##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

FORM 10-Q

(Mark One)



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

For the Quarter Ended July 31,
2001

or



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

Commission File Number 0-29251

FIREPOND, INC.

(Exact Name of Registrant as Specified in its
Charter)


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

(781) 487-8400

(Registrants telephone number, including
area code)


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

Yes  x  No  o

As of July 31, 2001 there were 38,806,902
shares of the Registrants Common Stock outstanding.



---






---

TABLE OF CONTENTS



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



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED JULY 31, 2001


TABLE OF CONTENTS

|                              |  |                                                                                                                |  |      |    | 
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                              |  |                                                                                                                |  | Page
|                              |  |                                                                                                                |  | No. 
|                              |  |                                                                                                                |  |     
|PART I  FINANCIAL INFORMATION |  |                                                                                                                |  |     
|                             
|Item 1.                       |  | Financial Statements (unaudited)                                                                               |  |      |    | 
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Balance
	Sheets 
	October 31, 2000 and July 31, 2001.                                  |  |      | 3  | 
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Statements of
	Operations 
	Three Months and Nine Months Ended July 31, 2000 and 2001. |  |      | 4  | 
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Statements of Cash
	Flows 
	Nine Months Ended July 31, 2000 and 2001.                  |  |      | 5  | 
|                             
|                             
|                             
|                             
|                              |  | Notes to Condensed Consolidated Financial
	Statements                                                          |  |      | 6  | 
|                             
|                             
|                             
|                             
|Item 2.                       |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations                         |  |      | 17 | 
|                             
|                             
|                             
|                             
|                             
|Item 3.                       |  | Quantitative and Qualitative Disclosures About
	Market Risk                                                    |  |      | 35 | 
|PART II  OTHER INFORMATION    |  |                                                                                                                |  |     
|                             
|                             
|                             
|                             
|Item 1.                       |  | Legal Proceedings                                                                                              |  |      | 35 | 
|                             
|                             
|                             
|                             
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                      |  |      | 36 | 
|                             
|                             
|                             
|                             
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                |  |      | 36 | 
|                             
|                             
|                             
|                             
|Item 4.                       |  | Submission of Matters to a Vote of Security
	Holders                                                           |  |      | 36 | 
|                             
|                             
|                             
|                             
|Item 5.                       |  | Other Information                                                                                              |  |      | 36 | 
|                             
|                             
|                             
|                             
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                               |  |      | 36 | 
|                             
|                             
|                             
|                             
|                              |  | SIGNATURES                                                                                                     |  |      | 37 | 

2



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE
SHEETS

(In thousands, except share and per share
data)


(unaudited)


