##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarter Ended January 31, 2002

OR

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

As of January 31, 2002 there were 36,841,192 shares of the Registrants
Common Stock outstanding.





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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                                                                                   
|Ex-10.20 Loan and Pledge Agreement           
|Ex-10.21 Amended and Restated Promissory Note
|Ex-10.22 Employment Letter with Cem Tanyel   



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED January 31, 2002

TABLE OF CONTENTS

|        |  |                                                                 |                                              |  |    |          |  | 
|------- |  | --------------------------------------------------------------- | -------------------------------------------- |  | -- | -------- |  | 
|        |  |                                                                 |                                              |  |    | Page No.
|        |  |                                                                 |                                              |  |    |         
|PART I  |  | FINANCIAL INFORMATION                                           |                                              |  |    |         
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|        |  |                                                                 |                                              |  |    |          |  | 
|       
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|Item 1. |  | Financial Statements (unaudited)                                |                                              |  |    |         
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|        |  |                                                                 |                                              |  |    |          |  | 
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|        |  | Condensed Consolidated Balance Sheets -                         |                                              |  |    |         
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|        |  |                                                                 | October 31, 2001 and January 31, 2002        |  | 3  |         
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|        |  |                                                                 |                                              |  |    |          |  | 
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|        |  | Condensed Consolidated Statements of Operations -               |                                              |  |    |         
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|        |  |                                                                 | Three Months Ended January 31, 2001 and 2002 |  | 4  |         
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|        |  |                                                                 |                                              |  |    |          |  | 
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|        |  | Condensed Consolidated Statements of Cash Flows -               |                                              |  |    |         
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|        |  |                                                                 | Three Months Ended January 31, 2001 and 2002 |  | 5  |         
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|        |  |                                                                 |                                              |  |    |          |  | 
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|        |  | Notes to Condensed Consolidated Financial Statements            |                                              |  | 6  |         
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|        |  |                                                                 |                                              |  |    |          |  | 
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|Item 2. |  | Management's Discussion and Analysis of Financial Condition and |                                              |  |    |         
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|        |  |                                                                 | Results of Operations                        |  | 17 |         
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|        |  |                                                                 |                                              |  |    |          |  | 
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|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk      |                                              |  | 33 |         
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|        |  |                                                                 |                                              |  |    |          |  | 
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|PART II |  | OTHER INFORMATION                                               |                                              |  |    |         
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|        |  |                                                                 |                                              |  |    |          |  | 
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|Item 1. |  | Legal Proceedings                                               |                                              |  | 33 |         
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|Item 2. |  | Changes in Securities and Use of Proceeds                       |                                              |  | 34 |         
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|        |  |                                                                 |                                              |  |    |          |  | 
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|Item 3. |  | Defaults Upon Senior Securities                                 |                                              |  | 34 |         
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|        |  |                                                                 |                                              |  |    |          |  | 
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|Item 4. |  | Submission of Matters to a Vote of Security Holders             |                                              |  | 34 |         
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|Item 5. |  | Other Information                                               |                                              |  | 34 |         
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|        |  |                                                                 |                                              |  |    |          |  | 
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|Item 6. |  | Exhibits and Reports on Form 8-K                                |                                              |  | 34 |         
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|        |  |                                                                 |                                              |  |    |          |  | 
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|        |  | SIGNATURES                                                      |                                              |  | 35 |         

2



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##### Table of Contents






FIREPOND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(unaudited)

|                                            |                                                                                                                                                                                                                    |                            |                           |                                      |        |             |        |             |        |        |  | 
|------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------------------------- | ------------------------------------ | ------ | ----------- | ------ | ----------- | ------ | ------ |  | 
|                                            |                                                                                                                                                                                                                    |                            |                           |                                      |        | October 31, |        | January 31,
|                                            |                                                                                                                                                                                                                    |                            |                           |                                      |        | 2001        |        | 2002       
|                                            |                                                                                                                                                                                                                    |                            |                           |                                      |        |             |        |            
|                                            |                                                                                                                                                                                                                    |                            |                           | ASSETS                               |        |             |        |             |        |        |  | 
|                                           
|                                           
|                                           
|                                           
|Current assets:                             |                                                                                                                                                                                                                    |                            |                           |                                      |        |             |        |            
|                                           
|                                           
|                                           
|                                           
|                                            | Cash and cash equivalents                                                                                                                                                                                          |                            | $                         | 34,660                               |        |             | $      | 34,496      |       
|                                           
|                                           
|                                           
|                                           
|                                            | Short-term investments                                                                                                                                                                                             |                            |                           | 9,593                                |        |             |        | 7,274       |       
|                                           
|                                           
|                                           
|                                           
|                                            | Accounts receivable, net                                                                                                                                                                                           |                            |                           | 10,310                               |        |             |        | 5,930       |       
|                                           
|                                           
|                                           
|                                           
|                                            | Unbilled revenue                                                                                                                                                                                                   |                            |                           | 594                                  |        |             |        | 418         |       
|                                           
|                                           
|                                           
|                                           
|                                            | Prepaid expenses and other current assets                                                                                                                                                                          |                            |                           | 2,118                                |        |             |        | 1,702       |       
|                                            |                                                                                                                                                                                                                    |                            |                           |                                      |        |             |        |            
|                                            |                                                                                                                                                                                                                    |                            | Total current assets      |                                      |        | 57,275      |        |             |        | 49,820 | 
|                                           
|                                           
|                                           
|                                           
|Property and equipment, net                 |                                                                                                                                                                                                                    |                            | 5,356                     |                                      |        |             | 4,702  |            
|                                           
|                                           
|                                           
|                                           
|Goodwill and other intangible assets, net   |                                                                                                                                                                                                                    |                            | 11,114                    |                                      |        |             | 215    |            
|                                           
|                                           
|                                           
|                                           
|Restricted cash                             |                                                                                                                                                                                                                    |                            | 550                       |                                      |        |             | 400    |            
|                                           
|                                           
|                                           
|                                           
|Other assets                                |                                                                                                                                                                                                                    |                            | 843                       |                                      |        |             | 1,256  |            
|                                            |                                                                                                                                                                                                                    |                            |                           |                                      |        |             |        |            
|                                            |                                                                                                                                                                                                                    | $                          | 75,138                    |                                      |        | $           | 56,393 |            
|                                            |                                                                                                                                                                                                                    |                            |                           |                                      |        |             |        |            
|                                            |                                                                                                                                                                                                                    |                            |                           | LIABILITIES AND STOCKHOLDERS EQUITY |        |             |        |             |        |        |  | 
|                                           
|                                           
|                                           
|                                           
|Current liabilities:                        |                                                                                                                                                                                                                    |                            |                           |                                      |        |             |        |            
|                                           
|                                           
|                                           
|                                           
|                                            | Accounts payable                                                                                                                                                                                                   |                            | $                         | 1,790                                |        |             | $      | 1,228       |       
|                                           
|                                           
|                                           
|                                           
|                                            | Accrued liabilities                                                                                                                                                                                                |                            |                           | 8,874                                |        |             |        | 8,628       |       
|                                           
|                                           
|                                           
|                                           
|                                            | Restructuring accrual                                                                                                                                                                                              |                            |                           | 5,057                                |        |             |        | 2,344       |       
|                                           
|                                           
|                                           
|                                           
|                                            | Deferred revenue                                                                                                                                                                                                   |                            |                           | 10,802                               |        |             |        | 7,730       |       
|                                            |                                                                                                                                                                                                                    |                            |                           |                                      |        |             |        |            
|                                            |                                                                                                                                                                                                                    |                            | Total current liabilities |                                      |        | 26,523      |        |             |        | 19,930 | 
|                                           
|                                           
|                                           
|                                           
|Restructuring accrual, less current
portion |                                                                                                                                                                                                                    |                            | 1,102                     |                                      |        |             | 1,049  |            
|                                           
|                                           
|                                           
|                                           
|Stockholders equity:                       |                                                                                                                                                                                                                    |                            |                           |                                      |        |             |        |            
|                                           
|                                           
|                                           
|                                           
|                                            | Common stock, $0.01 par value 
Authorized  100,000,000 shares at October 31, 2001 and January 31, 2002;
Issued and outstanding  37,316,911 shares at October 31, 2001 and
36,841,192 shares at January 31, 2002 |                            |                           | 373                                  |        |             |        | 368         |       
|                                           
|                                           
|                                           
|                                           
|                                            | Additional paid-in capital                                                                                                                                                                                         |                            |                           | 202,231                              |        |             |        | 202,428     |       
|                                           
|                                           
|                                           
|                                           
|                                            | Accumulated deficit                                                                                                                                                                                                |                            |                           | (148,416                             | )      |             |        | (159,596    | )     
|                                           
|                                           
|                                           
|                                           
|                                            | Loans receivable                                                                                                                                                                                                   |                            |                           | (4,407                               | )      |             |        | (4,294      | )     
|                                           
|                                           
|                                           
|                                           
|                                            | Deferred compensation                                                                                                                                                                                              |                            |                           | (1,285                               | )      |             |        | (2,514      | )     
|                                           
|                                           
|                                           
|                                           
|                                            | Other comprehensive loss                                                                                                                                                                                           |                            |                           | (983                                 | )      |             |        | (978        | )     
|                                            |                                                                                                                                                                                                                    |                            |                           |                                      |        |             |        |            
|                                            |                                                                                                                                                                                                                    | Total stockholders equity |                           |                                      | 47,513 |             |        |             | 35,414 |       
|                                            |                                                                                                                                                                                                                    |                            |                           |                                      |        |             |        |            
|                                            |                                                                                                                                                                                                                    | $                          | 75,138                    |                                      |        | $           | 56,393 |            
|                                            |                                                                                                                                                                                                                    |                            |                           |                                      |        |             |        |            

