1 Certification of Principal Executive Officer
pursuant to Rule 13a-14(a)


or Rule 15d-14(a)




31.2 Certification of Principal Financial Officer
pursuant to Rule


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




32.1 Certifications pursuant to 18 U.S.C. Section 1350,
as adopted pursuant


To Section 906 of the Sarbanes-Oxley Act Of
2002


-16-
 Index


Signatures





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





Date:
            February
      4, 2009
            Firepond,
      Inc. (Registrant)





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