##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

FORM 10-Q

(Mark One)



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the quarter ended April 30, 2001

or



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-29251

FIREPOND, INC.

(Exact Name of Registrant as Specified in its
Charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|                                                               
|                                                               
|                                                               
|                                                               
|Delaware                                                        |  | 41-1462409                           
|(State or Other Jurisdiction of
	Incorporation or Organization) |  | (I.R.S. Employer
	Identification No.)
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|890 Winter Street, Waltham, Massachusetts                       |  | 02451                                
|(Address of principal executive offices)                        |  | (Zip Code)                           

(781) 487-8400

(Registrants telephone number, including
area code)


Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

Yes  

  No

As of April 30, 2001 there were 38,806,902 shares of the
Registrants Common Stock outstanding.



---






---

TABLE OF CONTENTS



|                           |                                                                                               |  |  |  |  |  |  | 
|-------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                           | CONDENSED CONSOLIDATED BALANCE SHEETS                                                        
|                           | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                              
|                           | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                              
|                           | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                         
|                           | Item 2. Managements Discussion and Analysis of Financial Condition And Results Of Operations
|                           | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II. OTHER INFORMATION
|                           | Item 1. Legal Proceedings                                                                    
|                           | Item 2. Changes in Securities and Use of Proceeds                                            
|                           | Item 3. Defaults upon Senior Securities                                                      
|                           | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                           | Item 5. Other Information                                                                    
|                           | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED APRIL 30, 2001


TABLE OF CONTENTS

|                              |  |                                                                                                                |  |      |    | 
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                              |  |                                                                                                                |  | Page
|                              |  |                                                                                                                |  | No. 
|                              |  |                                                                                                                |  |     
|PART I  FINANCIAL INFORMATION |  |                                                                                                                |  |     
|                             
|Item 1.                       |  | Financial Statements (unaudited)                                                                               |  |      |    | 
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Balance
	Sheets 
	October 31, 2000 and April 30, 2001.                                 |  |      | 3  | 
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Statements of
	Operations 
	Three Months and Six Months Ended April 30, 2000 and 2001. |  |      | 4  | 
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Statements of Cash
	Flows 
	Six Months Ended April 30, 2000 and 2001.                  |  |      | 5  | 
|                             
|                             
|                             
|                             
|                              |  | Notes to Condensed Consolidated Financial
	Statements                                                          |  |      | 6  | 
|                             
|                             
|                             
|                             
|Item 2.                       |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations                         |  |      | 15 | 
|                             
|                             
|                             
|                             
|                             
|Item 3.                       |  | Quantitative and Qualitative Disclosures About
	Market Risk                                                    |  |      | 31 | 
|PART II  OTHER INFORMATION    |  |                                                                                                                |  |     
|                             
|                             
|                             
|                             
|Item 1.                       |  | Legal Proceedings                                                                                              |  |      | 31 | 
|                             
|                             
|                             
|                             
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                      |  |      | 31 | 
|                             
|                             
|                             
|                             
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                |  |      | 31 | 
|                             
|                             
|                             
|                             
|Item 4.                       |  | Submission of Matters to a Vote of Security
	Holders                                                           |  |      | 31 | 
|                             
|                             
|                             
|                             
|Item 5.                       |  | Other Information                                                                                              |  |      | 31 | 
|                             
|                             
|                             
|                             
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                               |  |      | 31 | 
|                             
|                             
|                             
|                             
|                              |  | SIGNATURES                                                                                                     |  |      | 33 | 

2



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)


(unaudited)


|                                          |                                           |                                                                                                            |                            |           |     |         |         |          |     |        | 
|----------------------------------------- | ----------------------------------------- | ---------------------------------------------------------------------------------------------------------- | -------------------------- | --------- | --- | ------- | ------- | -------- | --- | ------ | 
|                                          |                                           | October 31,                                                                                                |                            | April 30,
|                                          |                                           | 2000                                                                                                       |                            | 2001     
|                                          |                                           |                                                                                                            |                            |          
|ASSETS                                    |                                           |                                                                                                            |                            |           |     |         |         |         
|                                         
|                                         
|                                         
|                                         
|Current assets:                           |                                           |                                                                                                            |                            |           |     |         |         |         
|                                         
|                                         
|                                         
|                                         
|                                          | Cash and cash equivalents                 |                                                                                                            | $                          | 79,500    |     |         | $       | 52,629   |    
|                                         
|                                         
|                                         
|                                         
|                                          | Short-term investments                    |                                                                                                            |                            | 36,733    |     |         |         | 14,411   |    
|                                         
|                                         
|                                         
|                                         
|                                          | Accounts receivable, net                  |                                                                                                            |                            | 15,418    |     |         |         | 9,921    |    
|                                         
|                                         
|                                         
|                                         
|                                          | Unbilled revenue                          |                                                                                                            |                            | 1,676     |     |         |         | 3,385    |    
|                                         
|                                         
|                                         
|                                         
|                                          | Restricted cash (Note 8)                  |                                                                                                            |                            |          |     |         |         | 3,390    |    
|                                         
|                                         
|                                         
|                                         
|                                          | Prepaid expenses and other current assets |                                                                                                            |                            | 2,436     |     |         |         | 8,032    |    
|                                          |                                           |                                                                                                            |                            |           |     |         |         |         
|                                          |                                           |                                                                                                            | Total current assets       |           |     | 135,763 |         |          |     | 91,768 | 
|                                         
|                                         
|                                         
|                                         
|Property and equipment, net               |                                           |                                                                                                            | 6,887                      |           |     |         | 10,740  |         
|                                         
|                                         
|                                         
|                                         
|Goodwill and other intangible assets, net |                                           |                                                                                                            |                           |           |     |         | 12,741  |         
|                                         
|                                         
|                                         
|                                         
|Restricted cash                           |                                           |                                                                                                            | 550                        |           |     |         | 550     |         
|                                         
|                                         
|                                         
|                                         
|Other assets                              |                                           |                                                                                                            | 1,120                      |           |     |         | 982     |         
|                                          |                                           |                                                                                                            |                            |           |     |         |         |         
|                                          |                                           | $                                                                                                          | 144,320                    |           |     | $       | 116,781 |         
|                                          |                                           |                                                                                                            |                            |           |     |         |         |         
|                                         
|LIABILITIES AND STOCKHOLDERS EQUITY      |                                           |                                                                                                            |                            |           |     |         |         |         
|                                         
|                                         
|                                         
|                                         
|Current liabilities:                      |                                           |                                                                                                            |                            |           |     |         |         |         
|                                         
|                                         
|                                         
|                                         
|                                          | Accounts payable                          |                                                                                                            | $                          | 4,851     |     |         | $       | 5,350    |    
|                                         
|                                         
|                                         
|                                         
|                                          | Accrued liabilities                       |                                                                                                            |                            | 13,798    |     |         |         | 14,513   |    
|                                         
|                                         
|                                         
|                                         
|                                          | Deferred revenue                          |                                                                                                            |                            | 15,207    |     |         |         | 12,623   |    
|                                          |                                           |                                                                                                            |                            |           |     |         |         |         
|                                          |                                           |                                                                                                            | Total current liabilities  |           |     | 33,856  |         |          |     | 32,486 | 
|                                         
|                                         
|                                         
|                                         
|Stockholders equity:                     |                                           |                                                                                                            |                            |           |     |         |         |         
|                                          | Common stock, $0.01 par value            |                                                                                                            |                            |           |     |         |         |          |    
|                                          |                                           | Authorized  100,000,000 shares at
	October 31, 2000 and April 30, 2001;                                   |                            |           |     |         |         |          |     |       
|                                         
|                                         
|                                         
|                                         
|                                          |                                           | Issued and outstanding  35,596,022 shares
	at October  31, 2000 and 38,806,902 shares at
	April 30, 2001. |                            |           | 356 |         |         |          | 388 |       
|                                         
|                                         
|                                         
|                                         
|                                          | Additional paid-in capital                |                                                                                                            |                            | 195,166   |     |         |         | 200,911  |    
|                                         
|                                         
|                                         
|                                         
|                                          | Accumulated deficit                       |                                                                                                            |                            | (78,135   | )   |         |         | (113,384 | )  
|                                         
|                                         
|                                         
|                                         
|                                          | Deferred compensation                     |                                                                                                            |                            | (6,077    | )   |         |         | (3,082   | )  
|                                         
|                                         
|                                         
|                                         
|                                          | Other comprehensive loss                  |                                                                                                            |                            | (846      | )   |         |         | (538     | )  
|                                          |                                           |                                                                                                            |                            |           |     |         |         |         
|                                          |                                           |                                                                                                            | Total stockholders equity |           |     | 110,464 |         |          |     | 84,295 | 
|                                          |                                           |                                                                                                            |                            |           |     |         |         |         
|                                          |                                           | $                                                                                                          | 144,320                    |           |     | $       | 116,781 |         
|                                          |                                           |                                                                                                            |                            |           |     |         |         |         

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

3



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)


(unaudited)


|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |        |        |        | 
|--------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------------------------------- | ----------------------------- | --------------- | ----- | ------ | ------- | ------ | ----- | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | 
|                                              |                                                                         |                                                       |                               |                
|                                              |                                                                         | Three Months                                          |                               | Six Months     
|                                              |                                                                         | Ended April 30,                                       |                               | Ended April 30,
|                                              |                                                                         |                                                       |                               |                
|                                              |                                                                         | 2000                                                  |                               | 2001            |       | 2000   |         | 2001  
|                                              |                                                                         |                                                       |                               |                 |       |        |         |       
|Revenue:                                      |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|                                             
|                                             
|                                             
|                                             
|                                              | Product-related revenue:                                                |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |        |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | License                                               |                               | $               | 4,921 |        |         | $      | 3,631 |        |         | $      | 8,828  |        |         | $      | 7,665  |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Services and maintenance                              |                               |                 | 5,058 |        |         |        | 7,907 |        |         |        | 9,516  |        |         |        | 16,180 |       
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|                                              |                                                                         |                                                       | Total product-related revenue |                 |       | 9,979  |         |        |       | 11,538 |         |        |        | 18,344 |         |        |        | 23,845 | 
|                                             
|                                             
|                                             
|                                             
|                                              | Custom development services                                             |                                                       |                               | 3,608           |       |        |         | 777    |       |        |         | 7,220  |        |        |         | 3,017  |       
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|                                              |                                                                         |                                                       | Total revenue                 |                 |       | 13,587 |         |        |       | 12,315 |         |        |        | 25,564 |         |        |        | 26,862 | 
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|Cost of revenue:                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | License                                               |                               |                 | 138   |        |         |        | 155   |        |         |        | 267    |        |         |        | 224    |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Product-related services and maintenance(1)           |                               |                 | 2,828 |        |         |        | 9,262 |        |         |        | 5,111  |        |         |        | 17,795 |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Custom development services(1)                        |                               |                 | 1,407 |        |         |        | 145   |        |         |        | 3,006  |        |         |        | 822    |       
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|                                              |                                                                         |                                                       | Total cost of revenue         |                 |       | 4,373  |         |        |       | 9,562  |         |        |        | 8,384  |         |        |        | 18,841 | 
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|Gross profit                                  |                                                                         |                                                       | 9,214                         |                 |       |        | 2,753   |        |       |        | 17,180  |        |        |        | 8,021   |       
|                                             
|                                             
|                                             
|                                             
|Operating expenses:                           |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Sales and marketing(1)                                |                               |                 | 6,671 |        |         |        | 8,559 |        |         |        | 13,089 |        |         |        | 15,411 |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Research and development(1)                           |                               |                 | 3,650 |        |         |        | 6,598 |        |         |        | 7,347  |        |         |        | 11,277 |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | General and administrative(1)                         |                               |                 | 2,242 |        |         |        | 3,044 |        |         |        | 4,204  |        |         |        | 5,934  |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Stock-based compensation                              |                               |                 | 1,767 |        |         |        | 672   |        |         |        | 2,934  |        |         |        | 1,368  |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Amortization of goodwill and other intangible
	assets |                               |                 |      |        |         |        | 946   |        |         |        |       |        |         |        | 946    |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Restructuring charge (credit)                         |                               |                 | (500  | )      |         |        | 3,021 |        |         |        | (500   | )      |         |        | 3,021  |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Settlement of claim                                   |                               |                 |      |        |         |        | 1,211 |        |         |        |       |        |         |        | 1,211  |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Acquired in-process research and development          |                               |                 |      |        |         |        | 6,200 |        |         |        |       |        |         |        | 6,200  |       
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|                                              |                                                                         |                                                       | Total operating expenses      |                 |       | 13,830 |         |        |       | 30,251 |         |        |        | 27,074 |         |        |        | 45,368 | 
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|Loss from operations                          |                                                                         |                                                       | (4,616                        | )               |       |        | (27,498 | )      |       |        | (9,894  | )      |        |        | (37,347 | )     
|                                             
|                                             
|                                             
|                                             
|Interest income                               |                                                                         |                                                       | 1,201                         |                 |       |        | 1,038   |        |       |        | 398     |        |        |        | 2,779   |       
|                                             
|                                             
|                                             
|                                             
|Other income (expense), net                   |                                                                         |                                                       | 271                           |                 |       |        | (181    | )      |       |        | 529     |        |        |        | (681    | )     
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|Net loss before extraordinary item            |                                                                         |                                                       | (3,144                        | )               |       |        | (26,641 | )      |       |        | (8,967  | )      |        |        | (35,249 | )     
|                                             
|                                             
|                                             
|                                             
|Loss on extinguishment of debt                |                                                                         |                                                       | (1,437                        | )               |       |        |        |        |       |        | (1,437  | )      |        |        |        |       
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|Net loss                                      |                                                                         |                                                       | (4,581                        | )               |       |        | (26,641 | )      |       |        | (10,404 | )      |        |        | (35,249 | )     
|                                             
|                                             
|                                             
|                                             
|Stock dividend paid to preferred stockholders |                                                                         |                                                       | (65,542                       | )               |       |        |        |        |       |        | (65,542 | )      |        |        |        |       
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|Loss applicable to common stockholders        |                                                                         | $                                                     | (70,123                       | )               |       | $      | (26,641 | )      |       | $      | (75,946 | )      |        | $      | (35,249 | )     
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|Net loss per share (Note 5(a)):               |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|                                             
|                                             
|                                             
|                                             
|                                              | Basic and diluted net loss per share before
	extraordinary item         |                                                       | $                             | (0.09           | )     |        | $       | (0.74  | )     |        | $       | (0.41  | )      |        | $       | (0.98  | )     
|                                             
|                                             
|                                             
|                                             
|                                              | Extraordinary item                                                      |                                                       |                               | (0.04           | )     |        |         |       |       |        |         | (0.07  | )      |        |         |       |       
|                                             
|                                             
|                                             
|                                             
|                                              | Stock dividend paid to preferred shareholders                           |                                                       |                               | (1.96           | )     |        |         |       |       |        |         | (3.01  | )      |        |         |       |       
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|                                              | Basic and diluted net loss per share applicable
	to common stockholders |                                                       | $                             | (2.09           | )     |        | $       | (0.74  | )     |        | $       | (3.49  | )      |        | $       | (0.98  | )     
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|                                              | Basic and diluted weighted average common shares
	outstanding           |                                                       |                               | 33,396          |       |        |         | 36,094 |       |        |         | 21,748 |        |        |         | 35,821 |       
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|Pro forma net loss per share (Note 5(b)):     |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|                                             
|                                             
|                                             
|                                             
|                                              | Pro forma net loss per share                                            |                                                       | $                             | (0.13           | )     |        | $       | (0.74  | )     |        | $       | (0.34  | )      |        | $       | (0.98  | )     
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       
|                                              | Pro forma basic and diluted weighted average
	common shares outstanding |                                                       |                               | 34,172          |       |        |         | 36,094 |       |        |         | 30,961 |        |        |         | 35,821 |       
|                                              |                                                                         |                                                       |                               |                 |       |        |         |        |       |        |         |        |        |        |         |       