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

3



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##### Table of Contents






FIREPOND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)

|                                                                                 |                                                                                                   |                                                          |                               |        |                   |        |         |        |       |        | 
|-------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ----------------------------- | ------ | ----------------- | ------ | ------- | ------ | ----- | ------ | 
|                                                                                 |                                                                                                   |                                                          |                               |        | Three Months     
|                                                                                 |                                                                                                   |                                                          |                               |        | Ended January 31,
|                                                                                 |                                                                                                   |                                                          |                               |        |                  
|                                                                                 |                                                                                                   |                                                          |                               |        | 2001              |        | 2002   
|                                                                                 |                                                                                                   |                                                          |                               |        |                   |        |        
|Revenue:                                                                         |                                                                                                   |                                                          |                               |        |                   |        |         |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Product-related revenue:                                                                          |                                                          |                               |        |                   |        |         |        |      
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 |                                                                                                   | License                                                  |                               | $      | 4,034             |        |         | $      | 3,236 |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 |                                                                                                   | Services and maintenance                                 |                               |        | 8,273             |        |         |        | 3,897 |       
|                                                                                 |                                                                                                   |                                                          |                               |        |                   |        |         |       
|                                                                                 |                                                                                                   |                                                          | Total product-related revenue |        |                   | 12,307 |         |        |       | 7,133  | 
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Custom development services                                                                       |                                                          |                               | 2,240  |                   |        |         | 421    |      
|                                                                                 |                                                                                                   |                                                          |                               |        |                   |        |         |       
|                                                                                 |                                                                                                   |                                                          | Total revenue                 |        |                   | 14,547 |         |        |       | 7,554  | 
|                                                                                 |                                                                                                   |                                                          |                               |        |                   |        |         |       
|Cost of revenue:                                                                 |                                                                                                   |                                                          |                               |        |                   |        |         |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 |                                                                                                   | License                                                  |                               |        | 69                |        |         |        | 56    |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 |                                                                                                   | Product-related services and maintenance (1)             |                               |        | 8,533             |        |         |        | 2,934 |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 |                                                                                                   | Custom development services                              |                               |        | 677               |        |         |        | 113   |       
|                                                                                 |                                                                                                   |                                                          |                               |        |                   |        |         |       
|                                                                                 |                                                                                                   |                                                          | Total cost of revenue         |        |                   | 9,279  |         |        |       | 3,103  | 
|                                                                                 |                                                                                                   |                                                          |                               |        |                   |        |         |       
|Gross profit                                                                     |                                                                                                   |                                                          | 5,268                         |        |                   |        | 4,451   |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Operating expenses:                                                              |                                                                                                   |                                                          |                               |        |                   |        |         |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 |                                                                                                   | Sales and marketing (1)                                  |                               |        | 6,852             |        |         |        | 2,275 |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 |                                                                                                   | Research and development (1)                             |                               |        | 4,678             |        |         |        | 2,863 |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 |                                                                                                   | General and administrative (1)                           |                               |        | 2,891             |        |         |        | 1,492 |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 |                                                                                                   | Stock-based compensation (1)                             |                               |        | 696               |        |         |        | 1,485 |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 |                                                                                                   | Amortization of other intangible assets                  |                               |        |                  |        |         |        | 408   |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 |                                                                                                   | Impairment of developed technology and know-how (Note 7) |                               |        |                  |        |         |        | 3,120 |       
|                                                                                 |                                                                                                   |                                                          |                               |        |                   |        |         |       
|                                                                                 |                                                                                                   |                                                          | Total operating expenses      |        |                   | 15,117 |         |        |       | 11,643 | 
|                                                                                 |                                                                                                   |                                                          |                               |        |                   |        |         |       
|Loss from operations                                                             |                                                                                                   |                                                          | (9,849                        | )      |                   |        | (7,192  | )     
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Interest income                                                                  |                                                                                                   |                                                          | 1,740                         |        |                   |        | 181     |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Other expense                                                                    |                                                                                                   |                                                          | (499                          | )      |                   |        | (196    | )     
|                                                                                 |                                                                                                   |                                                          |                               |        |                   |        |         |       
|Net loss before cumulative effect of a change in accounting
accounting principle |                                                                                                   | $                                                        | (8,608                        | )      |                   | $      | (7,207  | )     
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Cumulative effect of a change in accounting principle (Note 8)                   |                                                                                                   |                                                          |                              |        |                   |        | (3,973  | )     
|                                                                                 |                                                                                                   |                                                          |                               |        |                   |        |         |       
|Net loss                                                                         |                                                                                                   | $                                                        | (8,608                        | )      |                   | $      | (11,180 | )     
|                                                                                 |                                                                                                   |                                                          |                               |        |                   |        |         |       
|Net loss per share (Note 4):                                                     |                                                                                                   |                                                          |                               |        |                   |        |         |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Basic and diluted net loss per share before cumulative effect
of a change in accounting principle |                                                          | $                             | (0.24  | )                 |        | $       | (0.20  | )    
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Cumulative effect of a change in accounting principle                                             |                                                          |                               |       |                   |        |         | (0.11  | )    
|                                                                                 |                                                                                                   |                                                          |                               |        |                   |        |         |       
|                                                                                 | Basic and diluted net loss per share                                                              |                                                          | $                             | (0.24  | )                 |        | $       | (0.31  | )    
|                                                                                 |                                                                                                   |                                                          |                               |        |                   |        |         |       
|                                                                                 | Basic and diluted weighted average common shares outstanding                                      |                                                          |                               | 35,548 |                   |        |         | 36,393 |      
|                                                                                 |                                                                                                   |                                                          |                               |        |                   |        |         |       



---

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

|                               |                            |   |                   |     |      |   |       |       | 
|------------------------------ | -------------------------- | - | ----------------- | --- | ---- | - | ----- | ----- | 
|                               |                            |   | Three Months     
|                               |                            |   | Ended January 31,
|                               |                            |   |                  
|                               |                            |   | 2001              |     | 2002
|                               |                            |   |                   |     |     
|Cost of revenue                |                            | $ | 10                |     |      | $ | 92    |      
|                              
|                              
|                              
|                              
|Operating expenses:            |                            |   |                   |     |      |   |       |      
|                              
|                              
|                              
|                              
|                               | Sales and marketing        |   |                   | 72  |      |   |       | 35    | 
|                              
|                              
|                              
|                              
|                               | Research and development   |   |                   | 61  |      |   |       | 205   | 
|                              
|                              
|                              
|                              
|                               | General and administrative |   |                   | 553 |      |   |       | 1,153 | 
|                               |                            |   |                   |     |      |   |       |      
|Total stock-based compensation |                            | $ | 696               |     |      | $ | 1,485 |      
|                               |                            |   |                   |     |      |   |       |      

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

4



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##### Table of Contents






FIREPOND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)

|                                                             |                                                                             |                                                                |                                           |                                           |     |                   |         |         |       |        |        |  
|------------------------------------------------------------ | --------------------------------------------------------------------------- | -------------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | --- | ----------------- | ------- | ------- | ----- | ------ | ------ | -
|                                                             |                                                                             |                                                                |                                           |                                           |     | Three Months     
|                                                             |                                                                             |                                                                |                                           |                                           |     | Ended January 31,
|                                                             |                                                                             |                                                                |                                           |                                           |     |                  
|                                                             |                                                                             |                                                                |                                           |                                           |     | 2001              |         | 2002   
|                                                             |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|Cash flows from operating activities:                        |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net loss                                                                    |                                                                | $                                         | (8,608                                    | )   |                   | $       | (11,180 | )    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Adjustments to reconcile net loss to net cash used in
operating activities: |                                                                |                                           |                                           |     |                   |         |         |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             | Stock-based compensation expense                               |                                           |                                           | 696 |                   |         |         | 1,485 |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             | Depreciation and amortization                                  |                                           |                                           | 949 |                   |         |         | 1,085 |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             | Impairment of developed technology and know-how (Note 7)       |                                           |                                           |    |                   |         |         | 3,120 |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             | Cumulative effect of a change in accounting principle (Note 8) |                                           |                                           |    |                   |         |         | 3,973 |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             | Changes in assets and liabilities:                             |                                           |                                           |     |                   |         |         |       |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                                | Accounts receivable                       |                                           |     | 670               |         |         |       | 4,450  |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                                | Unbilled services                         |                                           |     | (1,293            | )       |         |       | 176    |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                                | Prepaid expenses and other current assets |                                           |     | (4,007            | )       |         |       | 379    |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                                | Accounts payable                          |                                           |     | (1,330            | )       |         |       | (557   | )     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                                | Accrued liabilities                       |                                           |     | (2,161            | )       |         |       | (238   | )     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                                | Restructuring accrual                     |                                           |     |                  |         |         |       | (2,766 | )     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                                | Deferred revenue                          |                                           |     | (40               | )       |         |       | (3,072 | )     
|                                                             |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|                                                             |                                                                             |                                                                |                                           | Net cash used in operating activities     |     |                   | (15,124 | )       |       |        | (3,145 | )
|                                                             |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|Cash flows from investing activities:                        |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Purchases of short-term investments                                         |                                                                |                                           | (6,754                                    | )   |                   |         | (7,291  | )    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Proceeds from the sale and maturities of short-term investments             |                                                                |                                           | 17,490                                    |     |                   |         | 9,600   |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Purchases of property and equipment                                         |                                                                |                                           | (1,875                                    | )   |                   |         | (72     | )    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Return of cash from the Brightware acquisition escrow                       |                                                                |                                           |                                          |     |                   |         | 520     |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Decrease in restricted cash                                                 |                                                                |                                           |                                          |     |                   |         | 188     |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Increase (decrease) in other assets                                         |                                                                |                                           | (76                                       | )   |                   |         | 10      |      
|                                                             |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|                                                             |                                                                             |                                                                |                                           | Net cash provided by investing activities |     |                   | 8,785   |         |       |        | 2,955  |  
|                                                             |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|Cash flows from financing activities:                        |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Payments on long-term debt                                                  |                                                                |                                           | (118                                      | )   |                   |         | (4      | )    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Proceeds from stock options and warrants exercised                          |                                                                |                                           | 1,544                                     |     |                   |         | 39      |      
|                                                             |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|                                                             |                                                                             |                                                                |                                           | Net cash provided by financing activities |     |                   | 1,426   |         |       |        | 35     |  
|                                                             |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|Effect of exchange rate changes on cash and cash
equivalents |                                                                             |                                                                | 9                                         |                                           |     |                   | (9      | )      
|                                                             |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|Net decrease in cash and cash equivalents                    |                                                                             |                                                                | (4,904                                    | )                                         |     |                   | (164    | )      
|                                                            
|                                                            
|                                                            
|                                                            
|Cash and cash equivalents, beginning of period               |                                                                             |                                                                | 79,500                                    |                                           |     |                   | 34,660  |        
|                                                             |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|Cash and cash equivalents, end of period                     |                                                                             | $                                                              | 74,596                                    |                                           |     | $                 | 34,496  |        
|                                                             |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|Supplemental cash flow information:                          |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Interest paid                                                               |                                                                | $                                         | 8                                         |     |                   | $       | 37      |      
|                                                             |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|Non-cash investing and financing activities:                 |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Return of shares issued to Brightware                                       |                                                                | $                                         |                                          |     |                   | $       | 2,448   |      
|                                                             |                                                                             |                                                                |                                           |                                           |     |                   |         |        
|                                                             | Increase in other assets for value of shares returned from Brightware       |                                                                | $                                         |                                          |     |                   | $       | 430     |      
|                                                             |                                                                             |                                                                |                                           |                                           |     |                   |         |        

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

5



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##### 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 solutions that optimize the lead-to-order
process, helping companies more profitably acquire and retain customers. The
Companys product lines leverage advanced intelligence engines and patented
automation technology to drive new revenue streams, increase profitability, and
manage customer interactions across all channels and throughout the
lead-to-order process.

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 Company is subject to a number of risks similar to those of other
companies of similar size in its industry, including recurring losses, rapid
technological changes, competition, customer concentration, integration of
acquisitions, management of international activities and dependence on key
individuals.

The accompanying condensed 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
months ended January 31, 2002 and 2001 are unaudited and have been prepared on
a basis consistent with the October 31, 2001 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, 2001 included in the Companys Form 10-K. The
results of operations for the three months ended January 31, 2002 are not
necessarily indicative of results to be expected for the entire year or any
other period.

2. Significant Accounting Policies

(a) Use of Estimates

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

(b) Revenue Recognition

The Company recognizes revenue based on the provisions of the American
Institute of Certified Public Accountants (AICPA) Statement of Position, No.
97-2, Software Revenue Recognition (SOP 97-2), as amended, and Statement of
Position No. 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts (SOP 81-1).