|                                            |                                           |                                                                                                          |                            |          |     |         |        |          |     |        | 
|------------------------------------------- | ----------------------------------------- | -------------------------------------------------------------------------------------------------------- | -------------------------- | -------- | --- | ------- | ------ | -------- | --- | ------ | 
|                                            |                                           | October 31,                                                                                              |                            | July 31,
|                                            |                                           | 2000                                                                                                     |                            | 2001    
|                                            |                                           |                                                                                                          |                            |         
|ASSETS                                      |                                           |                                                                                                          |                            |          |     |         |        |         
|                                           
|                                           
|                                           
|                                           
|Current assets:                             |                                           |                                                                                                          |                            |          |     |         |        |         
|                                           
|                                           
|                                           
|                                           
|                                            | Cash and cash equivalents                 |                                                                                                          | $                          | 79,500   |     |         | $      | 43,677   |    
|                                           
|                                           
|                                           
|                                           
|                                            | Short-term investments                    |                                                                                                          |                            | 36,733   |     |         |        | 6,066    |    
|                                           
|                                           
|                                           
|                                           
|                                            | Accounts receivable, net                  |                                                                                                          |                            | 15,418   |     |         |        | 9,131    |    
|                                           
|                                           
|                                           
|                                           
|                                            | Unbilled revenue                          |                                                                                                          |                            | 1,676    |     |         |        | 812      |    
|                                           
|                                           
|                                           
|                                           
|                                            | Restricted cash                           |                                                                                                          |                            |         |     |         |        | 3,353    |    
|                                           
|                                           
|                                           
|                                           
|                                            | Prepaid expenses and other current assets |                                                                                                          |                            | 2,436    |     |         |        | 2,344    |    
|                                            |                                           |                                                                                                          |                            |          |     |         |        |         
|                                            |                                           |                                                                                                          | Total current assets       |          |     | 135,763 |        |          |     | 65,383 | 
|                                           
|                                           
|                                           
|                                           
|Property and equipment, net                 |                                           |                                                                                                          | 6,887                      |          |     |         | 8,399  |         
|                                           
|                                           
|                                           
|                                           
|Goodwill and other intangible assets, net   |                                           |                                                                                                          | 389                        |          |     |         | 12,575 |         
|                                           
|                                           
|                                           
|                                           
|Restricted cash                             |                                           |                                                                                                          | 550                        |          |     |         | 550    |         
|                                           
|                                           
|                                           
|                                           
|Other assets                                |                                           |                                                                                                          | 731                        |          |     |         | 972    |         
|                                            |                                           |                                                                                                          |                            |          |     |         |        |         
|                                            |                                           | $                                                                                                        | 144,320                    |          |     | $       | 87,879 |         
|                                            |                                           |                                                                                                          |                            |          |     |         |        |         
|                                           
|LIABILITIES AND STOCKHOLDERS
	EQUITY       |                                           |                                                                                                          |                            |          |     |         |        |         
|                                           
|                                           
|                                           
|                                           
|Current liabilities:                        |                                           |                                                                                                          |                            |          |     |         |        |         
|                                           
|                                           
|                                           
|                                           
|                                            | Accounts payable                          |                                                                                                          | $                          | 4,851    |     |         | $      | 2,879    |    
|                                           
|                                           
|                                           
|                                           
|                                            | Accrued liabilities                       |                                                                                                          |                            | 13,798   |     |         |        | 13,404   |    
|                                           
|                                           
|                                           
|                                           
|                                            | Deferred revenue                          |                                                                                                          |                            | 15,207   |     |         |        | 10,834   |    
|                                            |                                           |                                                                                                          |                            |          |     |         |        |         
|                                            |                                           |                                                                                                          | Total current liabilities  |          |     | 33,856  |        |          |     | 27,117 | 
|                                           
|                                           
|                                           
|                                           
|Restructuring accrual, less current portion |                                           |                                                                                                          |                           |          |     |         | 737    |         
|                                           
|                                           
|                                           
|                                           
|Stockholders equity:                       |                                           |                                                                                                          |                            |          |     |         |        |         
|                                            | Common stock, $0.01 par value            |                                                                                                          |                            |          |     |         |        |          |    
|                                            |                                           | Authorized  100,000,000 shares at
	October 31, 2000 and July 31, 2001;                                  |                            |          |     |         |        |          |     |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                           | Issued and outstanding  35,596,022 shares
	at October 31, 2000 and 38,806,902 shares at July 31,
	2001. |                            |          | 356 |         |        |          | 388 |       
|                                           
|                                           
|                                           
|                                           
|                                            | Additional paid-in capital                |                                                                                                          |                            | 195,166  |     |         |        | 201,451  |    
|                                           
|                                           
|                                           
|                                           
|                                            | Accumulated deficit                       |                                                                                                          |                            | (78,135  | )   |         |        | (134,739 | )  
|                                           
|                                           
|                                           
|                                           
|                                            | Officer loans receivable                  |                                                                                                          |                            |         |     |         |        | (4,282   | )  
|                                           
|                                           
|                                           
|                                           
|                                            | Deferred compensation                     |                                                                                                          |                            | (6,077   | )   |         |        | (2,149   | )  
|                                           
|                                           
|                                           
|                                           
|                                            | Other comprehensive loss                  |                                                                                                          |                            | (846     | )   |         |        | (644     | )  
|                                            |                                           |                                                                                                          |                            |          |     |         |        |         
|                                            |                                           |                                                                                                          | Total stockholders equity |          |     | 110,464 |        |          |     | 60,025 | 
|                                            |                                           |                                                                                                          |                            |          |     |         |        |         
|                                            |                                           | $                                                                                                        | 144,320                    |          |     | $       | 87,879 |         
|                                            |                                           |                                                                                                          |                            |          |     |         |        |         