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

|                               |                            |                 |       |                 |  |      |     |      |   |   |       |       |  |   |       |       | 
|------------------------------ | -------------------------- | --------------- | ----- | --------------- |  | ---- | --- | ---- | - | - | ----- | ----- |  | - | ----- | ----- | 
|                               |                            |                 |       |                
|                               |                            | Three Months    |       | Six Months     
|                               |                            | Ended April 30, |       | Ended April 30,
|                               |                            |                 |       |                
|                               |                            | 2000            |       | 2001            |  | 2000 |     | 2001
|                               |                            |                 |       |                 |  |      |     |     
|Cost of revenue                |                            | $               | 9     |                 |  | $    | 10  |      |   | $ | 53    |       |  | $ | 20    |      
|                              
|                              
|                              
|                              
|Operating expenses:            |                            |                 |       |                 |  |      |     |      |   |   |       |       |  |   |       |      
|                              
|                              
|                              
|                              
|                               | Sales and marketing        |                 |       | 1,326           |  |      |     | (25  | ) |   |       | 1,966 |  |   |       | 47    | 
|                              
|                              
|                              
|                              
|                               | Research and development   |                 |       | 407             |  |      |     | 55   |   |   |       | 703   |  |   |       | 116   | 
|                              
|                              
|                              
|                              
|                               | General and administrative |                 |       | 25              |  |      |     | 632  |   |   |       | 212   |  |   |       | 1,185 | 
|                               |                            |                 |       |                 |  |      |     |      |   |   |       |       |  |   |       |      
|Total stock-based compensation |                            | $               | 1,767 |                 |  | $    | 672 |      |   | $ | 2,934 |       |  | $ | 1,368 |      
|                               |                            |                 |       |                 |  |      |     |      |   |   |       |       |  |   |       |      

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

4



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


(unaudited)


|                                                              |                                                                              |                                                                 |                            |                                           |                                                      |   |         |         |       |       |        |         |  
|------------------------------------------------------------- | ---------------------------------------------------------------------------- | --------------------------------------------------------------- | -------------------------- | ----------------------------------------- | ---------------------------------------------------- | - | ------- | ------- | ----- | ----- | ------ | ------- | -
|                                                              |                                                                              |                                                                
|                                                              |                                                                              | Six Months                                                     
|                                                              |                                                                              | Ended April 30,                                                
|                                                              |                                                                              |                                                                
|                                                              |                                                                              | 2000                                                            |                            | 2001                                     
|                                                              |                                                                              |                                                                 |                            |                                          
|Cash flows from operating activities:                         |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Net loss                                                                     |                                                                 | $                          | (10,404                                   | )                                                    |   | $       | (35,249 | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Adjustments to reconcile net loss to net cash
	used in operating activities: |                                                                 |                            |                                           |                                                      |   |         |         |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              | Acquired in-process research and development                    |                            |                                           |                                                     |   |         |         | 6,200 |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              | Settlement of claim                                             |                            |                                           |                                                     |   |         |         | (389  | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              | Non-cash restructuring charges                                  |                            |                                           |                                                     |   |         |         | 115   |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              | Stock-based compensation expense                                |                            |                                           | 2,934                                                |   |         |         | 1,368 |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              | Depreciation and amortization                                   |                            |                                           | 1,541                                                |   |         |         | 3,286 |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              | Non-cash interest expense                                       |                            |                                           | 467                                                  |   |         |         |      |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              | Loss on early extinguishment of debt                            |                            |                                           | 1,437                                                |   |         |         |      |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              | Changes in assets and liabilities, net of
	acquisition:         |                            |                                           |                                                      |   |         |         |       |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              |                                                                 |                            | Accounts receivable                       |                                                      |   | (2,061  | )       |       |       | 6,082  |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              |                                                                 |                            | Unbilled revenue                          |                                                      |   | 185     |         |       |       | (1,709 | )      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              |                                                                 |                            | Prepaid expenses and other current assets |                                                      |   | (267    | )       |       |       | (5,244 | )      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              |                                                                 |                            | Accounts payable                          |                                                      |   | (1,723  | )       |       |       | (1,940 | )      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              |                                                                 |                            | Accrued liabilities                       |                                                      |   | 3,078   |         |       |       | (1,100 | )      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              |                                                                 |                            | Deferred revenue                          |                                                      |   | 788     |         |       |       | (3,671 | )      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              |                                                                 |                            | Restructuring accrual                     |                                                      |   | (378    | )       |       |       |       |        
|                                                              |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|                                                              |                                                                              |                                                                 |                            |                                           | Net cash used in operating activities                |   |         | (4,403  | )     |       |        | (32,251 | )
|                                                              |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|Cash flows from investing activities:                         |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Purchases of short-term investments                                          |                                                                 |                            | (16,395                                   | )                                                    |   |         | (8,256  | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Purchases of long-term investments                                           |                                                                 |                            | (2,558                                    | )                                                    |   |         |        |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Purchases of property and equipment                                          |                                                                 |                            | (1,397                                    | )                                                    |   |         | (3,166  | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Proceeds from the sale and maturities of
	short-term investments             |                                                                 |                            |                                          |                                                      |   |         | 30,640  |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Increase in restricted cash                                                  |                                                                 |                            |                                          |                                                      |   |         | (140    | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Acquisition of Brightware, Inc., net of cash
	acquired                       |                                                                 |                            |                                          |                                                      |   |         | (10,105 | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Increase in other assets                                                     |                                                                 |                            | (320                                      | )                                                    |   |         | (39     | )    
|                                                              |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|                                                              |                                                                              |                                                                 |                            |                                           | Net cash provided by (used in) investing
	activities |   |         | (20,670 | )     |       |        | 8,934   |  
|                                                              |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|Cash flows from financing activities:                         |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Net borrowings on line of credit                                             |                                                                 |                            | (6,740                                    | )                                                    |   |         |        |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Payments on long-term debt                                                   |                                                                 |                            | (197                                      | )                                                    |   |         | (237    | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Payments on Brightware debt                                                  |                                                                 |                            |                                          |                                                      |   |         | (4,860  | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Proceeds from common stock issuance, net of
	offering costs                  |                                                                 |                            | 113,800                                   |                                                      |   |         |        |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Proceeds from stock options and warrants exercised                           |                                                                 |                            | 8,088                                     |                                                      |   |         | 1,550   |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Decrease in subscription receivables                                         |                                                                 |                            | 13                                        |                                                      |   |         |        |      
|                                                              |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|                                                              |                                                                              |                                                                 |                            |                                           | Net cash provided by (used in) financing
	activities |   |         | 114,964 |       |       |        | (3,547  | )
|                                                              |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|Effect of exchange rate changes on cash and cash
	equivalents |                                                                              |                                                                 | (27                        | )                                         |                                                      |   | (7      | )      
|                                                              |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|Net increase (decrease) in cash and cash
	equivalents         |                                                                              |                                                                 | 89,864                     |                                           |                                                      |   | (26,871 | )      
|                                                             
|                                                             
|                                                             
|                                                             
|Cash and cash equivalents, beginning of period                |                                                                              |                                                                 | 2,120                      |                                           |                                                      |   | 79,500  |        
|                                                              |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|Cash and cash equivalents, end of period                      |                                                                              | $                                                               | 91,984                     |                                           |                                                      | $ | 52,629  |        
|                                                              |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|Supplemental cash flow information:                           |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Interest paid                                                                |                                                                 | $                          | 601                                       |                                                      |   | $       | 16      |      
|                                                              |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|Non-cash investing and financing activities:                  |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              | Warrants issued in conjunction with subordinated
	notes payable |                            | $                                         | 1,904                                                |   |         | $       |      |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                              | Conversion of preferred stock into common stock                 |                            | $                                         | 191                                                  |   |         | $       |      |      
|                                                              |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|Purchase of Business, net of cash acquired:                   |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Fair value of assets acquired                                                |                                                                 | $                          |                                          |                                                      |   | $       | 3,954   |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Liabilities assumed                                                          |                                                                 |                            |                                          |                                                      |   |         | (9,868  | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Cost in excess of net assets acquired                                        |                                                                 |                            |                                          |                                                      |   |         | 6,283   |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | In-process research and development                                          |                                                                 |                            |                                          |                                                      |   |         | 6,200   |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Developed technology and know-how                                            |                                                                 |                            |                                          |                                                      |   |         | 4,900   |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Assembled workforce                                                          |                                                                 |                            |                                          |                                                      |   |         | 2,200   |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Cash paid                                                                    |                                                                 |                            |                                          |                                                      |   |         | (5,228  | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Acquisition costs incurred                                                   |                                                                 |                            |                                          |                                                      |   |         | (2,576  | )    
|                                                              |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        
|                                                              |                                                                              |                                                                 | Fair value of stock issued |                                           | $                                                    |  |         |         | $     | 5,865 |       
|                                                              |                                                                              |                                                                 |                            |                                           |                                                      |   |         |        

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

5



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


1.  Nature of Business and Basis of Presentation

Firepond, Inc., together with its wholly owned subsidiaries (the
Company) is a leading provider of comprehensive
selling and customer service solutions that help companies more
profitably acquire and retain customers. Fireponds product
lines leverage proven intelligence engines and patented
automation technology to drive new revenue streams, increase
profitability, and manage customer interactions across all
channels and throughout the sales and service cycle.

On February 15, 2001, the Company acquired 100% of the
issued and outstanding shares of capital stock of Brightware,
Inc. (Brightware). The acquisition was accounted for as a
purchase in accordance with APB No. 16. Accordingly, the
results of operations of Brightware have been included in the
Companys results of operations since the date of
acquisition.

The accompanying consolidated financial statements include the
accounts of Firepond, Inc. and its wholly owned subsidiaries.
All significant intercompany balances and transactions have been
eliminated in the accompanying financial statements.

The accompanying condensed consolidated financial statements for
the three and six months ended April 30, 2001 and 2000 are
unaudited and have been prepared on a basis consistent with the
October 31, 2000 audited financial statements and include
normal recurring adjustments which are, in the opinion of
management, necessary for the fair presentation of the results
of these periods. These condensed consolidated financial
statements should be read in conjunction with the Companys
consolidated financial statements and notes thereto for the
fiscal year ended October 31, 2000 included in the
Companys Form 10-K. The results of operations for the
three and six months ended April 30, 2001 are not necessarily
indicative of results to be expected for the entire year or any
other period.

2.  Significant Accounting Policies

(a) Revenue Recognition

The Company recognizes revenue based on AICPA Statement of
Position, or SOP, No. 97-2, Software Revenue
Recognition, as amended by SOP No. 98-9, and SOP
No. 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.

The Company generates revenue from two primary sources: (1)
product-related license and service revenue and (2) custom
development service revenue.

Product-Related Revenue

Product-related license revenue is generated from licensing the
rights to the use of the Companys packaged software
products. Product-related service revenue is generated from
sales of maintenance, consulting and training services performed
for customers that license the Companys products.

The Company has concluded that generally, for the SalesPerformer
Suite of product and its components, the implementation services
are essential to the customers use of the packaged
software products in arrangements where the Company is
responsible for implementation services. As such, the Company
recognizes revenue for these arrangements following the
percentage-of-completion method over the implementation period.
Percentage of completion is measured by the percentage of
implementation hours incurred to date compared to estimated
total implementation hours. This method is used because
management has determined that past experience has shown
expended hours to be the best measure of progress on these
engagements. When the current estimates of total contract
revenue and contract cost indicate a loss, a provision for the
entire loss on the contract is recorded.

6



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


In situations where the Company is not responsible for
implementation services, the Company recognizes revenue on
delivery of the packaged software if there is persuasive
evidence of an arrangement, collection is probable, the fee is
fixed or determinable and vendor-specific objective evidence
exists to allocate the total fees to all elements of the
arrangement.

In situations where the Company is not responsible for
implementation services and is also obligated to provide
unspecified additional software products in the future, the
Company recognizes revenue as a subscription over the term of
the commitment period.

For the eServices product line, which was acquired in connection
with the Brightware transaction, the Company recognizes revenue
upon delivery, generally when the product is shipped to the
customer.

Vendor-specific objective evidence is based on the price charged
when an element is sold separately or, in the case of an element
not yet sold separately, the price established by authorized
management, if it is probable that the price, once established,
will not change before market introduction. Elements included in
multiple-element arrangements could consist of software
products, upgrades, enhancements, maintenance, consulting and
training services.