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 and, consulting and training
services performed for customers that license the Companys products.

6



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)

The Company has concluded that generally, for the SalesPerformer product
suite 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. During the quarter
ended January 31, 2002, the Company successfully completed a large customer
implementation resulting in a modification of the estimate to complete and the
recognition of license revenue of $1,172,000. Additional license revenue of
$1,253,000 was recognized in the quarter ended January 31, 2002 resulting from
the resolution of certain contingencies for two other customers.

In situations where the Company is not responsible for implementation
services for the SalesPerformer Suite of products, the Company recognizes
revenue on delivery of the packaged software if there is persuasive evidence of
an arrangement, collection is probable and the fee is fixed or determinable.

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

For separate sales of the eServicePerformer product line, which was
acquired in connection with the Brightware transaction, the Company recognizes
revenue on delivery of the packaged software if there is persuasive evidence of
an arrangement, collection is probable, and the fee is fixed or determinable.
The Company has determined that implementation services are not essential to
the functionality of the eServicePerformer product.

In situations where the Company enters into a license agreement for both
its SalesPerformer Suite and its eServicePerformer product and is responsible
for implementation services; it will recognize revenue for the entire
arrangement under SOP 81-1.

For product sales that are recognized on delivery, the Company executes
contracts that govern the terms and conditions of each software license, as
well as maintenance arrangements and other services arrangements. These
contracts may be elements in a multiple element arrangement. Revenue under
multiple element arrangements, which may include several different software
products and services sold together, is allocated to each element based on the
residual method in accordance with the SOP 98-9, Software Revenue Recognition
with Respect to Certain Arrangements.

The Company uses the residual method when vendor-specific objective
evidence of fair value does not exist for one of the delivered elements in the
arrangement. Under the residual method, the fair value of the undelivered
elements is deferred and subsequently recognized. The Company has established
sufficient vendor specific objective evidence for professional services,
training and maintenance and support services based on the price charged when
these elements are sold separately. Accordingly, software license revenue is
recognized under the residual method in arrangements in which software is
licensed with professional services, training, and maintenance and support
services.

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

7



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)

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 consists of the following:

|                            |  |                |        |             |  |   |       | 
|--------------------------- |  | -------------- | ------ | ----------- |  | - | ----- | 
|                            |  | October 31,    |        | January 31,
|                            |  | 2001           |        | 2002       
|                            |  |                |        |            
|                            |  | (in thousands)
|Product license             |  | $              | 5,073  |             |  | $ | 2,871 | 
|                           
|                           
|                           
|                           
|Product-related services    |  |                | 1,957  |             |  |   | 1,486 | 
|                           
|                           
|                           
|                           
|Product-related maintenance |  |                | 3,379  |             |  |   | 3,083 | 
|                           
|                           
|                           
|                           
|Custom development services |  |                | 393    |             |  |   | 290   | 
|                            |  |                |        |             |  |   |       | 
|                            |  | $              | 10,802 |             |  | $ | 7,730 | 
|                            |  |                |        |             |  |   |       | 

Unbilled revenue of $594,000 at October 31, 2001 and $418,000 at January
31, 2002 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 $343,000 at October 31, 2001 and
$2,958,000 at January 31, 2002.

During the quarter ended January 31, 2002, the Company reversed $500,000
out of bad debt reserve due to the resolution of past-due receivables. This
reversal was recorded as a reduction in operating expenses for the quarter
ended January 31, 2002.

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.

(c) 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 and consisted of the following:

|                           |                                |                                 |   |                |        |             |   |        |        | 
|-------------------------- | ------------------------------ | ------------------------------- | - | -------------- | ------ | ----------- | - | ------ | ------ | 
|                           |                                |                                 |   | October 31,    |        | January 31,
|                           |                                |                                 |   | 2001           |        | 2002       
|                           |                                |                                 |   |                |        |            
|                           |                                |                                 |   | (In thousands)
|Cash and cash equivalents: |                                |                                 |   |                |        |             |   |       
|                          
|                          
|                          
|                          
|                           | Interest bearing bank deposits |                                 | $ | 2,776          |        |             | $ | 3,216  |       
|                          
|                          
|                          
|                          
|                           | Money market accounts          |                                 |   | 10,765         |        |             |   | 14,882 |       
|                          
|                          
|                          
|                          
|                           | Commercial paper               |                                 |   | 19,748         |        |             |   | 14,900 |       
|                          
|                          
|                          
|                          
|                           | Discount notes                 |                                 |   | 1,371          |        |             |   | 1,498  |       
|                           |                                |                                 |   |                |        |             |   |       
|                           |                                | Total cash and cash equivalents |   | $              | 34,660 |             |   | $      | 34,496 | 
|                           |                                |                                 |   |                |        |             |   |       

8



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)

(d) 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
commercial paper, corporate notes and bonds and discount notes with an original
maturity of less than a year. Other comprehensive loss in stockholders equity
included an unrealized holding gain of $9,000 for October 31, 2001 and an
unrealized holding loss of $1,000 for January 31, 2002.

|                        |                                                                                                               |  |                              |       |                |       |             |       |   |       | 
|----------------------- | ------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ----- | -------------- | ----- | ----------- | ----- | - | ----- | 
|                        |                                                                                                               |  |                              |       | October 31,    |       | January 31,
|                        |                                                                                                               |  |                              |       | 2001           |       | 2002       
|                        |                                                                                                               |  |                              |       |                |       |            
|                        |                                                                                                               |  |                              |       | (In thousands)
|Short-term investments: |                                                                                                               |  |                              |       |                |       |             |      
|                       
|                       
|                       
|                       
|                        | Commercial paper (average 57 and 76 days to maturity for October
31, 2001 and January 31, 2002, respectively) |  | $                            | 3,089 |                |       | $           | 5,678 |  
|                       
|                       
|                       
|                       
|                        | Corporate notes and bonds (average 21 days to maturity for October
31, 2001)                                  |  |                              | 4,512 |                |       |             |      |  
|                       
|                       
|                       
|                       
|                        | Discount notes (average 71 and 65 days to maturity for October 31,
2001 and January 31, 2002, respectively)   |  |                              | 1,992 |                |       |             | 1,596 |  
|                        |                                                                                                               |  |                              |       |                |       |             |      
|                        |                                                                                                               |  | Total short-term investments |       | $              | 9,593 |             |       | $ | 7,274 | 
|                        |                                                                                                               |  |                              |       |                |       |             |      

(e) Comprehensive Income (Loss)

The components of comprehensive loss for the three months ended January
31, 2001 and 2002 are as follows:

|                    |                          |                                                  |        |                   |     |      |         |         |     |  
|------------------- | ------------------------ | ------------------------------------------------ | ------ | ----------------- | --- | ---- | ------- | ------- | --- | -
|                    |                          |                                                  |        | Three Months     
|                    |                          |                                                  |        | Ended January 31,
|                    |                          |                                                  |        |                  
|                    |                          |                                                  |        | 2001              |     | 2002
|                    |                          |                                                  |        |                   |     |     
|                    |                          |                                                  |        | (In thousands)   
|Comprehensive loss: |                          |                                                  |        |                   |     |      |         |        
|                   
|                   
|                   
|                   
|                    | Net loss                 |                                                  | $      | (8,608            | )   |      | $       | (11,180 | )  
|                   
|                   
|                   
|                   
|                    | Other comprehensive loss |                                                  |        |                   |     |      |         |         |    
|                   
|                   
|                   
|                   
|                    |                          | Unrealized gain (loss) on short-term
investments |        |                   | 62  |      |         |         | (10 | )
|                   
|                   
|                   
|                   
|                    |                          | Foreign currency
translation                     |        |                   | 263 |      |         |         | 15  |  
|                    |                          |                                                  |        |                   |     |      |         |        
|Comprehensive loss  |                          | $                                                | (8,283 | )                 |     | $    | (11,175 | )      
|                    |                          |                                                  |        |                   |     |      |         |        

(f) Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No, 141, Business Combinations. SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. This statement is effective for all business combinations
initiated after June 30, 2001.

Effective
November 1, 2001, the Company adopted SFAS No. 142, Goodwill
and Other Intangible Assets, which establishes financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, Intangible Assets. SFAS No. 142 requires that goodwill and
intangible assets that have indefinite useful lives not be amortized but,
instead, tested at least annually for impairment. See Note 8 of the Notes to
Consolidated Financial Statements of this quarterly report for a further
discussion of the impact of this statement on the Companys consolidated
financial statements.

9



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)

Effective November 1, 2001, the Company adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. This statement supercedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of Accounting Principles Board (APB) Opinion No. 30, Reporting the
Results of Operations  Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. Under this statement it is required that one accounting model be
used for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and it broadens the presentation of discontinued
operations to include more disposal transactions. See Note 7 of the Notes to
Consolidated Financial Statements of this quarterly report for a further
discussion of the impact of this statement on the Companys consolidated
financial statements.

3. Accrued Liabilities

Accrued liabilities consists of:

|                     |                           |  |                |       |             |  |       |       | 
|-------------------- | ------------------------- |  | -------------- | ----- | ----------- |  | ----- | ----- | 
|                     |                           |  | October 31,    |       | January 31,
|                     |                           |  | 2001           |       | 2002       
|                     |                           |  |                |       |            
|                     |                           |  | (In thousands)
|Accrued merger costs |                           |  | 1,122          |       |             |  | 1,039 |      
|                    
|                    
|                    
|                    
|Other                |                           |  | 7,752          |       |             |  | 7,589 |      
|                     |                           |  |                |       |             |  |       |      
|                     | Total accrued liabilities |  | $              | 8,874 |             |  | $     | 8,628 | 
|                     |                           |  |                |       |             |  |       |      

During the quarter ended January 31, 2002, the Company reversed $300,000
of loss contracts accrual due to the completion of certain implementations.
This reversal was recorded as a reduction in cost of revenue during the quarter
ended January 31, 2002.

4. 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 by the weighted average
number of common shares outstanding, and diluted loss per share, which is
computed by dividing the net loss 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 the three months ended January 31, 2001 and 2002, 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 months ended January 31, 2002 excludes contingently
issuable shares of 397,079 representing shares issued but held in escrow in
connection with the acquisition of Signature Software and Brightware (see Note
5(b)).

As of January 31, 2001 and 2002 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 11,041,000 and
8,529,000, respectively.

10



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)

5. Stockholders Equity

(a) Stock Options and Warrants

The Company granted stock options to employees that require the
recognition of stock-based compensation expense. Until July 2001, stock-based
compensation relating to employee grants represented 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 on the date of grant of
the Companys common stock for financial reporting purposes. In July 2001, the
Company completed a stock option exchange program in which its directors and
eligible employees were offered the opportunity to exchange existing stock
options for new stock options with an exercise price equal to the current
market value of the Companys common stock. Participants in the exchange
program received new options to purchase seventy-five percent (75%) of the
number of shares of our common stock subject to the options that were exchanged
and canceled. The new options were granted on July 31, 2001, with an exercise
price of $.66 per share. We accepted 7,179,285 stock options for exchange and
issued 5,384,384 stock options in exchange for such tendered options. All
option grants issued in conjunction with the stock option exchange program are
subject to variable plan accounting in accordance with APB No. 25, whereby the
Company is required to record, as compensation expense, increases and decreases
in the value of these options between the grant date of the option and the date
the option is exercised. The greater the increase in the market value of the
Companys common stock following the date of grant, the greater the
compensation expense the Company will be required to record.