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

3



---



##### Table of Contents






FIREPOND, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
data)


(unaudited)


|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |        |        |        | 
|--------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------------------------------- | ----------------------------- | -------------- | ----- | ------ | ------- | ------ | ----- | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | 
|                                              |                                                                         |                                                       |                               |               
|                                              |                                                                         | Three Months                                          |                               | Nine Months   
|                                              |                                                                         | Ended July 31,                                        |                               | Ended July 31,
|                                              |                                                                         |                                                       |                               |               
|                                              |                                                                         | 2000                                                  |                               | 2001           |       | 2000   |         | 2001  
|                                              |                                                                         |                                                       |                               |                |       |        |         |       
|Revenue:                                      |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|                                             
|                                             
|                                             
|                                             
|                                              | Product-related revenue:                                                |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |        |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | License                                               |                               | $              | 6,794 |        |         | $      | 3,924 |        |         | $      | 15,622 |        |         | $      | 11,589 |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Services and maintenance                              |                               |                | 6,492 |        |         |        | 5,329 |        |         |        | 16,008 |        |         |        | 21,509 |       
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|                                              |                                                                         |                                                       | Total product-related revenue |                |       | 13,286 |         |        |       | 9,253  |         |        |        | 31,630 |         |        |        | 33,098 | 
|                                             
|                                             
|                                             
|                                             
|                                              | Custom development services                                             |                                                       |                               | 4,029          |       |        |         | 861    |       |        |         | 11,249 |        |        |         | 3,878  |       
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|                                              |                                                                         |                                                       | Total revenue                 |                |       | 17,315 |         |        |       | 10,114 |         |        |        | 42,879 |         |        |        | 36,976 | 
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|Cost of revenue:                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | License                                               |                               |                | 159   |        |         |        | 145   |        |         |        | 426    |        |         |        | 369    |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Product-related services and maintenance(1)           |                               |                | 4,470 |        |         |        | 6,381 |        |         |        | 9,581  |        |         |        | 24,176 |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Custom development services(1)                        |                               |                | 1,366 |        |         |        | 217   |        |         |        | 4,372  |        |         |        | 1,039  |       
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|                                              |                                                                         |                                                       | Total cost of revenue         |                |       | 5,995  |         |        |       | 6,743  |         |        |        | 14,379 |         |        |        | 25,584 | 
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|Gross profit                                  |                                                                         |                                                       | 11,320                        |                |       |        | 3,371   |        |       |        | 28,500  |        |        |        | 11,392  |       
|                                             
|                                             
|                                             
|                                             
|Operating expenses:                           |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Sales and marketing(1)                                |                               |                | 7,918 |        |         |        | 6,574 |        |         |        | 21,007 |        |         |        | 21,985 |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Research and development(1)                           |                               |                | 3,485 |        |         |        | 4,540 |        |         |        | 10,832 |        |         |        | 15,816 |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | General and administrative(1)                         |                               |                | 2,507 |        |         |        | 2,904 |        |         |        | 6,711  |        |         |        | 8,838  |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Stock-based compensation                              |                               |                | 1,731 |        |         |        | 1,472 |        |         |        | 4,665  |        |         |        | 2,840  |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Amortization of goodwill and other intangible
	assets |                               |                |      |        |         |        | 1,331 |        |         |        |       |        |         |        | 2,278  |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Restructuring charge (credit)                         |                               |                |      |        |         |        | 8,129 |        |         |        | (500   | )      |         |        | 11,150 |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Settlement of claim                                   |                               |                |      |        |         |        |      |        |         |        |       |        |         |        | 1,211  |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                         | Acquired in-process research and development          |                               |                |      |        |         |        |      |        |         |        |       |        |         |        | 6,200  |       