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

The Company generally bills for services on a monthly basis. The
Company generally bills for product license fees upon
commencement of the contract, however, the Company may delay
billing based on the terms of the contract. The Company has
recorded deferred revenue on amounts billed or collected by the
Company before satisfying the above revenue recognition
criteria. Deferred revenue consisted of the following:

|                            |  |                |        |           |  |   |        | 
|--------------------------- |  | -------------- | ------ | --------- |  | - | ------ | 
|                            |  | October 31,    |        | April 30,
|                            |  | 2000           |        | 2001     
|                            |  |                |        |          
|                            |  |               
|                            |  | (in thousands)
|                           
|                           
|                           
|                           
|Product license             |  | $              | 8,740  |           |  | $ | 6,330  | 
|                           
|                           
|                           
|                           
|Product-related services    |  |                | 1,344  |           |  |   | 1,595  | 
|                           
|                           
|                           
|                           
|Product-related maintenance |  |                | 2,865  |           |  |   | 3,802  | 
|                           
|                           
|                           
|                           
|Custom development services |  |                | 2,258  |           |  |   | 896    | 
|                            |  |                |        |           |  |   |        | 
|                            |  | $              | 15,207 |           |  | $ | 12,623 | 
|                            |  |                |        |           |  |   |        | 

Unbilled revenue of $1,676,000 at October 31, 2000 and
$3,385,000 at April 30, 2001 represents amounts due to the
Company under license, service and maintenance agreements for
work performed that had not been billed but for which revenue
was recognized as of the period end. Product license fees for
which the Company has not billed based on contract terms nor has
the Company recognized or deferred revenue totaled $5,923,000 at
October 31, 2000 and $2,800,000 at April 30, 2001.

Custom Development Services Revenue

The Company historically had provided services to develop highly
customized applications utilizing core software technology. The
Company no longer accepts new custom development service
projects but continues to provide ongoing services related to
previously completed custom development projects including
software and data maintenance. Revenue from these ongoing
arrangements is recognized as the services are performed.

7



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


(b) Cash and Cash Equivalents

The Company accounts for cash equivalents based on the guidance
in Statement of Financial Accounting Standards, or SFAS,
No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Cash equivalents are short-term, highly
liquid investments with original maturity dates of three months
or less. Cash equivalents are carried at cost, which
approximates fair market value. Cash equivalents at
October 31, 2000 and April 30, 2001 consisted of
interest-bearing bank deposits, money market accounts and
commercial paper.

|                           |                       |                                 |   |           |        |  |   |        |        | 
|-------------------------- | --------------------- | ------------------------------- | - | --------- | ------ |  | - | ------ | ------ | 
|                           |                       | October 31,                     |   | April 30,
|                           |                       | 2000                            |   | 2001     
|                           |                       |                                 |   |          
|                           |                       |                                
|                           |                       | (In thousands)                 
|                          
|                          
|                          
|                          
|Cash and cash equivalents: |                       |                                 |   |           |        |  |   |       
|                          
|                          
|                          
|                          
|                           | Cash                  |                                 | $ | 7,186     |        |  | $ | 3,733  |       
|                          
|                          
|                          
|                          
|                           | Money market accounts |                                 |   | 4,095     |        |  |   | 4,809  |       
|                          
|                          
|                          
|                          
|                           | Commercial paper      |                                 |   | 68,219    |        |  |   | 44,087 |       
|                           |                       |                                 |   |           |        |  |   |       
|                           |                       | Total cash and cash equivalents |   | $         | 79,500 |  |   | $      | 52,629 | 
|                           |                       |                                 |   |           |        |  |   |       

(c) Short-term Investments

In accordance with SFAS No. 115 and based on the
Companys intentions regarding these instruments, the
Company has classified all short-term investments as
available-for-sale. These investments consist primarily of
corporate notes and bonds with an original maturity of less than
a year. Other comprehensive loss in stockholders equity
included an unrealized holding loss of $4,000 for
October 31, 2000 and an unrealized holding gain of $45,000
for April 30, 2001.

|                        |                                                                                                                         |                              |   |           |        |  |   |        |        | 
|----------------------- | ----------------------------------------------------------------------------------------------------------------------- | ---------------------------- | - | --------- | ------ |  | - | ------ | ------ | 
|                        |                                                                                                                         | October 31,                  |   | April 30,
|                        |                                                                                                                         | 2000                         |   | 2001     
|                        |                                                                                                                         |                              |   |          
|                        |                                                                                                                         |                             
|                        |                                                                                                                         | (In thousands)              
|                       
|                       
|                       
|                       
|Short-term investments: |                                                                                                                         |                              |   |           |        |  |   |       
|                       
|                       
|                       
|                       
|                        | Commercial paper (average 64 days to
	maturity for October 31, 2000)                                                    |                              | $ | 15,329    |        |  | $ |       |       
|                       
|                       
|                       
|                       
|                        | Corporate notes and bonds (average 148 and
	92 days to maturity for October 31, 2000 and
	April 30, 2001, respectively) |                              |   | 21,404    |        |  |   | 14,411 |       
|                        |                                                                                                                         |                              |   |           |        |  |   |       
|                        |                                                                                                                         | Total short-term investments |   | $         | 36,733 |  |   | $      | 14,411 | 
|                        |                                                                                                                         |                              |   |           |        |  |   |       

(d) Comprehensive Income (Loss)

The components of comprehensive loss for the three and six
months ended April 30, 2000 and 2001 are as follows:

|                    |                          |                                                                 |        |                 |      |      |         |         |     |   |         |         |      |   |         |         |     | 
|------------------- | ------------------------ | --------------------------------------------------------------- | ------ | --------------- | ---- | ---- | ------- | ------- | --- | - | ------- | ------- | ---- | - | ------- | ------- | --- | 
|                    |                          |                                                                 |        |                
|                    |                          | Three Months                                                    |        | Six Months     
|                    |                          | Ended April 30,                                                 |        | Ended April 30,
|                    |                          |                                                                 |        |                
|                    |                          | 2000                                                            |        | 2001            |      | 2000 |         | 2001   
|                    |                          |                                                                 |        |                 |      |      |         |        
|                    |                          |                                                                 |        |                
|                    |                          | (In thousands)                                                  |        | (In thousands) 
|                   
|                   
|                   
|                   
|Comprehensive loss: |                          |                                                                 |        |                 |      |      |         |         |     |   |         |         |      |   |         |        
|                   
|                   
|                   
|                   
|                    | Net loss                 |                                                                 | $      | (4,581          | )    |      | $       | (26,640 | )   |   | $       | (10,404 | )    |   | $       | (35,249 | )  
|                    | Other comprehensive loss |                                                                 |        |                 |      |      |         |         |     |   |         |         |      |   |         |         |    
|                   
|                   
|                   
|                   
|                    |                          | Unrealized (loss) gain on short-term and
	long-term investments |        |                 | (41  | )    |         |         | (14 | ) |         |         | (41  | ) |         |         | 49  | 
|                   
|                   
|                   
|                   
|                    |                          | Foreign currency translation                                    |        |                 | (382 | )    |         |         | (4  | ) |         |         | (570 | ) |         |         | 259 | 
|                    |                          |                                                                 |        |                 |      |      |         |         |     |   |         |         |      |   |         |        
|Comprehensive loss  |                          | $                                                               | (5,004 | )               |      | $    | (26,658 | )       |     | $ | (11,015 | )       |      | $ | (34,941 | )      
|                    |                          |                                                                 |        |                 |      |      |         |         |     |   |         |         |      |   |         |        

8



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


3.  Note Receivable From Officer

On November 28, 2000, the Companys Board of Directors
approved a loan facility to Klaus Besier, the Companys
Chairman and Chief Executive Officer, allowing borrowings up to
$3,000,000 bearing interest at the applicable federal rate in
effect during the term of the note. On January 9, 2001, the
Companys Board of Directors approved an increase in
the loan facility to $4,000,000. The outstanding principal
together with unpaid interest is due and payable on the earlier
of October 31, 2001, an event of default, or an event of
maturity, as defined. The promissory note is secured by a pledge
of 500,000 shares of common stock of Firepond, Inc. Amounts
totaling $4,000,000 plus accrued interest have been advanced to
Besier under this facility and is included in other current
assets as of April 30, 2001.

4.  Accrued Liabilities

Accrued liabilities consists of:

|                          |                           |                |       |           |  |   |       |        | 
|------------------------- | ------------------------- | -------------- | ----- | --------- |  | - | ----- | ------ | 
|                          |                           | October 31,    |       | April 30,
|                          |                           | 2000           |       | 2001     
|                          |                           |                |       |          
|                          |                           |               
|                          |                           | (In thousands)
|                         
|                         
|                         
|                         
|Payroll and related costs |                           | $              | 4,142 |           |  | $ | 3,424 |       
|                         
|                         
|                         
|                         
|Restructuring costs       |                           |                |      |           |  |   | 2,010 |       
|                         
|                         
|                         
|                         
|Other                     |                           |                | 9,656 |           |  |   | 9,079 |       
|                          |                           |                |       |           |  |   |       |       
|                          | Total accrued liabilities |                | $     | 13,798    |  |   | $     | 14,513 | 
|                          |                           |                |       |           |  |   |       |       

5. Net Loss Per Share

(a) Net Loss Per Share

Net loss per share is computed based on the guidance of SFAS
No. 128, Earnings per Share. SFAS No. 128
requires companies to report both basic loss per share, which is
computed by dividing the net loss applicable to common
stockholders by the weighted average number of common shares
outstanding, and diluted loss per share, which is computed by
dividing the net loss applicable to common stockholders by the
weighted average number of common shares outstanding plus the
weighted average dilutive potential common shares outstanding
using the treasury stock method. As a result of the losses
incurred by the Company for both the three and six months ended
April 30, 2000 and 2001, all potential common shares were
antidilutive and were excluded from the diluted net loss per
share calculations. The calculation of weighted average shares
outstanding for the three and six months ended April 30,
2001 excludes contingently issuable shares of 2,781,878
representing shares issued but held in escrow in connection with
the acquisition of Signature Software and Brightware (see Note
6(b)).

As of April 30, 2000 and 2001 common stock options and
warrants outstanding which were not included in the calculation
of diluted net loss per share since their inclusion would be
antidilutive were 9,990,000 and 12,709,000, respectively.

(b) Pro Forma Net Loss Per Share

Pro forma net loss per share has been computed as described
above and also gives effect to the conversion of preferred stock
that converted upon the completion of the Companys initial
public offering, using the if-converted method, from the
original date of issuance.

9



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


The following table reflects the reconciliation of the shares
used in the computation of pro forma loss per share:

|                             |                                                                                                              |                 |  |                 |  |      |  |        |  |  |  |        |  |  |  |        | 
|---------------------------- | ------------------------------------------------------------------------------------------------------------ | --------------- |  | --------------- |  | ---- |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|                             |                                                                                                              |                 |  |                
|                             |                                                                                                              | Three Months    |  | Six Months     
|                             |                                                                                                              | Ended April 30, |  | Ended April 30,
|                             |                                                                                                              |                 |  |                
|                             |                                                                                                              | 2000            |  | 2001            |  | 2000 |  | 2001  
|                             |                                                                                                              |                 |  |                 |  |      |  |       
|                             |                                                                                                              |                 |  |                
|                             |                                                                                                              | (In thousands)  |  | (In thousands) 
|                            
|                            
|                            
|                            
|Pro forma basic and diluted: |                                                                                                              |                 |  |                 |  |      |  |        |  |  |  |        |  |  |  |       
|                            
|                            
|                            
|                            
|                             | Weighted average common shares outstanding used
	in computing basic and diluted net loss per share           |                 |  | 33,396          |  |      |  | 36,094 |  |  |  | 21,748 |  |  |  | 35,821 | 
|                            
|                            
|                            
|                            
|                             | Weighted average common shares issuable upon the
	conversion of preferred stock                              |                 |  | 596             |  |      |  |       |  |  |  | 7,071  |  |  |  |       | 
|                            
|                            
|                            
|                            
|                             | Weighted average common shares issuable upon
	settlement of the priority payments                            |                 |  | 169             |  |      |  |       |  |  |  | 2,011  |  |  |  |       | 
|                            
|                            
|                            
|                            
|                             | Weighted average common shares issuable upon
	exercise of series F preferred stock warrants                  |                 |  | 11              |  |      |  |       |  |  |  | 131    |  |  |  |       | 
|                             |                                                                                                              |                 |  |                 |  |      |  |        |  |  |  |        |  |  |  |       
|                             | Weighted average common shares outstanding used
	in computing pro forma basic and diluted net loss per share |                 |  | 34,172          |  |      |  | 36,094 |  |  |  | 30,961 |  |  |  | 35,821 | 
|                             |                                                                                                              |                 |  |                 |  |      |  |        |  |  |  |        |  |  |  |       

6.  Stockholders Equity

(a) Stock Options and Warrants

The Company granted stock options to employees and consultants
that require the recognition of stock-based compensation
expense. Additionally, the Company granted stock warrants to
certain customers and to strategic business partners.
Stock-based compensation related to grants to employees
represents the amortization, over the vesting period of the
option, of the difference between the exercise price of options
granted to employees and the fair market value of its common
stock for financial reporting purposes. Stock-based compensation
related to grants to non-employees and warrants issued
represents the fair market value as computed using an
established option valuation formula. As of April 30, 2001,
the deferred compensation balance was $3,082,000 and will be
recognized as an expense over the vesting period of the
underlying stock options for options granted to employees and as
earned for non-employees and customers/strategic business
partners in accordance with EITF 96-18.

The Company granted options to employees to purchase 2,435,875
and 3,449,081 shares of common stock at a weighted-average
exercise price of $2.67 and $4.34 per share during the three and
six months ended April 30, 2001, respectively.

(b) Common Stock Outstanding

Common stock outstanding at April 30, 2001 includes 207,199
shares issued but held in escrow in connection with the
Companys acquisition of Signature Software, Inc. in
September 2000. These shares will be released from escrow
based on the retention of Signature Software employees over a
two-year period. It also includes 2,399,984 shares issued but
held in escrow in connection with the Companys acquisition
of Brightware, Inc. in February 2001. The shares held in
escrow related to Brightware will be released as follows;
(i) 900,078 shares will be released pending the settlement
of the general indemnification and warranty period and
(ii) 1,499,911 shares will be released based on achievement
of specified financial performance objectives.