In the future, the Company may incur compensation expense as a result of
the issuance of the new options. The new options may be subject to variable
plan accounting in accordance with APB No. 25, as describe above. As of January
31, 2002, a total of 5,026,253 shares of common stock are subject to variable
plan accounting as a result of the stock option exchange program. As of January
31, 2002, the Company has recorded $1,990,000 of deferred compensation
associated with these options which reflects an increase during the quarter due
to a rise in the fair market value of the Companys common stock.

The Company granted options to employees to purchase 1,250,588 shares of
common stock at a weighted-average exercise price of $0.88 per share during the
three months ended January 31, 2002. At January 31, 2002, 7,634,216 options
were outstanding.

The Company also granted stock options to non-employees and issued
warrants to certain customers and to strategic business partners that require
the recognition of stock-based compensation expense. Stock-based compensation
related to these grants represents the fair market value as computed using an
established option valuation formula. As of January 31, 2002, the deferred
compensation balance associated with these grants was $173,000 and will be
recognized as an expense as earned in accordance with EITF 96-18.

(b) Common Stock Outstanding

Common stock outstanding at January 31, 2002 includes 49,728 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 347,351 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 are subject to release pending the settlement
of the general indemnification and warranty period.

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FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)

(c) Loans Receivable

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.
Originally the outstanding principal together with unpaid interest was due and
payable on the earlier of October 31, 2001, an event of default, or an event of
maturity, as defined. On December 11, 2001, the Board of Directors amended the
facility to extend the maturity to May 1, 2006. Due to the modification of the
facility, all amounts outstanding have been reclassified as a component of
stockholders equity. The promissory note is secured by a pledge of 500,000
shares of common stock of Firepond, Inc. and is generally not a recourse
obligation of the borrower, with specified exceptions. Amounts totaling
$4,000,000 plus accrued interest have been advanced to Mr. Besier under this
facility as of January 31, 2002.

In fiscal 2001, the Company issued notes to two former officers of the
Company in the amount of $157,000 and to a former employee of the Company in
the amount of $125,000. During the quarter ended January 31, 2002, in
connection with the termination of one of the former officers employment with
the Company, the Company acquired the shares securing the note, in the amount
of $120,000, from the officer in satisfaction of the amounts due under the
note. This amount was charged to operations during the period.

6. 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.

Revenue from the United States, the United Kingdom, Switzerland and Sweden
contributed approximately 41%, 17%, 17% and 11% of our revenue, respectively for
the three months ended January 31, 2002. Revenue from the United States and
Switzerland contributed approximately 64% and 17% of our revenue, respectively
for the three months ended January 31, 2001.

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FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)

7. Brightware Acquisition

On February 15, 2001, pursuant to an Agreement and Plan of Merger between
the Company and Brightware, Inc. 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, 1.3 million shares of Firepond common stock
valued at $5,865,000, and $2,576,000 in acquisition related costs. The value
of approximately 1.5 million shares of Firepond common stock and cash payments
totaling $3,250,000 were excluded from the purchase price as this consideration
was contingent on achieving financial performance objectives as measured on
April 30, 2001 which subsequently were not achieved. In addition, the
consideration was subject to a final accounting of Brightwares net assets as
of February 15, 2001. The acquisition was accounted for using the purchase
method in accordance with APB No. 16 and accordingly, the results of operations
of Brightware from the date of acquisition have been included in the results of
operations of the Company. The consideration payable was subject to a final
accounting of Brightwares net assets as of February 15, 2001. In connection
therewith, during the quarter ended January 31, 2002, the Company received
$520,000 of cash and 553,000 shares of Firepond common stock previously
escrowed in resolution of this provision of the transaction. This release from
escrow had the effect of reducing the purchase price recorded by the Company by
approximately $2,968,000 to $10,701,000.

The following table summarizes the transaction:

|                           |                                     |  |                |         |  
|-------------------------- | ----------------------------------- |  | -------------- | ------- | -
|                           |                                     |  | Amount        
|                           |                                     |  |               
|                           |                                     |  | (in thousands)
|Acquisition of Brightware: |                                     |  |                |        
|                          
|                          
|                          
|                          
|                           | Fair value of assets acquired       |  | $              | 3,954   |  
|                          
|                          
|                          
|                          
|                           | Fair value of liabilities assumed   |  |                | (11,034 | )
|                          
|                          
|                          
|                          
|                           | In-process research and development |  |                | 6,200   |  
|                          
|                          
|                          
|                          
|                           | Developed technology and know-how   |  |                | 4,900   |  
|                          
|                          
|                          
|                          
|                           | Assembled workforce                 |  |                | 2,200   |  
|                          
|                          
|                          
|                          
|                           | Goodwill                            |  |                | 4,051   |  
|                           |                                     |  |                |        
|                           | Total purchase price                |  | $              | 10,271  |  
|                           |                                     |  |                |        

As part of the purchase price allocation, all intangible assets that are a
part of the acquisition were identified and valued. 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 calculation of 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.

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FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)

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. 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.
Both developed technology and assembled workforce were being amortized over a
period of three years. The excess of the purchase price over the fair value of
identified intangible assets of approximately $4,481,000 was allocated to
goodwill.

During the quarter ended January 31, 2002, in accordance with SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets, the Company
lowered its estimates of the expected cash flows from the eServices product and
determined that developed technology and know-how was significantly impaired.
Accordingly, the Company recorded a $3,120,000 charge to write-off the impaired
portion of developed technology and know-how leaving a balance of approximately
$215,000 as of January 31, 2002.

Through October 31, 2001, the Company amortized goodwill over a period of
three years; however, on June 30 2001, the FASB issued SFAS No. 142 Accounting
for Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill,
including amounts related to assembled workforce, no longer be amortized,
instead, goodwill will be subject to an assessment of impairment by applying a
fair-value based test at least annually. The Company has adopted SFAS 142
effective November 1, 2001. In accordance with SFAS 142, the net book value of
assembled workforce was reclassified to goodwill and as a result of an
independent valuation, the Company determined that without regard to the lower
expected cash flows from the eServices product determined during the quarter
ended January 31, 2002, the goodwill was fully impaired upon adoption and,
accordingly, recorded a cumulative effect of a change in accounting principle
of $3,973,000 (see Note 8).

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

|                                       |  |                    |         |  
|-------------------------------------- |  | ------------------ | ------- | -
|                                       |  | Three Months Ended
|                                       |  | January 31,       
|                                       |  | 2001              
|                                       |  |                   
|                                       |  | (In thousands)    
|Net sales                              |  | $                  | 16,586  |  
|                                      
|                                      
|                                      
|                                      
|Net loss                               |  |                    | (15,645 | )
|                                      
|                                      
|                                      
|                                      
|Net loss per share  basic and diluted |  | $                  | (0.42   | )

8. Goodwill and Other Intangible Assets  Adoption of Statement No. 142

In July 2001, the FASB issued SFAS No. 142 Goodwill and Other Intangible
Assets, which establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. The Company early adopted SFAS No. 142 on November 1, 2001,
the beginning of its fiscal year. SFAS No. 142 requires that goodwill and
intangible assets that have indefinite useful lives not be amortized but,
instead, tested at least annually for impairment. Accordingly, the Company
reclassified the net book value of assembled workforce to goodwill and ceased
amortization of all goodwill, on November 1, 2001. Intangible assets that have
finite useful lives, consisting of developed technology and know-how, continue
to be amortized over their useful lives.

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FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)

The standard also requires that goodwill be tested for impairment
annually. In the year of adoption, the standard required a transitional
goodwill impairment evaluation, which was a two-step process. The first step
was a screen for whether there was an indication that goodwill was impaired as
of November 1, 2001. To do this, the Company identified its reporting units and
determined the carrying value of each by assigning the Companys assets and
liabilities, including existing goodwill, to them as of November 1, 2001. The
Company then determined the fair value of each reporting unit by using a
combination of present value and multiple of earnings valuation techniques and
compared it to the reporting units carrying value. As of January 31, 2002, the
Company completed this first step, which indicated that goodwill recorded
during the Brightware acquisition was impaired as of November 1, 2001.

In the second step, the Company compared the implied fair value of the
affected reporting units goodwill to its carrying value to measure the amount
of impairment. The fair value of goodwill was determined by allocating the
reporting units fair value to all of its assets and liabilities in a manner
similar to a purchase price allocation in accordance with SFAS No. 141 Business
Combinations. As of January 31, 2002, the Company completed this second step
and measured and recognized a transitional impairment loss of $3,973,000 as a
cumulative effect of a change in accounting principle in its statement of
earnings.

The circumstances leading to the goodwill impairment related directly to
the global slow down in information technology spending. This negative economic
trend has lowered the eServices operating profits and cash flows and is
evidence that initial growth expectations when Brightware was acquired have not
materialized. The fair value used to determine the impairment was based on a
combination of earnings multiples and discounted cash flow valuation
techniques.

9. Restructuring Charge

The Company undertook three plans to restructure its operations during
fiscal 2001. During the quarter ended April 30, 2001, as a result of the global
information technology spending slowdown, specifically in the Customer
Relationship Management market, and the Companys acquisition of Brightware on
February 15, 2001, the Company undertook a plan to restructure its operations.
During the quarters ended July 31, 2001 and October 31, 2001, as a result of a
continued global slowdown in information technology spending, the Company took
actions to extend the first restructuring. These actions sought to better align
the Companys cost structure with its projected operations in the future,
preserve cash, and in the case of the Brightware transaction, eliminate
redundant operations.

The significant components of the restructuring charges were as follows:

|                                                    |  |                |       |            |  |             |       |             |  |   |       |  |  |   |        | 
|--------------------------------------------------- |  | -------------- | ----- | ---------- |  | ----------- | ----- | ----------- |  | - | ----- |  |  | - | ------ | 
|                                                    |  | Quarter Ended  |       |            |  |            
|                                                    |  |                |       | Year Ended
|                                                    |  | April 30,      |       | July 31,   |  | October 31, |       | October 31,
|                                                    |  | 2001           |       | 2001       |  | 2001        |       | 2001       
|                                                    |  |                |       |            |  |             |       |            
|                                                    |  | (In thousands)
|Employee severance costs                            |  | $              | 2,286 |            |  | $           | 3,296 |             |  | $ | 2,931 |  |  | $ | 8,513  | 
|                                                   
|                                                   
|                                                   
|                                                   
|Facilities related
costs                            |  |                | 270   |            |  |             | 1,884 |             |  |   | 862   |  |  |   | 3,016  | 
|                                                   
|                                                   
|                                                   
|                                                   
|Impairment of property and equipment                |  |                | 114   |            |  |             | 1,530 |             |  |   | 2,247 |  |  |   | 3,891  | 
|                                                   
|                                                   
|                                                   
|                                                   
|Excess contractual commitments and termination fees |  |                |      |            |  |             | 1,050 |             |  |   | 991   |  |  |   | 2,041  | 
|                                                   
|                                                   
|                                                   
|                                                   
|Other                                               |  |                | 351   |            |  |             | 369   |             |  |   | 62    |  |  |   | 782    | 
|                                                    |  |                |       |            |  |             |       |             |  |   |       |  |  |   |        | 
|                                                    |  | $              | 3,021 |            |  | $           | 8,129 |             |  | $ | 7,093 |  |  | $ | 18,243 | 
|                                                    |  |                |       |            |  |             |       |             |  |   |       |  |  |   |        | 

The employee severance cost was related to reductions in headcount. The
Company terminated 31 general and administrative, 111 sales and marketing, 159
professional services, and 62 development employees, as well as 90 contractors.

The facilities related cost component consisted of idle lease space, lease
termination fees, and the closing of our Australia and Malaysia facilities.
The Companys assumptions considered current market value of similar properties
and the ability, if any, to sublease the idle space or any other future use.

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FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)

The impairment of property and equipment charges consisted of excess
computer equipment and furniture and fixtures resulting from the
reductions-in-force and leasehold write-offs related to office closings or
downsizings.

The excess contractual commitment and termination fees are primarily
amounts resulting from the Company entering into a settlement agreement with
EPAM Systems, an offshore organization which provides software development
services to us, to resolve a contract dispute. Among other items, the Company
agreed to pay EPAM Systems $1,000,000 in cash and granted options to purchase
100,000 shares of the Companys common stock in return for restructuring the
relationship and a release of claims including those claims previously filed
against the Company by EPAM Systems. As part of this agreement, the
relationship has been restructured to reduce the Companys monthly commitment
for the retention of EPAM Systems consultants in furtherance of the Companys
cost reduction measures.

There were no other material contractual commitments terminated as a
result of these restructurings.

A summary of the short and long-term restructuring accrual is as follows:

|                       |                              |                                   |   |                |        |  
|---------------------- | ---------------------------- | --------------------------------- | - | -------------- | ------ | -
|                       |                              |                                   |   | As of         
|                       |                              |                                   |   | January 31,   
|                       |                              |                                   |   | 2002          
|                       |                              |                                   |   |               
|                       |                              |                                   |   | (In thousands)
|Restructuring reserve: |                              |                                   |   |               
|                      
|                      
|                      
|                      
|                       | Balance, beginning of period |                                   | $ | 6,159          |       
|                      
|                      
|                      
|                      
|                       |                              | Severance payments                |   |                | (1,839 | )
|                      
|                      
|                      
|                      
|                       |                              | Facilities related payments       |   |                | (622   | )
|                      
|                      
|                      
|                      
|                       |                              | Contract termination fees         |   |                | (218   | )
|                      
|                      
|                      
|                      
|                       |                              | Other payments                    |   |                | (181   | )
|                      
|                      
|                      
|                      
|                       |                              | Property and equipment write-offs |   |                | 94     |  
|                       |                              |                                   |   |               
|                       | Balance, end of period       |                                   | $ | 3,393          |       
|                       |                              |                                   |   |               

10. Subsequent Event

In connection with the Companys acquisition of Brightware, Inc., a
portion of the consideration payable was placed in escrow to be available to
satisfy potential claims for damages as defined in the merger agreement. In
connection therewith, on February 8, 2002, the Company received $97,499 of cash
and 74,980 shares of Firepond common stock previously escrowed to satisfy
claims for damages. This release from escrow has the effect of reducing the
purchase price recorded by the Company by approximately $429,660 to
$10,271,000. The Company accounted for this reduction in purchase price in the
quarter ending January 31, 2002, by reducing goodwill and recording the value
of cash and stock returned to other assets. The Companys total stockholders
equity will be reduced by the value of the shares returned.

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##### 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 solutions that optimize the lead-to-order
process, helping companies more profitably acquire and retain customers. Our
product lines leverage advanced intelligence engines and patented automation
technology to drive new revenue streams, increase profitability, and manage
customer interactions across all channels and throughout the lead-to-order
process. 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 90.2% in fiscal 2001 and to 94.4% in the three months ended
January 31, 2002.

On February 15, 2001, we acquired 100% of the issued and outstanding
shares of capital stock of Brightware, Inc., located in San Rafael, California.
The acquisition was accounted for as a purchase in accordance with APB No. 16
and accordingly, the results of operations of Brightware have been included in
our results of operations since the date of acquisition. In addition, on
September 27, 2000, we 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 have been included in our results of operations.

During fiscal 2001, as a result of a global slowdown in information
technology spending, specifically in the Customer Relationship Management
market, and our acquisition of Brightware, we undertook a plan to restructure
its operations. These actions sought to better align our cost structure with
projected operations in the future, preserve cash, and in the case of the
Brightware transaction, eliminate redundant operations. We reduced headcount
and facilities as well as wrote off excess equipment and terminated and
restructured certain contractual relationships. Overall, we terminated 31
general and administrative, 111 sales and marketing, 159 professional services
and 62 development employees, as well as 90 contractors. The restructuring
charge for fiscal 2001 totaled $18.2 million. As a result of these actions,
the expenses in the three months ended January 31, 2002 significantly decreased
compared to the same period of the prior year.

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, $70.3 million for fiscal 2001, and
$11.2 million in the three months ended January 31, 2002. We currently plan to
incur an annual net loss for fiscal 2002. However, we plan to reach break even,
excluding stock based compensation and amortization of intangible assets in the
fourth quarter of fiscal 2002.

We generate revenue from primarily product-related license and service
revenue. Product-related license revenue is generated from licensing the rights
to the use of our packaged software products. Product-related service revenue
is generated from sales of maintenance, consulting and training services
performed for customers that license our products.

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##### Table of Contents



Revenue is recognized based on the provisions of Statement of Position,
No. 97-2,Software Revenue Recognition (SOP 97-2), and Statement of Position
No. 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts (SOP 81-1).

We have concluded that generally, for the SalesPerformer product suite and
its components, the implementation services are essential to the customers use
of the packaged software products in arrangements where we are responsible for
implementation services. As such, we recognize 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.

In situations where we are not responsible for implementation services for
the SalesPerformer Suite of products, we recognize revenue on delivery of the
packaged software if there is persuasive evidence of an arrangement, collection
is probable and the fee is fixed or determinable.

In situations where we are not responsible for implementation services for
the SalesPerformer Suite of products, but are obligated to provide unspecified
additional software products in the future, we recognize revenue as a
subscription over the term of the commitment period.

For separate sales of the eServicePerformer product line, which was
acquired in connection with the Brightware transaction, we recognize revenue on
delivery of the packaged software if there is persuasive evidence of an
arrangement, collection is probable and the fee is fixed or determinable. We
have determined that implementation services are not essential to the
functionality of the eServicePerformer product.

In situations where we enter into a license agreement for both its
SalesPerformer Suite and its eServicePerformer product and are responsible for
implementation services, we recognize revenue for the entire arrangement under
SOP 81-1.

We execute contracts that govern the terms and conditions of each software
license, maintenance arrangement and other services arrangements. These
contracts may be elements in a multiple element arrangement. Revenue under
multiple element arrangements, which may include several different software
products and services sold together, is allocated to each element based on the
residual method in accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position 98-9, Software Revenue Recognition
with Respect to Certain Arrangements.

We use the residual method when vendor-specific objective evidence of fair
value does not exist for one of the delivered elements in the arrangement.
Under the residual method, the fair value of the undelivered elements is
deferred and subsequently recognized. We have established sufficient vendor
specific objective evidence for professional services, training and maintenance
and support services based on the price charged when these elements are sold
separately. Accordingly, software license revenue is recognized under the
residual method in arrangements in which software is licensed with professional
services, training, and maintenance and support services.

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

We generally bill for services on a monthly basis. We generally bill for
product license fees upon commencement of the contract, although we may delay
billing based on the terms of the contract. We record deferred revenue on
amounts billed or collected by us before satisfying the above revenue
recognition criteria.

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##### Table of Contents



We historically have provided services to develop highly customized
applications utilizing core software technology. We no longer accept new
custom development service projects and anticipate custom development services
revenue will continue to decline, as we have strategically de-emphasized that
business and do not plan to accept new custom development contracts. We will
continue to earn custom development services 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. Revenue from these ongoing arrangements is
recognized as the services are performed.

We have invested heavily in research and development. 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 that require the recognition of
stock-based compensation expense. Until July 2001, stock-based compensation
relating to employee grants represented 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 on the date of grant of our
common stock for financial reporting purposes. In July 2001, we completed a
stock option exchange program in which our directors and eligible employees
were offered the opportunity to exchange existing stock options for new stock
options with an exercise price equal to the then current market value of our
common stock. Participants in the exchange program received new options to
purchase seventy-five percent (75%) of the number of shares of our common stock
subject to the options that were exchanged and canceled. The new options were
granted on July 31, 2001, with an exercise price of $.66 per share. We
accepted 7,179,285 stock options for exchange and issued 5,384,384 stock
options in exchange for such tendered options. All option grants issued in
connection with the stock option exchange program are subject to variable plan
accounting in accordance with APB No. 25, whereby we are required to record, as
compensation expense, increases and decreases in the value of these options
between the grant date of the option and the date the option is exercised. In
addition, we have granted stock options to non-employees and issued warrants to
certain customers and to strategic business partners. Stock-based compensation
related to grants to non-employees represents the fair market value of the
options and warrants granted as computed using an established option valuation
formula.

In connection with the Signature acquisition, we issued 276,266 shares of
restricted common stock, valued at approximately $3.9 million, subject to
vesting through September 27, 2002. Vesting of these shares is based on the
retention of certain Signature employees measured on a quarterly basis, as
defined. The value of these restricted shares is being recorded as stock-based
compensation on a pro rata basis over the vesting period. Accordingly, we
recognized approximately $162,000 of stock-based compensation for these shares
in fiscal 2000, $2,404,000 in fiscal 2001 and $249,000 for the three months
ended January 31, 2002. In fiscal 2001 we also recognized approximately
$733,000 in stock-based compensation due to the acceleration of the vesting of
certain shares of restricted common stock related to one employee termination.

In the aggregate, we recorded stock-based compensation expense of
approximately $696,000 and $1.5 million for the three months ended January 31,
2001 and January 31, 2002, respectively. As of January 31, 2002, $510,000 of
our deferred compensation balance of approximately $2.5 million will be
amortized over the remaining vesting period of the options, warrants and
restricted common stock. The remaining balance of $1.9 million relates to
options subject to variable accounting and therefore, the amount of
compensation recognized will fluctuate based on changes in the market value of
our stock.

We have adopted SFAS No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets.During the quarter ended January 31, 2002, in accordance
with SFAS No. 144, we lowered our estimates of the expected cash flows from the
eServices product and determined that developed technology and know-how was
significantly impaired. Accordingly, we recorded a $3.1 million charge to
write-off the impaired portion of developed technology and know-how.

We have adopted SFAS 142 effective November 1, 2001. In accordance with
SFAS 142, the net book value of assembled workforce was reclassified to
goodwill and as a result of an independent valuation, we determined that
without regard to the lower expected cash flows from the eServices product
determined during the quarter ended January 31, 2002, the goodwill was fully
impaired upon adoption and, accordingly, recorded a cumulative effect of a
change in accounting principle of $4.0 million.