10



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


7.  Segment Reporting

The Company has adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which
establishes standards for reporting information related to
operating segments in annual financial statements and requires
selected information for those segments to be presented in
interim financial reports issued to stockholders. SFAS
No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating
segments are defined as components of an enterprise about which
separate, discrete financial information is available for
evaluation by the chief operating decision maker, or
decision-making group, in making decisions how to allocate
resources and assess performance. The Companys chief
operating decision maker, as defined under SFAS No. 131, is
its chief executive officer.

The Company views its operations and manages its business as two
segments, product-related licenses and services and custom
development services. The Companys reportable segments are
strategic business units that provide distinct services to the
end customer. They are managed separately because each business
segment requires different marketing and management strategies.
The Companys approach is based on the way that management
organizes the segments within the Company for making operating
decisions and assessing performance.

The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The
Company does not allocate operating expenses between its two
reportable segments. Therefore, the Companys measure of
performance for each reportable segment is based on total net
revenue and direct costs of services, which are reported
separately in the accompanying condensed consolidated statements
of operations and no additional disclosure is required. The
Company does not identify assets and liabilities by segment and
therefore, identifiable assets, capital expenditures and
depreciation and amortization are not reported by segment.

The majority of the Companys revenue is derived from the
United States with approximately 35% coming from foreign
countries for the three and six months ended April 30,
2001. Revenue from contracts entered into by our United Kingdom
subsidiaries contributed approximately 13% and 10% of our
revenue for the three and six months ended April 30, 2001,
respectively. Revenue from contracts entered into by our
Netherlands subsidiaries contributed approximately 16% and
19% of our revenue for the three and six months ended
April 30, 2001, respectively.

8.  Brightware Acquisition

On February 15, 2001, pursuant to an Agreement and Plan of
Merger between the Company and Brightware, Inc. (Brightware),
the Company acquired 100% of the issued and outstanding capital
stock of Brightware, a supplier of eCustomer assistance
software. The purchase price of the acquisition was $13,669,000,
which was composed of $5,228,000 in cash, the issuance of stock
in the amount of $5,865,000, and $2,576,000 in acquisition
related fees and expenses. The value of approximately 1,500,000
shares of Firepond common stock and cash payments totaling
$3,250,000 have been excluded from purchase price as this
consideration is contingent on achieving financial performance
objectives as measured on April 30, 2001. The Company has
notified the former Brightware stockholders that their
performance objectives were not achieved and the Company is
entitled to receive 1.5 million shares of its stock and
$3.2 million of cash returned from escrow. The cash has
been reflected on the financial statements as restricted
cash and the shares are included in the amount as
outstanding as of April 30, 2001. See note
6(b). The acquisition was accounted for using the purchase
method in accordance with APB No. 16. Accordingly, the
results of operations of Brightware from the date of
acquisition, February 15, 2001, have been included in the
results of operations of the Company.

11



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


The following table summarizes the transaction (in thousands):

|                           |                                     |                |        |        |  
|-------------------------- | ----------------------------------- | -------------- | ------ | ------ | -
|                           |                                     | Amount        
|                           |                                     |               
|                           |                                     | (in thousands)
|                          
|                          
|                          
|                          
|Acquisition of Brightware: |                                     |                |        |       
|                          
|                          
|                          
|                          
|                           | Fair value of assets acquired       |                | $      | 3,954  |  
|                          
|                          
|                          
|                          
|                           | Liabilities assumed                 |                |        | (9,868 | )
|                          
|                          
|                          
|                          
|                           | In-process research and development |                |        | 6,200  |  
|                          
|                          
|                          
|                          
|                           | Developed technology and know-how   |                |        | 4,900  |  
|                          
|                          
|                          
|                          
|                           | Assembled workforce                 |                |        | 2,200  |  
|                          
|                          
|                          
|                          
|                           | Goodwill                            |                |        | 6,283  |  
|                           |                                     |                |        |       
|                           |                                     | $              | 13,669 |       
|                           |                                     |                |        |       

As part of the purchase price allocation, all intangible assets
that are a part of the acquisition were identified and valued.
It was determined that technology assets and assembled workforce
had value. As a result of this identification and valuation
process, the Company allocated approximately
$6,200,000 million of the purchase price to in-process
research and development projects. This allocation represented
the estimated fair value based on risk-adjusted cash flows
related to the incomplete research and development projects. At
the date of acquisition, the development of these projects had
not yet reached technological feasibility, and the research and
development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the date of the
acquisition.

In making its purchase price allocation, management considered
the present value in calculating income, an analysis of project
accomplishments and remaining outstanding items, an assessment
of overall contributions, as well as project risks. The value
assigned to purchased in-process research and development was
determined by estimating the costs to develop the acquired
technology into commercially viable products, estimating the
resulting net cash flows from the projects, and discounting the
net cash flows to their present value. The revenue projection
used to value the in-process research and development was based
on estimates of relevant market sizes and growth factors,
expected trends in technology, and the nature and expected
timing of new product introductions by the Company and its
competitors. The resulting net cash flows from such projects are
based on managements estimates of cost of sales, operating
expenses, and income taxes from such projects.

As a result of the identification and valuation of intangibles
acquired, the Company also allocated approximately $4,900,000
and $2,200,000 to developed technology and know-how and
assembled workforce, respectively. Developed technology
represents patented and unpatented technology and know-how
related to Brightwares current eService product offering
founded on a combination of artificial intelligence, knowledge
manager-technology and internet enterprise applications.
Developed technology is being amortized over a period of three
years. Assembled workforce is the presence of a skilled
workforce that is knowledgeable about company procedures and
possesses expertise in certain fields that are important to
continued profitability and growth of a company. Assembled
workforce is being amortized over a period of three years.

The excess of the purchase price over the fair value of
identification intangible net assets of approximately $6,283,000
was allocated to goodwill. Unidentifiable intangible assets are
being amortized over a period of three years.

Accumulated amortization of developed technology was $340,278 as
of April 30, 2001. Accumulated amortization of assembled
workforce was $152,778 as of April 30, 2001. Accumulated
amortization of goodwill was $436,307 as of April 30, 2001.

12



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


Unaudited pro forma operating results for the Company, assuming
the Acquisition of Brightware occurred at the beginning of each
of the following periods are as follows:

|                                        |  |                 |        |                 |  |      |         |      |  |   |         |   |  |   |         |  
|--------------------------------------- |  | --------------- | ------ | --------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                        |  |                 |        |                
|                                        |  | Three Months    |        | Six Months     
|                                        |  | Ended April 30, |        | Ended April 30,
|                                        |  |                 |        |                
|                                        |  | 2000            |        | 2001            |  | 2000 |         | 2001
|                                        |  |                 |        |                 |  |      |         |     
|                                        |  |                 |        |                
|                                        |  | (In thousands)  |        | (In thousands) 
|                                       
|                                       
|                                       
|                                       
|Net sales                               |  | $               | 19,106 |                 |  | $    | 12,777  |      |  | $ | 36,531  |   |  | $ | 29,185  |  
|                                       
|                                       
|                                       
|                                       
|Net loss before extraordinary item      |  |                 | (4,015 | )               |  |      | (23,742 | )    |  |   | (14,026 | ) |  |   | (39,678 | )
|                                       
|                                       
|                                       
|                                       
|Net loss                                |  |                 | (5,452 | )               |  |      | (23,742 | )    |  |   | (15,463 | ) |  |   | (39,678 | )
|                                       
|                                       
|                                       
|                                       
|Net loss per share  basic and
	diluted |  | $               | (0.16  | )               |  | $    | (0.66   | )    |  | $ | (0.67   | ) |  | $ | (1.08   | )

9.  Settlement of Claim

On March 2, 2001 the Company entered into an agreement with
a customer, under which the Company paid to the customer
$1,600,000 to resolve outstanding contractual matters. The
expense for the settlement was partially offset by $389,000
previously paid by the customer but not yet earned by the
Company. The Company recorded this transaction as a net charge
of $1,211,000 to operations in the quarter ended April 30,
2001.

10.  Restructuring Charge

As a result of a global slowdown in information technology
spending and the Companys acquisition of Brightware, the
Company undertook a plan to restructure its operations during
the quarter ending April 30, 2001. A reduction-in-force was
completed to align the Companys cost structure with the
market conditions and eliminate redundant operations.

The significant components of the restructuring charge were as
follows:

|                              |  |                |       | 
|----------------------------- |  | -------------- | ----- | 
|                              |  | Amount        
|                              |  |               
|                              |  | (in thousands)
|                             
|                             
|                             
|                             
|Employee severance costs      |  | $              | 2,286 | 
|                             
|                             
|                             
|                             
|Facilities related costs      |  |                | 270   | 
|                             
|                             
|                             
|                             
|Excess property and equipment |  |                | 114   | 
|                             
|                             
|                             
|                             
|Other costs                   |  |                | 351   | 
|                              |  |                |       | 
|                              |  | $              | 3,021 | 
|                              |  |                |       | 

The employee severance cost component of the restructuring
charge was related to reductions in headcount. Under the plan,
the Company terminated two general and administrative employees,
18 sales and marketing employees, 45 services employees, 16
development employees as well as 89 contractors.

The facilities related cost component consisted of idle lease
space and termination payments for three satellite offices which
are no longer required as a result of the reduction-in-force.

The excess property and equipment consist of excess computer
equipment resulting from the reduction-in-force and leasehold
write-offs related to the aforementioned office closings. Also
included were office design and layout fees incurred for
abandoned plans for expansion of the Companys Minneapolis,
MN office. Expansion is no longer required as a result of the
reduction-in-force.

13



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


A summary of the restructuring reserve is as follows:

|          |                             |                |       |      |  
|--------- | --------------------------- | -------------- | ----- | ---- | -
|          |                             | As of         
|          |                             | April 30,     
|          |                             | 2001          
|          |                             |               
|          |                             | (In thousands)
|         
|         
|         
|         
|Provision |                             | $              | 3,021 |     
|         
|         
|         
|         
|          | Severance payments          |                |       | (810 | )
|         
|         
|         
|         
|          | Facilities related payments |                |       | (56  | )
|         
|         
|         
|         
|          | Other payments              |                |       | (192 | )
|          |                             |                |       |     
|          |                             | $              | 1,963 |     
|          |                             |                |       |     

11.  Subsequent Event

On June 12, 2001 the Company announced it was reducing its
workforce by approximately an additional 30%. In connection
therewith, the Company will record a restructuring charge in its
third quarter ending July 31, 2001.

14



---



##### Table of Contents






Item 2. Managements Discussion and Analysis of
Financial Condition And Results Of Operations

Certain statements in the Managements Discussion and
Analysis of Financial Condition and Results of Operations
are forward-looking statements that involve risks and
uncertainties. Words such as anticipates, expects, intends,
plans, believes, seeks, estimates and similar expressions
identify such forward-looking statements. The forward-looking
statements contained herein are based on current expectations
and entail various risks and uncertainties that could cause
actual results to differ materially from these expressed in such
forward-looking statements. Factors that might cause such a
difference include, among other things, those set forth under
Overview, Liquidity and Capital
Resources and Risk Factors 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.

Overview

We are a leading provider of comprehensive selling and customer
service solutions that help companies more profitably acquire
and retain customers. Our product lines leverage proven
intelligence engines and patented automation technology to drive
new revenue streams, increase profitability, and manage customer
interactions across all channels and throughout the sales and
service cycle. From our inception in 1983 through 1997, we
generated revenue primarily through providing custom development
services. These services consisted of the development of highly
customized applications utilizing core software technology, and
related software maintenance and data maintenance services. In
early fiscal 1997, we undertook a plan to change our strategic
focus from a custom development services company to a software
product company providing more standardized solutions. Our first
packaged software product was introduced in May 1997. We
released the Firepond Application Suite in October 1999 and
renamed and repackaged the FirePond Application Suite as the
SalesPerformer Suite in December 2000. As a result of these
efforts, product-related revenue as a percentage of total
revenue increased from 1.5% in fiscal 1997 to 76.5% in fiscal
2000 and to 88.8% in the six months ended April 30, 2001.

On February 15, 2001, we acquired 100% of the issued and
outstanding shares of capital stock of Brightware, Inc.
(Brightware). The acquisition was accounted for as a purchase in
accordance with APB No. 16. Accordingly, the results of
operations of Brightware have been included in the
Companys results of operations since the date of
acquisition. In addition, on September 27, 2000, the
Company acquired 100% of the issued and outstanding shares of
capital stock of Signature Software, Inc. (Signature). This
acquisition was also accounted for using the purchase method in
accordance with APB No. 16. Accordingly, the results of
operations of Signature from the date of acquisition, was
included in the results of operations of the Company.

As a result of a global slowdown in information technology
spending and the Companys acquisition of Brightware,
located in San Rafael, California, the Company undertook a plan
to restructure its operations during the quarter ended
April 30, 2001. A reduction-in-force of 81 employees and 89
contractors was necessary to align the Companys cost
structure with the market conditions and eliminate redundant
operations. In addition, in June 2001 as a result of the
continued slow down in information technology spending and the
resulting effects on our revenue, we took further action to
reduce our costs by reducing our employee base by an additional
30%. This action will result in an additional restructuring
charge in the quarter ending July 31, 2001.

We have incurred quarterly and annual losses intermittently
since we were formed, and regularly since we began transitioning
to a software product business in early fiscal 1997. We incurred
net losses of $28.9 million for fiscal 1999,
$16.3 million for fiscal 2000, and $35.2 million for
the six months ended April 30, 2001. We currently plan on
achieving break-even by the second quarter of our fiscal 2002
and expect to continue to incur losses on a quarterly basis
until that time.

We derive revenue principally from software product licenses;
product-related consulting and training, support and maintenance
services; and custom development services and related support
and maintenance.

15



---



##### Table of Contents



We recognize revenue under Statement of Position, or SOP,
No. 97-2, Software Revenue Recognition, as amended
by SOP No. 98-9, and SOP No. 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type
Contracts.We generally recognize revenue from
product-related license agreements over the implementation
period. We recognize this revenue following the
percentage-of-completion method over the implementation period
because we have concluded that the implementation services are
essential to our customers use of our packaged software
products. Percentage of completion is measured by the percentage
of implementation hours incurred to date to total estimated
implementation hours. In situations where the Company is not
responsible for implementation services, the Company recognizes
revenue on delivery of the packaged software if there is
persuasive evidence of an arrangement, collection is probable,
the fee is fixed or determinable and vendor-specific objective
evidence exists to allocate the total fees to all elements of
the arrangement. In situations where the Company is not
responsible for implementation services and is also obligated to
provide unspecified additional software products in the future,
the Company recognizes revenue as a subscription over the term
of the commitment period.