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As of October 31, 2001, the Company has available net operating losses of
approximately $93 million to reduce future federal and state income taxes, if
any. This carryforward expires beginning in fiscal 2012 and may be subject to
review and possible adjustment by the Internal Revenue Service. Utilization of
these carryforwards may be subject to substantial limitations due to the
ownership change limitations provided by the Internal Revenue Service Code of
1986. The Companys wholly-owned foreign subsidiaries have net operating loss
carryforwards of approximately $31 million.

Critical Accounting Policies

In December 2001, the SEC requested that all registrants list their most
critical accounting policies in MD&A. The SEC indicated that a critical
accounting policy is one which is both important to the portrayal of the
Companys financial condition and results and requires our most difficult,
subjective or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain. We believe
that the following accounting policies fit this definition:

Revenue Recognition.We recognize a significant portion of our license
revenue 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 with revisions to estimates reflected in the period in
which changes become known. We also derive a portion of our consulting services
revenue from fixed-price contracts also following the percentage of completion
method. If we do not accurately estimate the resources required or the scope of
work to be performed, or do not manage our projects properly within the planned
periods of time or satisfy our obligations under the contracts, then future
consulting margins may be significantly and negatively affected or losses on
existing contracts may need to be recognized. Any such resulting reductions in
margins or contract losses could be material to our results of operations.

Valuation of Long-Lived Assets.We periodically review the carrying value
of our long-lived assets for impairment . This review is based upon our
projections of anticipated future cash flows. While we believe that our
estimates of future cash flows are reasonable, different assumptions regarding
such cash flows could materially affect our evaluations.

Lease Loss Estimates.Our restructuring charge taken in fiscal 2001
included a component for idle lease space. Our assumptions considered current
market value of similar properties and the ability, if any, to sublease the
idle space or any other future use. If actual market conditions are less
favorable than those projected by us, additional charges may be required
related to this idle lease space.

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Results of Operations

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

|                                                                      |                                                 |                          |                               |      |                    |       |        |      |      |       | 
|--------------------------------------------------------------------- | ----------------------------------------------- | ------------------------ | ----------------------------- | ---- | ------------------ | ----- | ------ | ---- | ---- | ----- | 
|                                                                      |                                                 |                          |                               |      | Three Months Ended
|                                                                      |                                                 |                          |                               |      | January 31,       
|                                                                      |                                                 |                          |                               |      |                   
|                                                                      |                                                 |                          |                               |      | 2001               |       | 2002  
|                                                                      |                                                 |                          |                               |      |                    |       |       
|Revenue:                                                              |                                                 |                          |                               |      |                    |       |        |     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Product-related revenue:                        |                          |                               |      |                    |       |        |      |     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                 | License                  |                               |      | 27.7               | %     |        |      | 42.8 | %    
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                 | Services and maintenance |                               |      | 56.9               |       |        |      | 51.6 |      
|                                                                      |                                                 |                          |                               |      |                    |       |        |     
|                                                                      |                                                 |                          | Total product-related revenue |      |                    | 84.6  |        |      |      | 94.4  | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Custom development services                     |                          |                               | 15.4 |                    |       |        | 5.6  |     
|                                                                      |                                                 |                          |                               |      |                    |       |        |     
|                                                                      |                                                 |                          | Total revenue                 |      |                    | 100.0 |        |      |      | 100.0 | 
|                                                                      |                                                 |                          |                               |      |                    |       |        |     
|Cost of revenue:                                                      |                                                 |                          |                               |      |                    |       |        |     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | License                                         |                          |                               | 0.5  |                    |       |        | 0.7  |     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Product-related services and maintenance        |                          |                               | 58.6 |                    |       |        | 38.8 |     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Custom development services                     |                          |                               | 4.7  |                    |       |        | 1.5  |     
|                                                                      |                                                 |                          |                               |      |                    |       |        |     
|                                                                      |                                                 |                          | Total cost of revenue         |      |                    | 63.8  |        |      |      | 41.0  | 
|                                                                      |                                                 |                          |                               |      |                    |       |        |     
|Gross profit                                                          |                                                 |                          | 36.2                          |      |                    |       | 59.0   |     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Operating expenses:                                                   |                                                 |                          |                               |      |                    |       |        |     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Sales and marketing                             |                          |                               | 47.0 |                    |       |        | 30.1 |     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Research and development                        |                          |                               | 32.2 |                    |       |        | 37.9 |     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | General and administrative                      |                          |                               | 19.9 |                    |       |        | 19.8 |     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Stock-based compensation                        |                          |                               | 4.8  |                    |       |        | 19.7 |     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Amortization of intangible assets               |                          |                               |     |                    |       |        | 5.4  |     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Impairment of developed technology and know-how |                          |                               |     |                    |       |        | 41.3 |     
|                                                                      |                                                 |                          |                               |      |                    |       |        |     
|                                                                      |                                                 |                          | Total operating expenses      |      |                    | 103.9 |        |      |      | 154.2 | 
|                                                                      |                                                 |                          |                               |      |                    |       |        |     
|Loss from operations                                                  |                                                 |                          | (67.7                         | )    |                    |       | (95.2  | )   
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Interest income                                                       |                                                 |                          | 11.9                          |      |                    |       | 2.4    |     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Other expense                                                         |                                                 |                          | (3.4                          | )    |                    |       | (2.6   | )   
|                                                                      |                                                 |                          |                               |      |                    |       |        |     
|Net loss before cumulative effect of a change in
accounting principle |                                                 |                          | (59.2                         | )    |                    |       | (95.4  | )   
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Cumulative effect of a change in accounting principle                 |                                                 |                          |                              |      |                    |       | (52.6  | )   
|                                                                      |                                                 |                          |                               |      |                    |       |        |     
|Net loss                                                              |                                                 |                          | (59.2                         | )%   |                    |       | (148.0 | )%  
|                                                                      |                                                 |                          |                               |      |                    |       |        |     

Comparison of Three Months Ended January 31, 2001 and 2002

Revenue.Total revenue decreased $7.0 million, or 48.1%, to $7.6 million
in the three months ended January 31, 2002 from $14.6 million in the three
months ended January 31, 2001. This decrease is attributable to a 42.0%
decrease in product related revenue and 81.2% decrease in custom development
service revenue.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | License.License revenue decreased $798,000, or 19.8%, to $3.2 million
in the three months ended January 31, 2002 from $4.0 million in the three
months ended January 31, 2001. License revenue as a percentage of total
revenue increased to 42.8% in the three months ended January 31, 2002 from
27.7% in the three months ended January 31, 2001. The decrease in absolute
dollars would have been greater if not for two events. We believe the overall
decline is attributable to a global slow down in information technology
spending experienced by software companies in our industry. The decrease in
the license revenue was partially offset by the following transactions. In
the first quarter of fiscal 2002, we successfully completed a large customer
implementation resulting in a modification of the estimate to complete and
the acceleration of license revenue recognition of $1.2 million. Additional
license revenue of $1.2 million was recognized in the quarter resulting from
the resolution of certain contingencies for two other customers. Over the
long term we anticipate that license revenue will grow as a result of
additional license sales resulting from increased market acceptance of our
products, a growing customer base, increased marketing efforts, and improved
productivity of our sales force.



| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Product service and maintenance.Product service and maintenance
revenue decreased $4.4 million, or 52.9%, to $3.9 million in the three months
ended January 31, 2002 from $8.3 million in the three months ended January
31, 2001.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Product services and maintenance revenue as a percentage of total
revenue decreased to 51.6% in the three months ended January 31, 2002 from
56.9% in the three months ended January 31, 2001. The decrease in absolute
dollars is attributable to the decrease in consulting engagements and
maintenance agreements related to the decreased license revenue in this
period as compared to the prior year period. Over the long term, we are
planning for product service and maintenance revenue growth as a result of
additional customer implementation related to additional license sales.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Custom development services.Custom development services revenue
decreased $1.8 million, or 81.2%, to $421,000 in the three months ended
January 31, 2002 from $2.2 million in the three months ended January 31,
2001. Custom development services revenue as a percentage of total revenue
decreased to 5.6 % in the three months ended January 31, 2002 from 15.4% in
the three months ended January 31, 2001. 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 continue to decline.

Cost of revenue.Total cost of revenue decreased $6.2 million, or 66.6%,
to $3.1 million in the three months ended January 31, 2002 from $9.3 million in
the three months ended January 31, 2001. Total cost of revenue as a percentage
of total revenue decreased to 41.0% in the three months ended January 31, 2002
from 63.8% in the three months ended January 31, 2001.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of license revenue.Cost of license revenue consists primarily of
costs of royalties, media, product packaging, and other production cost.
Cost of license revenue decreased $13,000, or 18.8%, to $56,000 in the three
months ended January 31, 2002 from $69,000 in the three months ended January
31, 2001. Cost of license revenue as a percentage of license revenue was 1.7%
for the first quarter of both fiscal 2001 and fiscal 2002. The decrease in
absolute dollars of 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 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
decreased $5.6 million, or 65.6%, to $2.9 million in the three months ended
January 31, 2002 from $8.5 million in the three months ended January 31,
2001. Cost of product-related services and maintenance revenue as a
percentage of product-related services and maintenance revenue decreased to
75.3% in the three months ended January 31, 2002 from 103.1% in the three
months ended January 31, 2001. The decrease in absolute dollars and as a
percentage of total product-related services and maintenance revenue was
primarily due to decreased staff and consulting resources as a result of the
action we took to reduce our workforce in fiscal 2001, which resulted in
reduced payroll and other expenses, as well as a $300,000 reduction in
expenses related to the reversal of loss contracts accrual due to the
completion of certain implementations. We expect cost of productrelated
services and maintenance revenue to remain flat or increase slightly for the
remainder of fiscal 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 consultants engaged by us. Cost of custom development services
revenue decreased $564,000, or 83.3%, to $113,000 in the three months ended
January 31, 2002 from $677,000 in the three months ended January 31, 2001.
Cost of custom development services as a percentage of custom development
services revenue decreased to 26.8% in the three months ended January 31,
2002 from 30.2% in the three months ended January 31, 2001. 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 consist
primarily of salaries, commissions and bonuses for sales and marketing
personnel and promotional expenses. Sales and marketing expenses decreased $4.6
million, or 66.8%, to $2.3 million in the three months ended January 31, 2002
from $6.9 million in the three months ended January 31, 2001. Sales and
marketing expenses as a percentage of total revenue decreased to 30.1% in the
three months ended January 31, 2002 from 47.0% in the three months ended
January 31, 2001. Sales and marketing expenses decreased in absolute dollars
and as a percentage of total revenue primarily due to the decrease in headcount
in our sales and marketing operations as a result of the action we took to
restructure our operation in fiscal 2001, as well as a decrease in marketing
program spending. We plan to continue to invest in marketing programs in order
to achieve the planned revenue levels.