We recognize revenue from product-related support and
maintenance services ratably over the term of the contract,
typically one year. Product-related support and maintenance
services include technical support and unspecified upgrade and
maintenance rights. We recognize consulting and training revenue
as the services are performed. Consulting and training revenue
is primarily related to implementation services performed on a
time-and-materials basis under separate service arrangements.

The Company historically had provided services to develop highly
customized applications utilizing core software technology. The
Company no longer accepts new custom development service
projects but continues to provide ongoing services related to
previously completed custom development projects including
software and data maintenance. Revenue from these ongoing
arrangements is recognized as the services are performed.

We recognize revenue upon delivery, generally when the product
is shipped to the customer for our eServices product line, which
was acquired in connection with the Brightware transaction.

We plan that product-related revenue from product licenses will
grow over the long-term as result of increased market acceptance
of our products, the recent introduction of the SalesPerformer
Suite and the recently acquired eServices product line, and
increases in the productivity of our sales force. Therefore, we
expect that a higher percentage of total revenue will be
attributable to product-related revenue in the future. Unlike
our custom development services, our product-related services
represent the implementation of our packaged software products.

We also anticipate custom development services revenue remaining
at or below its current levels, as we have strategically
de-emphasized that business and do not plan to accept new custom
development contracts. Custom development services revenue will
continue to represent a material portion of total revenue until
existing custom development contracts and related maintenance
agreements are completed. Custom development services revenue in
the future will be primarily from ongoing software maintenance
and data maintenance services that we provide under custom
development services contracts. The rate of decline in custom
development revenue depends in part on our ability to convert
custom development services customers to our software products.

We have invested heavily in research and development. Research
and development expenses have been increasing since early fiscal
1997 when we began the development of our software products.
Since the introduction of our first software product, we have
determined that technological feasibility of our software
products occurs late in the development cycle and close to
general release of the products, and that the development costs
incurred between the time technological feasibility is
established and general release of the product are not material.
Therefore, beginning in June 1997, we expense these costs
as incurred to research and development expense. To enhance our
product offering and market position, we believe it is essential
for us to continue to make significant investment in research
and development.

We have granted stock options to employees and consultants that
require us to record stock-based compensation expense. We have
also granted stock warrants to certain customers and to
strategic business partners. Stock-based compensation related to
grants to employees represents the amortization, over the

16



---



##### Table of Contents





Our series A, series C and series G preferred stock, as well as
shares of our common stock outstanding on May 20, 1997
other than those shares held by General Atlantic Partners, had
rights that allow holders to receive a priority payment upon the
completion of our initial public offering. These priority
payments totaled $35.8 million for the series A, series C
and series G preferred stockholders, and $10.0 million for
the shares of our common stock outstanding on May 20, 1997
other than those shares held by General Atlantic Partners. These
amounts were payable in cash, or, at our option, a number of
shares of common stock determined by dividing the amount payable
by $12.00. Our board of directors elected to make these payments
in 3,812,532 shares of common stock upon consummation of our
initial public offering. At the initial public offering price of
$22.00 per share, the value of the stock dividend totaled
$65.5 million for the series A, series C and series G
preferred stockholders, and $18.3 million for the stock
dividend on the shares of our common stock outstanding on
May 20, 1997 other than those shares held by General
Atlantic Partners. The stock dividend on the preferred stock
increased the loss attributable to common stockholders by $65.5
for fiscal 2000.

On March 2, 2001 we entered into an agreement with a
customer under which we paid to the customer $1.6 million
to resolve outstanding contractual matters. The expense for the
settlement was partially offset by $389,000 previously paid by
the customer but not yet earned by the Company. The Company
recorded this transaction as a net charge of $1,211,000 to
operations in the quarter ended April 30, 2001.

On June 13, 2001, claims were filed against us by EPAM Systems,
LLC and EPAM Systems, Inc. with the American Arbitration
Association alleging that these entities have a contract with us
and that we breached the alleged contract. These companies are
further seeking trustee process relief in the Massachusetts
Superior Courts in support of these claims. This matter is under
investigation, but based upon our initial review of the claims
we believe they are without merit and we intend to defend these
claims vigorously.

As of October 31, 2000, we had available a net operating
loss carryforward of approximately $46.0 million to reduce
future federal and state income taxes, if any. This carryforward
expires beginning in 2012 and may be subject to review and
possible adjustment by the Internal Revenue Service. The Tax
Reform Act of 1986 contains provisions that may limit the amount
of net operating loss carryforwards that we may utilize in any
one year in the event of cumulative changes in ownership over a
three-year period in excess of 50%. The Companys wholly
owned foreign subsidiaries have net operating loss carryforwards
of approximately $16 million as of October 31, 2000.

17



---



##### Table of Contents



Results of Operations

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

|                                   |                                                       |                          |                               |                 |      |       |        |      |      |       |       |      |      |       |        |      |      |       | 
|---------------------------------- | ----------------------------------------------------- | ------------------------ | ----------------------------- | --------------- | ---- | ----- | ------ | ---- | ---- | ----- | ----- | ---- | ---- | ----- | ------ | ---- | ---- | ----- | 
|                                   |                                                       |                          |                               |                
|                                   |                                                       | Three Months             |                               | Six Months     
|                                   |                                                       | Ended April 30,          |                               | Ended April 30,
|                                   |                                                       |                          |                               |                
|                                   |                                                       | 2000                     |                               | 2001            |      | 2000  |        | 2001
|                                   |                                                       |                          |                               |                 |      |       |        |     
|Revenue:                           |                                                       |                          |                               |                 |      |       |        |      |      |       |       |      |      |       |        |     
|                                  
|                                  
|                                  
|                                  
|                                   | Product-related revenue:                              |                          |                               |                 |      |       |        |      |      |       |       |      |      |       |        |      |     
|                                  
|                                  
|                                  
|                                  
|                                   |                                                       | License                  |                               |                 | 36.2 | %     |        |      | 29.5 | %     |       |      | 34.5 | %     |        |      | 28.5 | %    
|                                  
|                                  
|                                  
|                                  
|                                   |                                                       | Services and maintenance |                               |                 | 37.2 |       |        |      | 64.2 |       |       |      | 37.3 |       |        |      | 60.3 |      
|                                   |                                                       |                          |                               |                 |      |       |        |      |      |       |       |      |      |       |        |     
|                                   |                                                       |                          | Total product-related revenue |                 |      | 73.4  |        |      |      | 93.7  |       |      |      | 71.8  |        |      |      | 88.8  | 
|                                  
|                                  
|                                  
|                                  
|                                   | Custom development services                           |                          |                               | 26.6            |      |       |        | 6.3  |      |       |       | 28.2 |      |       |        | 11.2 |     
|                                   |                                                       |                          |                               |                 |      |       |        |      |      |       |       |      |      |       |        |     
|                                   |                                                       |                          | Total revenue                 |                 |      | 100.0 |        |      |      | 100.0 |       |      |      | 100.0 |        |      |      | 100.0 | 
|                                   |                                                       |                          |                               |                 |      |       |        |      |      |       |       |      |      |       |        |     
|Cost of revenue:                   |                                                       |                          |                               |                 |      |       |        |      |      |       |       |      |      |       |        |     
|                                  
|                                  
|                                  
|                                  
|                                   | License                                               |                          |                               | 1.0             |      |       |        | 1.3  |      |       |       | 1.0  |      |       |        | 0.8  |     
|                                  
|                                  
|                                  
|                                  
|                                   | Product-related services and maintenance              |                          |                               | 20.8            |      |       |        | 75.2 |      |       |       | 20.0 |      |       |        | 66.2 |     
|                                  
|                                  
|                                  
|                                  
|                                   | Custom development services                           |                          |                               | 10.4            |      |       |        | 1.2  |      |       |       | 11.8 |      |       |        | 3.1  |     
|                                   |                                                       |                          |                               |                 |      |       |        |      |      |       |       |      |      |       |        |     
|                                   |                                                       |                          | Total cost of revenue         |                 |      | 32.2  |        |      |      | 77.7  |       |      |      | 32.8  |        |      |      | 70.1  | 
|                                   |                                                       |                          |                               |                 |      |       |        |      |      |       |       |      |      |       |        |     
|Gross profit                       |                                                       |                          | 67.8                          |                 |      |       | 22.3   |      |      |       | 67.2  |      |      |       | 29.9   |     
|                                  
|                                  
|                                  
|                                  
|Operating expenses:                |                                                       |                          |                               |                 |      |       |        |      |      |       |       |      |      |       |        |     
|                                  
|                                  
|                                  
|                                  
|                                   | Sales and marketing                                   |                          |                               | 49.1            |      |       |        | 69.5 |      |       |       | 51.3 |      |       |        | 57.4 |     
|                                  
|                                  
|                                  
|                                  
|                                   | Research and development                              |                          |                               | 26.9            |      |       |        | 53.6 |      |       |       | 28.7 |      |       |        | 42.0 |     
|                                  
|                                  
|                                  
|                                  
|                                   | General and administrative                            |                          |                               | 16.5            |      |       |        | 24.7 |      |       |       | 16.4 |      |       |        | 22.1 |     
|                                  
|                                  
|                                  
|                                  
|                                   | Stock-based compensation                              |                          |                               | 13.0            |      |       |        | 5.5  |      |       |       | 11.5 |      |       |        | 5.1  |     
|                                  
|                                  
|                                  
|                                  
|                                   | Amortization of goodwill and other intangible
	assets |                          |                               |                |      |       |        | 7.7  |      |       |       |     |      |       |        | 3.5  |     
|                                  
|                                  
|                                  
|                                  
|                                   | Restructuring charge (credit)                         |                          |                               | (3.7            | )    |       |        | 24.5 |      |       |       | (2.0 | )    |       |        | 11.2 |     
|                                  
|                                  
|                                  
|                                  
|                                   | Settlement of claim                                   |                          |                               |                |      |       |        | 9.8  |      |       |       |     |      |       |        | 4.5  |     
|                                  
|                                  
|                                  
|                                  
|                                   | Acquired in-process research and development          |                          |                               |                |      |       |        | 50.3 |      |       |       |     |      |       |        | 23.1 |     
|                                   |                                                       |                          |                               |                 |      |       |        |      |      |       |       |      |      |       |        |     
|                                   |                                                       |                          | Total operating expenses      |                 |      | 101.8 |        |      |      | 245.6 |       |      |      | 105.9 |        |      |      | 168.9 | 
|                                   |                                                       |                          |                               |                 |      |       |        |      |      |       |       |      |      |       |        |     
|Loss from operations               |                                                       |                          | (34.0                         | )               |      |       | (223.3 | )    |      |       | (38.7 | )    |      |       | (139.0 | )   
|                                  
|                                  
|                                  
|                                  
|Interest income                    |                                                       |                          | 8.9                           |                 |      |       | 8.3    |      |      |       | 1.6   |      |      |       | 10.3   |     
|                                  
|                                  
|                                  
|                                  
|Other income (expense), net        |                                                       |                          | 2.0                           |                 |      |       | (1.4   | )    |      |       | 2.0   |      |      |       | (2.5   | )   
|                                   |                                                       |                          |                               |                 |      |       |        |      |      |       |       |      |      |       |        |     
|Net loss before extraordinary item |                                                       |                          | (23.1                         | )               |      |       | (216.4 | )    |      |       | (35.1 | )    |      |       | (131.2 | )   
|                                  
|                                  
|                                  
|                                  
|Loss on extinguishment of debt     |                                                       |                          | (10.6                         | )               |      |       |       |      |      |       | (5.6  | )    |      |       |       |     
|                                   |                                                       |                          |                               |                 |      |       |        |      |      |       |       |      |      |       |        |     
|Net loss                           |                                                       |                          | (33.7                         | )%              |      |       | (216.4 | )%   |      |       | (40.7 | )%   |      |       | (131.2 | )%  
|                                   |                                                       |                          |                               |                 |      |       |        |      |      |       |       |      |      |       |        |     

Comparison of Three Months Ended
April 30, 2000 and 2001

Revenue.Total revenue decreased $1.3 million, or
9.4%, to $12.3 million in the three months ended
April 30, 2001 from $13.6 million in the three months
ended April 30, 2000. This decrease is attributable to a
78.5% decrease in custom development revenue, offset by a 15.6%
increase in product related revenue.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | License.License revenue decreased $1.3 million, or
	26.2%, to $3.6 million in the three months ended April 30,
	2001 from $4.9 million in the three months ended
	April 30, 2000. License revenue as a percentage of total
	revenue decreased to 29.5% in the three months ended
	April 30, 2001 from 36.2% in the three months ended
	April 30, 2000. The decrease is primarily due to the
	decrease in average transaction size during the second quarter
	of fiscal 2001. License revenue for the quarter ended
	April 30, 2001 has declined by $403,000, or 10% compared to
	the three months ended January 31, 2001. We believe this
	decline is attributable to a global slow down in information
	technology spending experienced

18



---



##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | by software companies in our market segment. In addition, in our
	pursuit of customer satisfaction, we have experienced slower
	revenue recognition from our current customer implementations
	than anticipated due to performing professional services outside
	of the original scope of the engagement for no incremental
	revenue. Over the long-term we are planning for license revenue
	growth as a result of additional license sales resulting from
	increased market acceptance of our products, a growing customer
	base, the success of our marketing efforts, and improved
	productivity of our sales force.                                                                                                                                                                                                                                                         
|
| | Product service and maintenance.Product service and
	maintenance revenue increased $2.8 million, or 56.3%, to
	$7.9 million in the three months ended April 30, 2001
	from $5.1 million in the three months ended April 30,
	2000. Product services and maintenance revenue as a percentage
	of total revenue increased to 64.2% in the three months ended
	April 30, 2001 from 37.2% in the three months ended
	April 30, 2000. The increase is attributable to an
	increased amount of services provided in connection with the
	license implementations in this period as compared to the prior
	year period as well as $573,000 of product service and
	maintenance revenue from Brightware. Over the long-term we are
	planning for product service and maintenance revenue growth as a
	result of additional customer implementations related to
	additional license sales.
|
| | Custom development services.Custom development services
	revenue decreased $2.8 million, or 78.5%, to $777,000 in
	the three months ended April 30, 2001 from $3.6 million in
	the three months ended April 30, 2000. Custom development
	services revenue as a percentage of total revenue decreased to
	6.3% in the three months ended April 30, 2001 from 26.6% in
	the three months ended April 30, 2000. The decrease in
	absolute dollars and as a percentage of total revenue is due to
	the change of our strategic focus. We expect custom development
	services revenue to remain at current levels or decline.                                                                                                                                                                                                                                                        