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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 decreased $1.8 million, or 38.8%,
to $2.9 million in the three months ended January 31, 2002 from $4.7 million in
the three months ended January 31, 2001. Research and development expenses as
a percentage of total revenue increased to 37.9% in the three months ended
January 31, 2002 from 32.2% in the three months ended January 31, 2001. These
expenses decreased in absolute dollars primarily due to a decrease in headcount
in the R&D department and decreased utilization of engineering and product
development contractors as a result of reduction of workforce in fiscal 2001.
Research and development expenses increased as a percent of total revenue
primarily due to our lower revenue in this period compared to the same period
of prior year. We will 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 decreased $1.4 million, or 48.4%, to $1.5 million in the three months
ended January 31, 2002 from $2.9 million in the three months ended January 31,
2001. General and administrative expenses as a percentage of total revenue was
19.8% in the three months ended January 31, 2002, and 19.9% in the three months
ended January 31, 2001. These expenses decreased in absolute dollars primarily
as a result of decreased headcount which resulted in reduced payroll and other
expenses, as well as a $500,000 reduction in expenses from the reversal of bad
debt reserves due to the resolution of certain past-due receivables. We expect
that general and administrative expenses will moderately increase for the
remainder of fiscal 2002 as compared to the first quarter results without
regard to the $500,000 bad debt reversal.

Stock-based compensation expense.Stock-based compensation expense
increased $789,000, or 113.4%, to $1.5 million in the three months ended
January 31, 2002 from $696,000 in the three months ended January 31, 2001.
Stock-based compensation expense as a percentage of total revenue increased to
19.7% in the three months ended January 31, 2002 from 4.8% in the three months
ended January 31, 2001. If we had allocated our stock-based compensation to the
departments for which the services were performed in the three months ended
January 31, 2002, the allocation would have increased cost of revenue by
$92,000, sales and marketing expenses by $35,000, research and development
expenses by $205,000 and general and administrative expenses by $1.2 million.
For the three months ended January 31, 2001, the allocation would have
increased cost of revenue by $10,000, sales and marketing expenses by $72,000,
research and development expenses by $61,000 and general and administrative
expenses by $553,000. The increase in stock-based compensation expense is
primarily the result of a $132,000 increase in charges for nonemployee stock
options and warrants and a $893,000 increase in charges for modifications of
stock option terms for employees, partially offset by a $239,000 decline in the
charge from the Signature acquisition stock grants.

Amortization of intangible assets.In conjunction with our acquisition of
Brightware, we allocated approximately $4.9 million to developed technology and
know-how. Developed technology represents patented and unpatented technology
and know-how related to Brightwares current eServices product offering founded
on a combination of artificial intelligence, knowledge-manager technology and
Internet enterprise applications. For the three months ended January 31, 2002,
we recognized $408,000 in amortization.

Impairment of developed technology and know-how.During the quarter, we
lowered our estimates of the expected revenue from the Brightware products and
determined that the developed technology and know-how intangible asset was
significantly impaired and, accordingly, recorded a $3.1 million impairment
charge in the quarter.

Interest income.Interest income decreased $1.6 million, or 89.5%, to
$181,000 in the three months ended January 31, 2002 from $1.7 million in the
three months ended January 31, 2001. The decrease is primarily due to our
decreased cash and cash equivalents and short-term investments as well as a
decline in interest rates.

Other expense.Other income (expense), net primarily
consists of bank fees and foreign currency transaction gains and losses. Other
income (expense), net improved $303,000, or 60.7%, to $196,000 in expense in
the three months ended January 31, 2002 from $499,000 in expense in the three
months ended January 31, 2001. The improvement is primarily due to the decrease
in foreign currency transaction losses in the three months ended January 31,
2002.

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Cumulative effect of a change in accounting principle.With the
acquisition of Brightware, Inc. in 2001, we allocated approximately $4.5
million to goodwill and $2.2 million to assembled workforce. As of January 31,
2002, accumulated amortization of goodwill and assembled workforce was $1.8
million and $519,000, respectively. Effective November 1, 2001, we adopted SFAS
142, Goodwill and Other Intangible Assetsand reclassified the net book value
of assembled workforce to goodwill. As a result of the valuation under the new
FASB standard of the remaining goodwill, we determined that the goodwill was
fully impaired and, accordingly, recorded a cumulative change in accounting
principle charge of $4.0 million.

Liquidity and Capital Resources

As of January 31, 2002, cash and cash equivalents were $34.5 million and
short-term investments were $7.3 million as compared with cash and cash
equivalents of $34.7 million and short-term investments of $9.6 million as of
October 31, 2001. Our working capital at January 31, 2002 was $29.9 million,
compared to working capital of $30.8 million at October 31, 2001.

Net cash used in operating activities was $3.1 million in the three months
ended January 31, 2002, compared with net cash used in operating activities of
$15.1 million in the three months ended January 31, 2001. Cash used in
operating activities in the three months ended January 31, 2002 was
attributable to our net loss and decreases in restructuring accrual and
deferred revenue offset by stock-based compensation expense, depreciation and
amortization impairment of developed technology and know-how, cumulative effect
of a change in accounting principle and a decrease in accounts receivable.

Net cash provided by investing activities was $2.9 million in the three
months ended January 31, 2002, compared with net cash provided by investing
activities of $8.8 million in the three months ended January 31, 2001. Net cash
provided by investing activities in the three months ended January 31, 2002 was
primarily attributable to the sale or maturity of short-term investments and
the return of cash from the Brightware acquisition escrow offset by the
purchase of short-term investments.

Net cash provided by financing activities was $35,000 in the three months
ended January 31, 2002, compared with net cash provided by financing activities
of $1.4 million in the three months ended January 31, 2001. Net cash provided
by financing activities for the three months ended January 31, 2002 was
primarily from the exercise of stock options.

We lease facilities under non-cancelable operating leases which have
various expiration dates ranging from 2002 through 2010. At October 31, 2001,
future minimum annual lease payments amounted to $11.6 million under these
leases.

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 stockholders would be reduced. Furthermore, these
securities may have rights, preferences or privileges senior to our common
stock.

Recent Accounting Pronouncements

In July 2001, the FASB issued SFAS No, 141, Business Combinations. SFAS
No. 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. This statement is effective for all
business combinations initiated after June 30, 2001.

Effective November 1, 2001, we adopted SFAS No. 142, Goodwill and Other
Intangible Assets, which establishes financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets. SFAS No. 142 requires that goodwill and intangible
assets that have indefinite useful lives not be amortized but, instead, tested
at least annually for impairment. See Note 9 of the Notes to Consolidated
Financial Statements of this quarterly report for a further discussion of the
impact of this statement on our consolidated financial statements.

24



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##### Table of Contents



Effective November 1, 2001, the Company adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. This statement supercedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of Accounting Principles Board (APB) Opinion No. 30, Reporting the
Results of Operations  Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. Under this statement it is required that one accounting model be
used for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and it broadens the presentation of discontinued
operations to include more disposal transactions. See Note 7 of the Notes to
Consolidated Financial Statements of this quarterly report for a further
discussion of the impact of this statement on our consolidated financial
statements.

Risk Factors

As defined under the 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.

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

Average license fees for our SalesPerformer Suite 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. In addition, regardless of the cost of our
products, many companies may elect not to pursue information technology
projects which may incorporate either of our product suites, or our individual
components, as a result of the global information technology spending slowdown.
As a result, 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.

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 sales and
services 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
our products 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. In addition, we expect to derive
the majority 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 customer acceptance of this new suite of
products and we expect that we will continue to depend on revenue from new and
enhanced versions of the SalesPerformer Suite. 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 qualified personnel to be successful

Our success depends upon the continued contributions of our senior
management and sales and engineering 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, sales and engineering
personnel. The loss of the services of any key personnel, particularly senior
management, sales personnel and engineers, could seriously harm our business.

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 places a significant burden on our management and our internal resources.
If we are not able to maintain adequate infrastructure to support and manage
our operations effectively our business could be harmed.

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We depend on our direct sales force for nearly all of our current sales
and our growth depends on the ability of our direct sales force to increase
sales to a level that will allow us to reach and maintain profitability. Our
ability to increase our sales will depend on our ability to train and retain
top quality sales people who are able to target prospective customers senior
management, and who can productively and efficiently generate and service large
accounts. Competition for these individuals is intense, and we may not be able
to attract, assimilate or retain highly qualified personnel in the future.
Turnover among our sales staff has been significant and a number of our
employees have left or been terminated. If we are unable to retain qualified
sales personnel, or if newly hired personnel fail to develop the necessary
skills or to reach productivity when anticipated, we may not be able to
increase sales of our products and services.

In addition, our success depends in large part upon our ability to
attract, train, motivate and retain highly technical, skilled employees,
particularly software engineers and professional services 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, and
implement our products successfully.

Recent material litigation could result in substantial costs and divert management attention and resources

On October 19, 2001, General Motors Corporation filed a complaint against
us alleging certain statutory and common law claims including breach of
contract, coercion, fraud, and unfair and deceptive trade practices. General
Motors claims relate to our original 1994 agreement with General Motors, as
amended, and license agreements, services agreements and a general release
entered into with us in May, 2000. We may incur substantial legal fees and
expenses, and the litigation may divert the attention of some of our key
management. Our defense of this litigation, regardless of its outcome, may be
costly and time-consuming. Should the outcome of the litigation be adverse to
us, we could be required to pay significant monetary damages to the plaintiffs,
which could harm our business.

In addition, since August 1, 2001, a number of securities class action
complaints were filed against us, the underwriters of our initial public
offering, and certain of our executives in the United States District Court for
the Southern District of New York. The complaints allege that the underwriters
of our initial public offering, Firepond and the other named defendants
violated federal securities laws by making material false and misleading
statements in the prospectus incorporated in our registration statement on Form
S-1 filed with the SEC in November 1999. The complaints allege, among other
things, that FleetBoston Robertson Stephens and the other underwriters
solicited and received excessive and undisclosed commissions from several
investors in exchange for which FleetBoston Robertson Stephens and the other
underwriters allocated to these investors material portions of the restricted
number of shares of common stock issued in connection with our initial public
offering. The complaints further allege that FleetBoston Robertson Stephens
and the other underwriters entered into agreements with its customers in which
FleetBoston Robertson Stephens and the other underwriters agreed to allocate
the common stock sold in our initial public offering to certain customers in
exchange for which such customers agreed to purchase additional shares of our
common stock in the after-market at pre-determined prices. Securities class
action litigation can result in substantial costs and divert our managements
attention and resources, which could seriously harm our business.

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 SalesPerformer Suite 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
license of our SalesPerformer Suite 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 price of
our common stock could fall substantially and we could become subject to
securities class-action litigation. 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.

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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
$28.9 million for fiscal 1999, $16.3 million for fiscal 2000, $70.3 million for
fiscal 2001 and $11.2 million for the three months ended January 31, 2002.
Although we currently plan that we will stop incurring a net loss, excluding
stock based compensation and amortization of intangible assets, by the end of
our 2002 fiscal year, we may not achieve this goal and may continue to incur
losses on a quarterly basis and not become profitable. Additionally, we may not
grow or generate sufficient revenue to attain profitability.

Our workforce reductions and financial performance may adversely affect the morale and performance of our personnel and our ability to hire new personnel.

In connection with our effort to streamline operations, reduce costs and
bring our staffing and infrastructure in line with industry standards, we
restructured our organization and reduced our workforce. We terminated 81
employees and 89 consultants in April, 2001, 157 employees and one consultant
in June, 2001, and 125 employees in October, 2001. We have incurred costs
aggregating of $8.5 million associated with these workforce reductions related
to severance and other employee-related costs, and may incur further costs. Our
restructuring may also yield unanticipated consequences, such as attrition
beyond our planned reduction in workforce and loss of employee morale and
decreased performance. Continuity of personnel is an important factor in the
successful completion of our business plan and ongoing turnover in our
personnel could materially and adversely impact our sales and marketing
efforts, current customer implementations, and our development projects. We
believe that hiring and retaining qualified individuals at all levels is
essential to our success, and there can be no assurance that we will be
successful in attracting and retaining the necessary personnel.