Cost of revenue.Total cost of revenue increased
$5.2 million, or 118.7%, to $9.6 million in the three
months ended April 30, 2001 from $4.4 million in the
three months ended April 30, 2000. Total cost of revenue as
a percentage of total revenue increased to 77.7% in the three
months ended April 30, 2001 from 32.2% in the three months
ended April 30, 2000.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of license revenue.Cost of license revenue consists
	primarily of costs of royalties, media, product packaging, and
	other production costs. Cost of license revenue increased
	$17,000, or 12.3% to $155,000 in the three months ended
	April 30, 2001 from $138,000 in the three months ended
	April 30, 2000. Cost of license revenue as a percentage of
	license revenue increased to 4.3% in the three months ended
	April 30, 2001 from 2.8% in the three months ended
	April 30, 2000. The increase in cost of license revenue is
	due primarily to an increase in royalty charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Cost of product-related services and maintenance revenue.Cost of product-related services and maintenance revenue
	consists primarily of salaries and related costs for consulting,
	training and customer support personnel, including cost of
	services provided by third-party consultants engaged by us. Cost
	of product-related services and maintenance revenue increased
	$6.4 million, or 227.5%, to $9.2 million in the three
	months ended April 30, 2001 from $2.8 million in the
	three months ended April 30, 2000. Cost of product-related
	services and maintenance revenue as a percentage of
	product-related services and maintenance revenue increased to
	117.1% in the three months ended April 30, 2001 from 55.9%
	in the three months ended April 30, 2000. The increase in
	absolute dollars was primarily due to increased staff and
	consulting resources to support product-related engagements in
	this period. The increase as a percentage of revenue was
	primarily due to lower billing rates realized on certain large
	engagements in this period as well as lower realized average
	revenue per hour on certain fixed price services contracts in
	this period caused by the Company improving customer
	satisfaction and performing services outside of the scope of the
	original engagement for no incremental revenue. In addition, we
	experienced a lower utilization of our consulting staff in this
	period. We expect costs of product-related services to decline
	for the remainder of this fiscal year as a result of the actions
	we have taken to reduce our employee base and related costs.
|
| | Cost of custom development services revenue.Cost of
	custom development services revenue consists primarily of
	salaries and related costs for development, consulting, training
	and customer support personnel related to our custom development
	projects, including cost of services provided by third-party                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

19



---



##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | consultants engaged by us. Cost of custom development services
	revenue decreased $1.3 million, or 89.7%, to $145,000 in
	the three months ended April 30, 2001 from
	$1.4 million in the three months ended April 30, 2000.
	Cost of custom development services as a percentage of custom
	development services revenue decreased to 18.7% in the three
	months ended April 30, 2001 from 39.0% in the three months
	ended April 30, 2000. The decrease in absolute dollars is
	primarily due to decreased staff supporting fewer custom
	development services engagements. We expect the cost of custom
	development services revenue to remain at current levels or
	decline.

Sales and marketing expenses.Sales and marketing
expenses consist primarily of salaries, commissions and bonuses
for sales and marketing personnel and promotional expenses.
Sales and marketing expenses increased $1.9 million, or 28.3%,
to $8.6 million in the three months ended April 30,
2001 from $6.7 million in the three months ended
April 30, 2000. Sales and marketing expenses as a
percentage of total revenue increased to 69.5% in the three
months ended April 30, 2001 from 49.1% in the three months
ended April 30, 2000. Sales and marketing expenses
increased in absolute dollars and as a percentage of total
revenue primarily due to $1.6 million of incremental sales
and marketing expenses incurred by Brightware since the
acquisition in February 2001, as well as the increase in
headcount in the sales operations, particularly our
international direct sales channel. As a result of the actions
we have taken to reduce our workforce, we expect sales and
marketing expenses will decline for the remainder of this fiscal
year due to reduced payroll and other expenses. We plan to
continue to invest in marketing programs in order to achieve
planned revenue levels.

Research and development expenses.Research and
development expenses consist primarily of salaries and
personnel-related costs and the costs of contractors associated
with the development of new products, the enhancement of
existing products, and the performance of quality assurance and
documentation activities. Research and development expenses
increased $2.9 million, or 80.8%, to $6.6 million in
the three months ended April 30, 2001 from
$3.7 million in the three months ended April 30, 2000.
Research and development expenses as a percentage of total
revenue increased to 53.6% in the three months ended April 30,
2001 from 26.9% in the three months ended April 30, 2000.
These expenses increased in absolute dollars and as a percentage
of total revenue primarily as a result of increased utilization
of engineering and product development contractors associated
with our investment in the SalesPerformer Suite, as well as
$1.6 million of incremental research and development
expenses incurred by Brightware since the acquisition. We expect
research and development expenses will decline for the remainder
of this fiscal year as a result of the actions we have taken to
reduce our workforce which will result in reduced payroll and
other expenses. We plan to continue to make necessary
investments to enhance our existing products and develop new
products in order to achieve planned revenue levels.

General and administrative expenses.General and
administrative expenses consist primarily of salaries, and other
personnel-related costs for executive, financial, human
resource, information services, and other administrative
functions, as well as legal and accounting costs. General and
administrative expenses increased $802,000, or 35.8%, to
$3.0 million in the three months ended April 30, 2001
from $2.2 million in the three months ended April 30,
2000. General and administrative expenses as a percentage of
total revenue increased to 24.7% in the three months ended
April 30, 2001 from 16.5% in the three months ended
April 30, 2000. These expenses increased in absolute
dollars and as a percentage of total revenue primarily as a
result of increased headcount and increased cost of
infrastructure necessary to support our growth. We expect that
general and administrative expenses will remain approximately
flat through the remainder of the fiscal year.

Stock-based compensation expense.Stock-based
compensation expense decreased $1.1 million, or 62.0%, to
$672,000 in the three months ended April 30, 2001 from
$1.8 million in the three months ended April 30, 2000.
Stock-based compensation expense as a percentage of total
revenue decreased to 5.5% in the three months ended
April 30, 2001 from 13.0% in the three months ended
April 30, 2000. The decrease is primarily due to lower
charges associated with option grants subject to variable
accounting, whereby the fair market value of the stock price at
the beginning of the period was higher than at the end of the
period. If we had allocated our stock-based compensation to the
departments for which the services were performed in the three
months ended April 30, 2001, the allocation would have
increased cost of revenue by $10,000, decreased sales and
marketing expenses by $25,000, increased research and
development expenses by $55,000 and increased general and
administrative expenses by $632,000. For the three months ended
April 30, 2000, the

20



---



##### Table of Contents





Amortization of goodwill and other intangible assets. In
conjunction with our acquisition of Brightware, we allocated
approximately $6.3 million to goodwill, $4.9 million
to developed technology and know-how and $2.2 million to
assembled workforce. Developed technology represents patented
and unpatented technology and know-how related to
Brightwares current eService product offering founded on a
combination of artificial intelligence, knowledge-manager
technology and internet enterprise applications. Developed
technology is being amortized over a period of 3 years.
Assembled workforce is the presence of a skilled workforce that
is knowledgeable about company procedures and possesses
expertise in certain fields that are important to continued
profitability and growth of a company. Assembled workforce is
being amortized over a period of 3 years. Therefore, for the
three months ended April 30, 2001, we recognized $929,000
in amortization, reflecting the amortization of total intangible
assets acquisition related to Brightware.

Restructuring charge (credit).During the quarter ended
April 30, 2001, the Company announced a restructuring of
its operations due to a global slowdown in technology spending
and the Brightware acquisition resulting in some redundant
operations. In connection with this plan, we incurred $3.0
million of restructuring charges in the three months ended
April 30, 2001, which includes $2.3 million of
employee severance costs, $270,000 of facilities related costs,
$114,000 of excess fixed asset costs and $351,000 of other costs.

Settlement of claim.On March 2, 2001 we entered
into an agreement with a customer under which we paid to the
customer $1.6 million to resolve outstanding contractual
matters. The expense for the settlement was partially offset by
$389,000 previously paid by the customer but not yet earned by
the Company. The Company recorded this transaction as a net
charge of $1,211,000 to operations in the quarter ended
April 30, 2001.

Acquired in-process research and development.As part of
the purchase price allocation for Brightware, all intangible
assets that are a part of the acquisition were identified and
valued. It was determined that technology assets and assembled
workforce had value. As a result of this identification and
valuation process, we allocated approximately $6.2 million
of the purchase price to in-process research and development
projects. This allocation represented the estimated fair value
based on risk-adjusted cash flows related to the incomplete
research and development projects. At the date of acquisition,
the development of these projects had not yet reached
technological feasibility, and the research and development in
progress had no alternative future uses. Accordingly, these
costs were expensed as of the date of the acquisition.

Interest income. Interest income (expense), net,
decreased $163,000, or 13.6%, to $1.0 million of income in
the three months ended April 30, 2001 from
$1.2 million of income in the three months ended
April 30, 2000. The decrease is primarily due to our
decreased cash and cash equivalents and short-term investments.

Other income (expense), net.Other income (expense), net
primarily consists of bank fees and foreign currency transaction
gains and losses. Other income (expense), net decreased $452,000
to $181,000 in expense in the three months ended April 30,
2001 from $271,000 in income in the three months ended
April 30, 2000. The decline is primarily due to foreign
currency transaction losses in the three months ended
April 30, 2001 as compared to foreign currency transaction
gains in the fiscal 2000 period.

Comparison of Six Months Ended
April 30, 2000 and 2001

Revenue.Total revenue increased $1.3 million, or
5.1%, to $26.9 million in the six months ended
April 30, 2001 from $25.6 million in the six months
ended April 30, 2000. This increase is attributable to a
70.0% increase in service and maintenance revenue, offset by a
13.2% decrease in license revenue and 58.2% decrease in custom
development revenue.



| |                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | License.License revenue decreased $1.1 million, or
	13.2%, to $7.7 million in the six months ended April 30,
	2001 from $8.8 million in the six months ended
	April 30, 2000. License revenue as a percentage of total
	revenue decreased to 28.5% in the six months ended
	April 30, 2001 from 34.5% in the six months

21



---



##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ended April 30, 2000. The decrease in license revenue in
	absolute dollars and as a percentage of total revenue is
	primarily attributable to the decrease in average transaction
	size as a result of a global slow down in information technology
	spending experienced by software companies in our market
	segment. In addition, in our pursuit of customer satisfaction,
	we have experienced slower revenue recognition from our current
	customer implementations than anticipated due to performing
	professional services outside of the original scope of the
	engagement for no incremental revenue.                                     
|
| | Product service and maintenance.Product service and
	maintenance revenue increased $6.7 million, or 70.0%, to
	$16.2 million in the six months ended April 30, 2001
	from $9.5 million in the six months ended April 30,
	2000. Product services and maintenance revenue as a percentage
	of total revenue increased to 60.3% in the six months ended
	April 30, 2001 from 37.3% in the six months ended
	April 30, 2000. The increase is attributable to an increase
	in the number of maintenance agreements and amount of services
	provided in connection with the license implementations in this
	period as compared to the prior year period.
|
| | Custom development services.Custom development services
	revenue decreased $4.2 million, or 58.2%, to
	$3.0 million in the six months ended April 30, 2001
	from $7.2 million in the six months ended April 30,
	2000. Custom development services revenue as a percentage of
	total revenue decreased to 11.2% in the six months ended
	April 30, 2001 from 28.2% in the six months ended
	April 30, 2000. The decrease in absolute dollars and as a
	percentage of total revenue is due to the change of our
	strategic focus.                                                                                                                    

Cost of revenue.Total cost of revenue increased
$10.4 million, or 124.7%, to $18.8 million in the six
months ended April 30, 2001 from $8.4 million in the six
months ended April 30, 2000. Total cost of revenue as a
percentage of total revenue increased to 70.1% in the six months
ended April 30, 2001 from 32.8% in the six months ended
April 30, 2000.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of license revenue.Cost of license revenue
	decreased $43,000, or 16.1% to $224,000 in the six months ended
	April 30, 2001 from $267,000 in the six months ended
	April 30, 2000. Cost of license revenue as a percentage of
	license revenue decreased to 2.9% in the six months ended
	April 30, 2001 from 3.0% in the six months ended
	April 30, 2000. The decrease in cost of license revenue is
	due primarily to a decrease in royalty charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | Cost of product-related services and maintenance revenue.Cost of product-related services and maintenance revenue
	increased $12.7 million, or 248.2%, to $17.8 million
	in the six months ended April 30, 2001 from $5.1 million in
	the six months ended April 30, 2000. Cost of
	product-related services and maintenance revenue as a percentage
	of product-related services and maintenance revenue increased to
	110.0% in the six months ended April 30, 2001 from 53.7% in
	the six months ended April 30, 2000. The increase in
	absolute dollars was primarily due to increased staff and
	consulting resources to support product-related engagements in
	this period. The increase as a percentage of revenue was
	primarily due to lower billing rates realized on certain large
	engagements in this period as well as lower realized average
	revenue per hour on certain fixed price services contracts in
	this period caused by the Company improving customer
	satisfaction and performing services outside of the scope of the
	original engagement for no incremental revenue. In addition, we
	experienced a lower utilization of our consulting staff in this
	period.
|
| | Cost of custom development services revenue.Cost of
	custom development services revenue decreased $2.2 million,
	or 72.7%, to $822,000 in the six months ended April 30,
	2001 from $3.0 million in the six months ended April 30,
	2000. Cost of custom development services as a percentage of
	custom development services revenue decreased to 27.2% in the
	six months ended April 30, 2001 from 41.6% in the six months
	ended April 30, 2000. The decrease in absolute dollars is
	primarily due to decreased staff supporting fewer custom
	development services engagements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

Sales and marketing expenses.Sales and marketing
expenses increased $2.3 million, or 17.7%, to $15.4 million
in the six months ended April 30, 2001 from
$13.1 million in the six months ended April 30, 2000.
Sales and marketing expenses as a percentage of total revenue
increased to 57.4% in the six months ended April 30, 2001
from 51.3% in the six months ended April 30, 2000. Sales
and marketing expenses increased in absolute dollars and as a
percentage of total revenue primarily due to the increase in
headcount in

22



---



##### Table of Contents





Research and development expenses.Research and
development expenses increased $3.9 million, or 53.5%, to
$11.2 million in the six months ended April 30, 2001
from $7.3 million in the six months ended April 30,
2000. Research and development expenses as a percentage of total
revenue increased to 42.0% in the six months ended
April 30, 2001 from 28.7% in the six months ended
April 30, 2000. These expenses increased in absolute
dollars and as a percentage of total revenue primarily as a
result of increased utilization of engineering and product
development contractors associated with our investment in the
SalesPerformer Suite, as well as $1.6 million of
incremental research and development cost incurred by Brightware
since the acquisition.

General and administrative expenses.General and
administrative expenses increased $1.7 million, or 41.2%,
to $5.9 million in the six months ended April 30, 2001 from
$4.2 million in the six months ended April 30, 2000.
General and administrative expenses as a percentage of total
revenue increased to 22.1% in the six months ended
April 30, 2001 from 16.4% in the six months ended April 30,
2000. These expenses increased in absolute dollars and as a
percentage of total revenue primarily as a result of increased
headcount and increased cost of infrastructure necessary to
support our growth.

Stock-based compensation expense.Stock-based
compensation expense decreased $1.5 million, or 53.4%, to
$1.4 million in the six months ended April 30, 2001 from
$2.9 million in the six months ended April 30, 2000.
Stock-based compensation expense as a percentage of total
revenue decreased to 5.1% in the six months ended April 30,
2001 from 11.5% in the six months ended April 30, 2000. The
decrease is primarily due to lower charges associated with
option grants subject to variable accounting, whereby the fair
market value of the stock price at the beginning of the period
was higher than at the end of the period. If we had allocated
our stock-based compensation to the departments for which the
services were performed in the six months ended April 30,
2001, the allocation would have increased cost of revenue by
$20,000, sales and marketing expenses by $47,000, research and
development expenses by $116,000 and general and administrative
expenses by $1.2 million. For the six months ended April
30, 2000, the allocation would have increased cost of revenue by
$53,000, sales and marketing expenses by $1.9 million,
research and development expenses by $703,000 and general and
administrative expenses by $212,000. The primary component of
stock-based compensation expense in the first six months of
fiscal 2001 was $1.0 million of amortization of deferred
stock compensation related to retention of Signature Software
employees associated with the acquisition of Signature Software
in September 2000.

Amortization of goodwill and other intangible assets. In
conjunction with our acquisition of Brightware, we allocated
approximately $6.3 million to goodwill, $4.9 million
to developed technology and know-how and $2.2 million to
assembled workforce. Developed technology represents patented
and unpatented technology and know-how related to
Brightwares current eService product offering founded on a
combination of artificial intelligence, knowledge-manager
technology and internet enterprise applications. Developed
technology is being amortized over a period of 3 years.
Assembled workforce is the presence of a skilled workforce that
is knowledgeable about company procedures and possesses
expertise in certain fields that are important to continued
profitability and growth of a company. Assembled workforce is
being amortized over a period of 3 years. Therefore, for the
three months ended April 30, 2001, we recognized $929,000
in amortization, reflecting the amortization of total intangible
assets acquisition related to Brightware.

Restructuring charge (credit).During the quarter ended
April 30, 2001 the Company announced a restructuring of its
operations due to a global slowdown in technology spending and
the Brightware acquisition resulting in some redundant
operations. In connection with this plan, we incurred
$3.0 million of restructuring charges in the three months
ended April 30, 2001, which includes $2.3 million of
employee severance costs, $270,000 of facilities related costs,
$114,000 of excess fixed asset costs and $351,000 of other costs.

Settlement of claim.On March 2, 2001 we entered
into an agreement with a customer under which we paid to the
customer $1.6 million to resolve outstanding contractual
matters. The expense for the settlement was partially offset by
$389,000 previously paid by the customer but not yet earned by
the Company. The

23



---



##### Table of Contents





Acquired in-process research and development.As part of
the purchase price allocation for Brightware, all intangible
assets that are a part of the acquisition were identified and
valued. It was determined that technology assets and assembled
workforce had value. As a result of this identification and
valuation process, we allocated approximately $6.2 million
of the purchase price to in-process research and development
projects. This allocation represented the estimated fair value
based on risk-adjusted cash flows related to the incomplete
research and development projects. At the date of acquisition,
the development of these projects had not yet reached
technological feasibility, and the research and development in
progress had no alternative future uses. Accordingly, these
costs were expensed as of the date of the acquisition.

Interest income. Interest income (expense), net,
increased $2.4 million, or 598.2%, to $2.8 million of
income in the six months ended April 30, 2001 from $398,000
of income in the six months ended April 30, 2000. The
increase is primarily due to interest earned on increased cash
and cash equivalents and short-term investments as a result of
our initial public offering on February 4, 2000.

Other income (expense), net.Other income (expense), net
decreased $1.2 million to $681,000 in expense in the six months
ended April 30, 2001 from $529,000 in income in the six
months ended April 30, 2000. The decline is primarily due
to foreign currency transaction losses in the six months ended
April 30, 2001 as compared to foreign currency transaction
gains in the fiscal 2000 period.

Liquidity and Capital Resources

As of April 30, 2001, cash and cash equivalents were
$52.6 million and short-term investments were
$14.4 million as compared with cash and cash equivalents of
$79.5 million and short-term investments of
$36.7 million as of October 31, 2000. The Company also
has $3.2 million in restricted cash held in escrow in
conjunction with the Brightware acquisition. Our working capital
at April 30, 2001 was $59.3 million, compared to
working capital of $101.9 million at October 31, 2000.

Net cash used in operating activities was $32.3 million in
the six months ended April 30, 2001, compared with net cash
used in operating activities of $4.4 million in the six
months ended April 30, 2000. Cash used in operating
activities in the six months ended April 30, 2001 was
primarily attributable to our net loss and to a lesser extent ,
an increase in unbilled revenue, prepaid expenses and other
current assets, accounts payable, accrued liabilities and a
decrease in accounts receivable and deferred revenue offset by
non-cash expenses stock-based compensation expense, depreciation
and amortization and acquired in-process research and
development.

Net cash provided by investing activities was $8.9 million
in the six months ended April 30, 2001, compared with net
cash used in investing activities of $20.7 million in the
six months ended April 30, 2000. Net cash provided by
investing activities in the six months ended April 30, 2001
was primarily attributable to the sale of short-term investments
offset by the acquisition of Brightware, net of cash acquired
and the purchase of property and equipment.

Net cash used in financing activities was $3.5 million in
the six months ended April 30, 2001, compared with net cash
provided by financing activities of $115.0 million in the
six months ended April 30, 2000. Net cash used in financing
activities for the six months ended April 30, 2001 were
primarily from payments on debt related to the acquisition of
Brightware partially offset by the exercise of stock options.

We anticipate continued spending on capital expenditures
consistent with anticipated requirements for operations,
infrastructure and personnel. We believe that our existing cash
balances will be sufficient to meet our anticipated cash need
for working capital and capital expenditures for at least the
next 12 months. However, we may need to raise additional
funds in the next 12 months or in the future to support
more rapid expansion of our sales force, develop new or enhanced
products or services, respond to competitive pressures, acquire
complementary businesses or technologies or respond to
unanticipated requirements. If we seek to raise additional
funds, we may not be able to obtain funds on terms which are
favorable or acceptable to us. If we raise additional funds
through the issuance of equity securities, the percentage
ownership of our existing

24



---



##### Table of Contents





Risk Factors

As defined under Safe Harbor provisions of The Private
Securities Litigation Reform Act of 1995, except for the
historical information contained herein, some of the matters
discussed in this filing contain forward-looking statements
regarding future events that are subject to risks and
uncertainties. The following factors, among others, could cause
actual results to differ materially from those described by such
statements.

We expect to continue to incur losses and may not be
profitable in the future

We have incurred quarterly and annual losses intermittently
since we were formed in 1983, and regularly since fiscal 1997.
We incurred net losses of $9.0 million for fiscal 1998,
$28.9 million for fiscal 1999, $16.3 million for
fiscal 2000 and $26.6 million and $35.2 million for
the three and six months ended April 30, 2001,
respectively. We expect to continue to incur losses on a
quarterly basis and we are uncertain if or when we will become
profitable. Moreover, we expect to continue to incur significant
sales and marketing and research and development expenses, and,
as a result, we will need to generate significant revenue to
achieve and maintain profitability. We may not sustain our
growth or generate sufficient revenue to attain profitability.

A continued slowdown in information technology spending could
reduce the sale of our products

Average license fees for our products typically range from
approximately several hundred thousand dollars to several
million dollars. Often this represents a significant IT capital
expenditure for the companies to which we target our sales
efforts. If the current global slowdown in IT spending should
continue, whether resulting from a weakened economy or other
factors, we may be unable to maintain or increase our sales
volumes and achieve our targeted revenue growth.

A significant percentage of our product development is
performed by a third party internationally, the loss of which
would substantially harm our product development efforts

A significant percentage of our product development work, and
implementation services, are performed by a third-party
development organization in Minsk, Belarus. In connection with
these services the organization may from time to time control
certain components of our proprietary technology. Unpredictable
events in the political, economic and social conditions in
Belarus, or our failure to maintain or renew our consulting
agreement with this organization, could eliminate or reduce the
availability of these product development and implementation
services and hinder our ability to retrieve or cause us to lose
certain components of our proprietary technology. If access to
these services were to be unexpectedly eliminated or
significantly reduced, our ability to meet development
objectives vital to our ongoing strategy would be hindered,
certain components of our proprietary technology could be lost,
and our business could be seriously harmed.

Disappointing quarterly revenue or operating results could
cause the price of our common stock to fall

We currently derive a significant portion of our license revenue
in each quarter from a small number of relatively large orders,
and we generally recognize revenue from our licenses over the
related implementation period. If we are unable to recognize
revenue from one or more substantial license sales planned for a
particular fiscal quarter, our operating results for that
quarter would be seriously harmed. In addition, the purchase of
our products typically involves a substantial commitment of
resources by our customers or their consultants over an extended
period of time. The time required to complete an implementation
may vary from customer to customer and may be protracted due to
unforeseen circumstances. Because our revenue from
implementation, maintenance and training services are largely
correlated with our license revenue, a decline in license
revenue would also cause a decline in our services revenue in
the same quarter and in subsequent quarters. Because our sales
cycle is long, we may have difficulty predicting when we will
recognize revenue. If our quarterly revenue or operating results
fall below the expectations of investors or securities analysts,
the

25



---



##### Table of Contents





Difficulties and financial burdens associated with
acquisitions could harm our business and financial results

On February 15, 2001, we acquired all of the outstanding
stock of Brightware, Inc. Our product range and customer base
have increased in the recent past due in part to this
acquisition. There can be no assurance that the integration of
all of the acquired technologies will be successful or will not
result in unforeseen difficulties that may absorb significant
management attention.

In the future, we may acquire additional businesses or product
lines. The recently completed acquisition, or any future
acquisition, may not produce the revenue, earnings or business
synergies that we anticipated, and an acquired product, service
or technology might not perform as expected. Prior to completing
an acquisition, however, it is difficult to determine if such
benefits can actually be realized. The process of integrating
acquired companies into our business may also result in
unforeseen difficulties. Unforeseen operating difficulties may
absorb significant management attention, which we might
otherwise devote to our existing business. Also, the process may
require significant financial resources that we might otherwise
allocate to other activities, including the ongoing development
or expansion of our existing operations.

If we pursue a future acquisition, our management could spend a
significant amount of time and effort identifying and completing
the acquisition. If we make a future acquisition, we could issue
equity securities which would dilute current stockholders
percentage ownership, incur substantial debt, assume contingent
liabilities, incur a one-time charge or be required to amortize
goodwill.

Because we have a limited operating history as a software
company, our future success is uncertain

Although Firepond was incorporated in 1983, we have only been
focused on providing software products since 1997. Because we
have only been focused on providing software products for a
short time, we have a limited operating history pursuing this
business model. The revenue and income potential of the market
for e-business sales and marketing solutions is unproven. As a
result, our historical financial statements are not an accurate
indicator of our future operating results. In addition, we have
limited insight into trends that may emerge and affect our
business, and we cannot forecast operating expenses based on our
historical results. In evaluating Firepond, you should consider
the risks and uncertainties frequently encountered by early
stage companies in new and rapidly evolving markets. If we are
not able to successfully address these risks, our business could
be harmed.

The success of our business depends on the SalesPerformer
Suite, which has been recently introduced and may not be widely
adopted by our customers

We expect to derive substantially all of our product license
revenue in the future from the Firepond Application Suite and
its component products, which were released in
October 1999, and renamed and repackaged as the
SalesPerformer Suite in December 2000. Our business depends
on the successful release, introduction and customer acceptance
of this new suite of products. We expect that we will continue
to depend on revenue from new and enhanced versions of the
SalesPerformer Suite, and our business would be harmed if our
target customers do not adopt and expand their use of the
SalesPerformer Suite and its component products.

We depend on key personnel and must attract and retain
additional qualified personnel to be successful

Our success depends upon the continued contributions of our
senior sales, engineering and management personnel, who perform
important functions, and would be difficult to replace.
Specifically, we believe that our future success is highly
dependent on Klaus P. Besier, our chairman and chief executive
officer, and other senior management personnel. The loss of the
services of any key personnel, particularly senior management
and engineers, could seriously harm our business.

26



---



##### Table of Contents



In addition, our success depends in large part upon our ability
to attract, train, motivate and retain highly skilled employees,
particularly marketing personnel, software engineers and other
senior personnel. Our failure to attract and retain the highly
trained technical personnel that are integral to our product
development, professional services and support teams may limit
our ability to develop new products or product enhancements.

Failure to expand our relationships with systems integrators
and consulting firms would impede acceptance of our products and
delay the growth of our revenue

At times we rely on systems integrators and consulting firms to
recommend our products to their customers and to install and
support our products for their customers. To increase our
revenue and implementation capabilities, we must develop and
expand our relationships with systems integrators and consulting
firms. If these firms fail to implement our products
successfully for their clients, we may not have the resources to
implement our products on the schedule required by the client
which would result in our inability to recognize revenue from
the license of our products to these customers.