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

Our strategy includes expanding and increasing third party channels which
license and support our products, such as resellers, distributors, OEMs, system
integrators and consulting firms. This often requires that these third parties
recommend our products to their customers and install and support our products
for their customers. To increase our revenue and implementation capabilities,
we must develop and expand our relationships with these third parties. In
addition, 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.

We depend on third parties to assist in maintaining and developing certain components and also depend upon technology licensed to us by third parties, the loss of which could adversely affect out competitive position.

Although reduced from previous years levels, a portion of our product
development work in regard to key components as well as some implementation
services continue to be performed by third party organizations, including
off-shore organizations in India, Russia and Belarus. In connection with these
services such organizations may from time to time control certain components of
our proprietary technology. Unpredictable events in the political, economic and
social conditions in India, Russia and Belarus, or our failure to effectively
manage these organizations may 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 or
misappropriated, and our business could be seriously harmed.

In addition, we license technology from a small number of software
providers for use with our products and implementation services. 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.

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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.

We may not achieve anticipated maintenance revenue if we do not successfully
migrate our SalesPerformer customers to the latest version of our products and
customers cancel their maintenance agreements

Our business depends on the success and customer acceptance of our
products and the adoption of future enhancements to those products. Customers
enter into maintenance agreements for the purpose of receiving both customer
support and the right to future enhancements of the product. When implementing
our SalesPerformer products customers may have requirements to create
customized features or functionality outside of our base product offering.
Customization of our products is usually performed by writing additional
software code which will make it difficult for the customer to migrate to the
next version of the product. Customers who extensively customized our products
may be unwilling or unable to commit additional resources to upgrade to the
latest or next version of our product. If our customers do not adopt the
latest version of our products, those customers may cancel their maintenance
agreements and we may not achieve our anticipated maintenance revenue.

Our failure to successfully implement our products in a timely manner could
result in negative publicity and reduced sales, both of which would
significantly harm our business and operating results

In the future, our customers may experience difficulties or delays in
completing the implementation of our products. We have found that
implementing our SalesPerformer products may be more time consuming than we or
our customers anticipate. The unique configuration or integration with our
customers legacy systems, such as existing databases and enterprise resource
planning software, may be underestimated and the deployment of our products can
be delayed. Failing to meet customer expectations on deployment of our
products could result in a loss of customers and negative publicity regarding
us and our products, which could adversely affect our ability to attract new
customers. In addition, time-consuming deployments may also increase the
amount of professional services we allocate to each customer, thereby
increasing our costs and adversely affecting our business and operating
results.

Our results of operations will be harmed by charges associated with stock-based
compensation

On June 26, 2001, we announced an offer to allow our directors and certain
eligible employees to exchange outstanding stock options for new stock options.
The number of options granted was equal to three-fourths of the number of
options that were tendered and accepted for exchange. On July 26, 2001, we
accepted 7,179,285 options for exchange and, on July 31, 2001 issued 5,384,384
new stock options with an exercise price equal to $.66 per share. For
financial reporting purposes all option grants subject to the tender offer will
be treated as variable awards. Accordingly, we will be required to record as a
compensation expense, chargeable against our reported earnings, all increases
in the value of those options, including any appreciation in the market price
of the underlying option shares, which occurs between the grant date of that
option and the date the option is exercised for those shares or otherwise
terminates unexercised. The greater the increase in the market value of our
common stock following the date of grant, the greater the compensation expense
and effect on our reported earnings.

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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 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 or incur a one-time charge.

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 services solutions is immature. 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.

We face possible Nasdaq delisting which would result in a limited public market
for our common stock and make obtaining future equity financing more difficult
for us

In the past, our stock price has closed below $1.00 for extended periods
of time. If our common stock closing bid price falls below $1.00 per share for
a period of thirty consecutive business days, Nasdaq has the right to delist
the stock if within ninety days thereafter the bid price for the stock is not
at least $1.00 per share for a minimum of ten consecutive business days. In
the event our stock price does not rise above $1.00 for the required ten
consecutive business days, we would have the right to request a hearing to
appeal a Nasdaq determination that our stock should be delisted.

We cannot assure you that our bid price will comply with the requirements
for continued listing of our common stock on the Nasdaq National Market, or
that any appeal of a decision to delist our common stock will be successful.
If our common stock loses its Nasdaq National Market status, shares of our
common stock would likely trade in the over-the-counter market. Consequently,
selling our common stock would be more difficult because smaller quantities of
shares would likely be bought and sold, transactions could be delayed, and
security analysts and news media coverage of us may be reduced. In addition,
in the event our common stock is delisted, broker-dealers have certain
regulatory burdens imposed upon them, which may discourage broker-dealers from
effecting transactions in our common stock, further limiting the liquidity
thereof. These factors could result in lower prices and larger spreads in the
bid and ask prices for shares of common stock.

Such delisting from the Nasdaq National Market or further declines in our
stock price could also greatly impair our ability to raise additional necessary
capital through equity or debt financing, and significantly increase the
ownership dilution to stockholders caused by our issuing equity in financing or
other transactions. Furthermore, our delisting from the Nasdaq National Market
will likely damage our general business reputation and thus may harm our
financial condition and operating results.

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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 revenue
was 11% in fiscal 1999, 28% in fiscal 2000, 36% for fiscal 2001 and 59% for the
three months ended January 31, 2002. Our failure to expand our international
sales could have a significant negative impact on our business.

Due to our international operations we are subject to foreign exchange risk

We serve our customers from offices throughout North America, Europe and
Japan. Consequently, we are exposed to fluctuations of the dollar against the
foreign currencies of those countries in which we have a substantial presence.
For each of our foreign subsidiaries, the functional currency is the local
currency. Accordingly, assets and liabilities are translated at period-end
exchange rates, and operating statement items are translated at
weighted-average rates prevailing during the periods presented. We have
exchange rate exposure in the following principal currencies: the British
Pound, Dutch Guilder, Euro and Japanese Yen.

Fluctuations against the US dollar can produce significant differences in
the reported value of sales and expenses. For sales in the US which are
produced outside of the US, any weakening of the US dollar against a particular
countrys currency reduces the amount of net income reported in US dollars.
Conversely, the same weakening of the US dollar generates an offsetting
increase in the dollar value of profits arising from sales within that country.
Any weakening of the US dollar that negatively impacts a foreign operations
trading profit will similarly reduce the dollar value of any overhead expense
located in that country.

The translation of foreign denominated assets and liabilities at
period-end exchange rates could materially and adversely effect our reported
financial position.

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 and California, and our
executive officers and other key employees are dispersed throughout the United
States, Europe and Japan. This geographic dispersion requires significant
management resources that our locally based competitors do not need to devote
to their operations. In addition, any future expansion of our existing
international operations and entry into additional international markets will
require significant management attention and financial resources.

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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 e-business sales and services 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 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.

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.

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.

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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 January 31, 2002, our executive officers, directors and entities
associated with them own approximately 48% 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.

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.

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.

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We develop products in the United States 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

On October 19, 2001, General Motors Corporation filed a complaint against
us in the Superior Court of Massachusetts, Middlesex County. The complaint
alleges, among other things, a breach of contract under agreements entered into
in 1994, as amended; anticipatory repudiation of agreements entered into in
1994, as amended; unjust enrichment; establishment of a constructive trust;
rescission and restitution based upon failure of consideration as well as
extortion and coercion relating to agreements entered into in 1994, as amended;
breach of the covenant of good faith and fair dealing; fraud; as well as
violation of Chapter 93A of the General Laws of the Commonwealth of
Massachusetts relating to unfair and deceptive trade practices. General
Motors claims further relate to license agreements, services agreements and a
general release entered into with us in May, 2000. The claims generally
allege, among other things, that we coerced, extorted or otherwise caused
General Motors to enter into the May 2000 agreements under duress. On the
Civil Cover Sheet for the Superior Court of Massachusetts, Middlesex County,
General Motors claims damages in the amount of $9,000,000 exclusive of fees,
costs and multiple damages. The complaint does not demand damages in specific
dollar amounts. While we believe the claims against us are without merit and
intend to defend the action vigorously, the litigation is in the preliminary
stage and we cannot predict the outcome with certainty. We may incur
substantial legal fees and expenses, and the litigation may divert the
attention of some of our key management. Our defense of this litigation,
regardless of its outcome, may be costly and time-consuming. Should the outcome
of the litigation be adverse to us, we could be required to pay significant
monetary damages to the plaintiffs, which could harm our business.

Beginning in August, 2001, a number of securities class action complaints
were filed in the Southern District of New York seeking an unspecified amount
of damages on behalf of an alleged class of persons who purchased shares of our
common stock between the date of our initial public offering and December 6,
2000. The complaints name as defendants Firepond and certain of its directors
and officers, and FleetBoston Robertson Stephens an underwriter of our initial
public offering. The plaintiffs allege, among other things, that our
prospectus, incorporated in the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission was materially false and misleading
because it failed to disclose that the investment banks which underwrote
Fireponds initial public offering of securities received undisclosed and
excessive brokerage commissions, and required investors to agree to buy shares
of our securities after the initial public offering was completed at
predetermined prices as a precondition to obtaining initial public offering
allocations. The plaintiffs further allege that these actions artificially
inflated the price of our common stock after the initial public offering. While
we believe the claims against us are without merit and intend to defend the
actions vigorously, the litigation is in the preliminary stage, and we cannot
predict the outcome with certainty. We may incur substantial legal fees and
expenses, and the litigation may divert the attention of some of our key
management. Our defense of this litigation, regardless of its outcome, may be
costly and time-consuming. Should the outcome of the litigation be adverse to
us, we could be required to pay significant monetary damages to the plaintiffs,
which could harm our business.

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

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##### Table of Contents






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

Not applicable




ITEM 5. OTHER INFORMATION

Not applicable




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits
| | --- |  | --------

|        |  |                                                                                                       
|------- |  | ------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                       
|Number  |  | Exhibit Description                                                                                   
|        |  |                                                                                                       
|10.20   |  | Loan and Pledge agreement dated January 25, 2002 between the Registrant and Klaus P. Besier           
|       
|       
|       
|       
|        |  |                                                                                                       
|       
|       
|       
|       
|10.21   |  | Amended and Restated Promissory Note dated January 25, 2002 between the Registrant and
Klaus P. Besier
|       
|       
|       
|       
|        |  |                                                                                                       
|       
|       
|       
|       
|10.22   |  | Employment Letter dated July 13, 2001 between the Registrant and Cem Tanyel                           



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



| |     
| | ----
| | None

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##### 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.

Dated: March 18, 2002



| | FIREPOND, INC. | 
| | -------------- | 



| | /S/ KLAUS P. BESIER
Klaus P. Besier
Chairman, Chief Executive
Officer and Director (Principal
Executive Officer) | 
| | ---------------------------------------------------------------------------------------------------------------- | 



| | /S/ SUSAN W. LEDOUX
Susan W. Ledoux
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer) | 
| | -------------------------------------------------------------------------------------------------------------------------- | 

35