Our stock price may continue to be volatile which may lead to
losses by investors and result in securities litigation

The trading price of our common stock has been and may continue
to be highly volatile and could be subject to wide fluctuations
in price in response to various factors, many of which are
beyond our control, including quarterly variations in our
results of operations; changes in recommendations by the
investment community or in their estimates of our revenue or
operating results; speculation in the press or investment
community; strategic actions by our competitors, such as product
announcements or acquisitions; and general market conditions.

In addition, the stock market in general and the Nasdaq National
Market and securities of Internet and software companies in
particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate
to their operating performance. These broad market and industry
factors may materially adversely affect the market price of our
common stock, regardless of our actual operating performance.
Litigation, if instituted, could result in substantial costs and
a diversion of managements attention and resources, which
would materially adversely affect our business, financial
condition and results of operations

Failure to increase our international revenue could seriously
harm our business

International revenue currently accounts for a significant
percentage of our total revenue. We expect international revenue
to continue to account for a significant percentage of total
revenue in the future and we believe that we must continue to
expand our international sales activities to be successful.
However, foreign markets for our products may develop more
slowly than currently anticipated. International revenue as a
percentage of total product-related revenue was 13% in fiscal
1999, 36% in fiscal 2000 and 37% and 40% for the three and six
months ended April 30, 2001. Our failure to expand our
international sales could have a significant negative impact on
our business.

Failure to effectively manage our geographically dispersed
organization could have a significant negative impact on our
business operations

If we fail to manage our geographically dispersed organization,
we may fail to meet or exceed our objectives and our revenue may
decline. We perform research and development activities in
Minnesota, New Jersey, Massachusetts and Belarus, and our
executive officers and other key employees are similarly
dispersed throughout the United States, Europe and Asia. This
geographic dispersion requires significant management resources
that our locally based competitors do not need to devote to
their operations. In addition, the expansion of our existing
international operations and entry into additional international
markets will require significant management attention and
financial resources.

27



---



##### Table of Contents



Integration of a new management team and new personnel and
growth may strain our operations

We have experienced a period of rapid growth and expansion
requiring a significant increase in new personnel to support our
growth and the market opportunity. All members of our senior
management team have joined Firepond since May 1997, and we
continue to experience turnover at the senior management level.
This may place a significant burden on our management and our
internal resources. If we are not able to install adequate
systems, procedures and controls to support our future
operations in an efficient and timely manner, or if we are
unable to otherwise manage growth effectively, our business
could be harmed.

Intense competition from other technology companies could
prevent us from increasing or sustaining revenue and prevent us
from achieving or sustaining profitability

The market for integrated e-business sales and marketing
solutions is intensely competitive and we expect that this
competition will increase. Many of our current and potential
competitors have longer operating histories, greater name
recognition and substantially greater resources than we do.
Therefore, they may be able to respond more quickly than we can
to new or changing opportunities, technologies, standards or
customer requirements. If we are unable to compete effectively,
our revenue could significantly decline.

If e-business selling and customer service solutions are not
widely adopted, we may not be successful

Our products address a new and emerging market for e-business
selling and customer service solutions. The failure of this
market to develop, or a delay in the development of this market,
would seriously harm our business. The success of e-business
selling and customer service solutions depends substantially
upon the widespread adoption of the Internet as a primary medium
for commerce and business applications. The Internet
infrastructure may not be able to support the demands placed on
it by the continued growth upon which our success depends.
Moreover, critical issues concerning the commercial use of the
Internet, such as security, reliability, cost, accessibility and
quality of service, remain unresolved and may negatively affect
the growth of Internet use or the attractiveness of commerce and
business communication over the Internet.

If we are unable to introduce new and enhanced products on a
timely basis that respond effectively to changing technology,
our revenue may decline

Our market is characterized by rapid technological change,
changes in customer requirements, frequent new product and
service introductions and enhancements, and evolving industry
standards. Advances in Internet technology or in e-commerce
software applications, or the development of entirely new
technologies to replace existing software, could lead to new
competitive products that have better performance or lower
prices than our products and could render our products obsolete
and unmarketable. In addition, if a new software language or
operating system becomes standard or is widely adopted in our
industry, we may need to rewrite portions of our products in
another computer language or for another operating system to
remain competitive. If we are unable to develop new and enhanced
products on a timely basis that respond to changing technology,
our business could be seriously harmed.

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

We license technology from a small number of software providers
for use with our products. In addition, the effective
implementation of our products depends upon the successful
operation of third-party licensed technology in conjunction with
our products. We anticipate that we will continue to license and
rely on technology from third parties in the future. This
technology may not continue to be available on commercially
reasonable terms, if at all, and some of the technology we
license would be difficult to replace. The loss of the use of
this technology would result in delays in the license and
implementation of our products until equivalent technology, if
available, is identified, licensed and integrated. In turn, this
could prevent the implementation or impair the functionality of
our products, delay new product introductions, or injure our
reputation.

28



---



##### Table of Contents



Claims may be brought against us if we hire former employees
of our competitors, which may cause us to incur substantial
costs

Companies in the software industry, whose employees accept
positions with competitors, frequently claim that those
competitors have breached, or encouraged the breach of,
noncompetition and nondisclosure agreements. These claims have
been made against us in the past, and we may receive claims in
the future as we hire additional qualified personnel. If a claim
were to be made against us, it could result in material
litigation. We could incur substantial costs in defending
ourselves against any of these claims, regardless of the merits
of these claims.

If we are unable to provide adequate professional service and
customer support, our ability to sustain or grow our business
will be harmed

Our ability to continue to grow, to retain current and future
customers and to recognize revenue from our licenses depends in
part upon the quality of our professional service and customer
support operations. Failure to offer adequate integration,
consulting and other professional services in connection with
the implementation of our products, and ongoing customer
support, either directly or through third parties, could
materially and adversely affect our operating results and
reputation, and could cause demand for our products to decline.

If our new and complex products fail to perform properly, our
revenue would be adversely affected

Software products as complex as ours may contain undetected
errors, or bugs, which result in product failures, or may cause
our products to fail to meet our customers expectations.
Our products may be particularly susceptible to bugs or
performance degradation because of the evolving nature of
Internet technologies and the stress that full deployment of our
products over the Internet to thousands of end-users may cause.
Product performance problems could result in loss of or delay in
revenue, loss of market share, failure to achieve market
acceptance, diversion of development resources or injury to our
reputation.

Product liability claims related to our customers
critical business operations could result in substantial
costs

Our products are critical to the business operations of our
customers. If one of our products fails, a customer may assert a
claim for substantial damages against us, regardless of our
responsibility for the failure. Our product liability insurance
may not cover claims brought against us. Product liability
claims could require us to spend significant time and money in
litigation or to pay significant damages. Any product liability
claims, whether or not successful, could seriously damage our
reputation and our business.

Our limited ability to protect our intellectual property may
harm our ability to compete

Our success and ability to compete is dependent in part upon our
proprietary technology. Any infringement of our proprietary
rights could result in significant litigation costs, and any
failure to adequately protect our proprietary rights could
result in our competitors offering similar products, potentially
resulting in loss of a competitive advantage and decreased
revenue. Existing patent, copyright, trademark and trade secret
laws afford only limited protection. In addition, the laws of
some foreign countries do not protect our proprietary rights to
the same extent as do the laws of the United States. Therefore,
we may not be able to protect our proprietary rights against
unauthorized third party copying or use. Furthermore, policing
the unauthorized use of our products is difficult. Some of our
contractual arrangements provide third parties with access to
our source code and other intellectual property upon the
occurrence of specified events. This access could enable these
third parties to use our intellectual property and source code
to develop and manufacture competing products, which would
adversely affect our performance and ability to compete.
Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of
others. This litigation could result in substantial costs and
diversion of resources and could materially adversely affect our
future operating results.

29



---



##### Table of Contents



Claims alleging infringement of a third partys
intellectual property could result in significant expense to us
and result in our loss of significant rights

The software and other Internet-related industries are
characterized by the existence of frequent litigation of
intellectual property rights. From time to time, third parties
may assert patent, copyright, trademark and other intellectual
property rights to technologies that are important to our
business. Any claims, with or without merit, could be
time-consuming, result in costly litigation, divert the efforts
of our technical and management personnel, cause product
shipment delays, disrupt our relationships with our customers or
require us to enter into royalty or licensing agreements, any of
which could have a material adverse effect upon our operating
results. Royalty or licensing agreements, if required, may not
be available on terms acceptable to us, if at all. If a claim
against us is successful and we cannot obtain a license to the
relevant technology on acceptable terms, license a substitute
technology or redesign our products to avoid infringement, our
business, financial condition and results of operations would be
materially adversely affected.

Control by our executive officers, directors and associated
entities may limit your ability to influence the outcome of
director elections and other matters requiring stockholder
approval

As of April 30, 2001 our executive officers, directors and
their affiliates own approximately 47% of the outstanding shares
of our common stock. These stockholders have significant
influence over matters requiring approval by our stockholders,
including the election of directors and the approval of mergers
or other business combination transactions. This concentration
of ownership could have the effect of delaying or preventing a
change in our control or discouraging a potential acquirer from
attempting to obtain control of us, which in turn could have a
material adverse effect on the market price of the common stock
or prevent our stockholders from realizing a premium over the
market price for their shares of common stock.

Future sales of our stock could cause our stock price to
fall

Sales of a substantial number of shares of our common stock in
the public market could cause the market price of our common
stock to decline. In addition, the sale of these shares could
impair our ability to raise capital through the sale of
additional equity securities.

Provisions of Delaware law and of our charter and by-laws may
make a takeover more difficult and lower the value of our common
stock

Provisions in our certificate of incorporation and by-laws and
in Delaware corporate law may make it difficult and expensive
for a third party to pursue a tender offer, change in control or
takeover attempt that is opposed by our management. Public
stockholders who might desire to participate in such a
transaction may not have an opportunity to do so, and the
ability of public stockholders to change our management could be
substantially impeded by these anti-takeover provisions. For
example, we have a staggered board of directors and the right
under our charter documents to issue preferred stock without
further stockholder approval, which could adversely affect the
holders of our common stock.

30



---



##### Table of Contents






Item 3. Quantitative and Qualitative Disclosures About
Market Risk

We develop products in the United States and Belarus and sell
them worldwide. As a result, our financial results could be
affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in foreign markets. Since our
sales are currently priced in U.S. dollars and are translated to
local currency amounts, a strengthening of the dollar could make
our products less competitive in foreign markets. Interest
income and expense are sensitive to changes in the general level
of U.S. interest rates, particularly since our investments are
in short-term instruments. Based on the nature and current
levels of our investments, however, we have concluded that there
is no material market risk exposure.




PART II.  OTHER INFORMATION




Item 1. Legal Proceedings

We are engaged in legal proceedings incidental to the normal
course of business. Although the ultimate outcome of these
matters cannot be determined, we believe that the final outcome
of these proceedings will not seriously harm our business.

In addition, we learned on June 13, 2001, claims were filed
against us by EPAM Systems, LLC and EPAM Systems, Inc. with the
American Arbitration Association alleging that these entities
have a contract with us and that we breached the alleged
contract. These companies are further seeking trustee process
relief in the Massachusetts Superior Courts in support of these
claims. This matter is under investigation, but based upon our
initial review of the claims we believe they are without merit
and we intend to defend these claims vigorously.




Item 2. Changes in Securities and Use of Proceeds

Not applicable




Item 3. Defaults upon Senior Securities

Not applicable




Item 4. Submission of Matters to a Vote of Security
Holders

The Companys annual meeting of stockholders was held on
March 22, 2001 (the Annual Meeting). The
following matters were considered at the Annual Meeting:

The first matter related to the election of two director
nominees. J. Michael Cline and Gerhard Schulmeyer as Directors
to serve until the 2004 annual meeting of stockholders. The
votes cast and withheld for such nominees were as follows:

|                   |  |     |            |          |  |  |         | 
|------------------ |  | --- | ---------- | -------- |  |  | ------- | 
|Name               |  | For |            | Withheld
|                   |  |     |            |         
|J. Michael Cline   |  |     | 24,815,561 |          |  |  | 165,585 | 
|Gerhard Schulmeyer |  |     | 24,815,153 |          |  |  | 165,993 | 

The second matter related to the approval of the amendment to
the Companys Stock Option Plan, 23,724,054 votes were cast
for approval and 1,245,191 votes were cast against approval.
There were 11,901 abstentions.

The third matter related to the approval of the Brightware
Acquisition Stock Option Plan, 23,731,138 votes were cast for
approval and 1,237,948 votes were cast against approval. There
were 12,060 abstentions.

Based on these voting results, each of the directors nominated
was elected and the second and third matters were approved.

31



---



##### Table of Contents






Item 5. Other Information

Not applicable




Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits



| |      
| | -----
| | None.

(b)  Reports on Form 8-K



| |     |                                                                                                                                                                                                                                                                                                                                                              
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | On March 2, 2001 the Registrant filed a Current Report on
	Form 8-K relating to the acquisition of Brightware, Inc
	(Item 2 of Form  8-K).                                                                                                                                                                                                                   
|
| | (2) | On May 1, 2001 the Registrant filed a Current Report on
	Form 8-K/ A relating to the consolidated financial
	statements of Brightware, Inc. as of and for the years ended
	June  30, 1999 and 2000 and the unaudited pro forma
	combined condensed financial statements of Firepond, Inc. as of
	October 31, 2000 and January 31, 2001 (Item 7 of
	Form 8-K).

32



---



##### Table of Contents






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.



| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | FIREPOND, INC.                                                                                                                           
|
| | /s/ KLAUS P. BESIER                                                                                                                      
| |                                                                                                                                          
| | Klaus P. Besier                                                                                                                          
| | Chairman, Chief Executive Officer 
	 and Director (Principal Executive Officer)                                                          
|
| | /s/ PAUL K. MCDERMOTT                                                                                                                    
| |                                                                                                                                          
| | Paul K. McDermott                                                                                                                        
| | Chief Financial Officer and Vice President of Finance and
	Administration (Principal Financial Officer and Principal
	Accounting Officer)

Dated: June 14, 2001

33