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|                                              |                                                                         |                                                       | Total operating expenses      |                |       | 15,641 |         |        |       | 24,950 |         |        |        | 42,715 |         |        |        | 70,318 | 
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|Loss from operations                          |                                                                         |                                                       | (4,321                        | )              |       |        | (21,579 | )      |       |        | (14,215 | )      |        |        | (58,926 | )     
|                                             
|                                             
|                                             
|                                             
|Interest income                               |                                                                         |                                                       | 1,805                         |                |       |        | 605     |        |       |        | 2,203   |        |        |        | 3,385   |       
|                                             
|                                             
|                                             
|                                             
|Other income (expense), net                   |                                                                         |                                                       | (170                          | )              |       |        | (381    | )      |       |        | 359     |        |        |        | (1,062  | )     
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|Net loss before extraordinary item            |                                                                         |                                                       | (2,686                        | )              |       |        | (21,355 | )      |       |        | (11,653 | )      |        |        | (56,603 | )     
|                                             
|                                             
|                                             
|                                             
|Loss on extinguishment of debt                |                                                                         |                                                       |                              |                |       |        |        |        |       |        | (1,437  | )      |        |        |        |       
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|Net loss                                      |                                                                         |                                                       | (2,686                        | )              |       |        | (21,355 | )      |       |        | (13,090 | )      |        |        | (56,603 | )     
|                                             
|                                             
|                                             
|                                             
|Stock dividend paid to preferred stockholders |                                                                         |                                                       |                              |                |       |        |        |        |       |        | (65,542 | )      |        |        |        |       
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|Loss applicable to common stockholders        |                                                                         | $                                                     | (2,686                        | )              |       | $      | (21,355 | )      |       | $      | (78,632 | )      |        | $      | (56,603 | )     
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|Net loss per share:                           |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|                                             
|                                             
|                                             
|                                             
|                                              | Basic and diluted net loss per share before
	extraordinary item         |                                                       | $                             | (0.08          | )     |        | $       | (0.59  | )     |        | $       | (0.45  | )      |        | $       | (1.57  | )     
|                                             
|                                             
|                                             
|                                             
|                                              | Extraordinary item                                                      |                                                       |                               |               |       |        |         |       |       |        |         | (0.06  | )      |        |         |       |       
|                                             
|                                             
|                                             
|                                             
|                                              | Stock dividend paid to preferred shareholders                           |                                                       |                               |               |       |        |         |       |       |        |         | (2.51  | )      |        |         |       |       
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|                                              | Basic and diluted net loss per share applicable
	to common stockholders |                                                       | $                             | (0.08          | )     |        | $       | (0.59  | )     |        | $       | (3.02  | )      |        | $       | (1.57  | )     
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|                                              | Basic and diluted weighted average common shares
	outstanding           |                                                       |                               | 34,835         |       |        |         | 36,200 |       |        |         | 26,111 |        |        |         | 35,947 |       
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|Pro forma net loss per share:                 |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|                                             
|                                             
|                                             
|                                             
|                                              | Pro forma net loss per share                                            |                                                       | $                             | (0.08          | )     |        | $       | (0.59  | )     |        | $       | (0.41  | )      |        | $       | (1.57  | )     
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       
|                                              | Pro forma basic and diluted weighted average
	common shares outstanding |                                                       |                               | 34,835         |       |        |         | 36,200 |       |        |         | 32,230 |        |        |         | 35,947 |       
|                                              |                                                                         |                                                       |                               |                |       |        |         |        |       |        |         |        |        |        |         |       




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

|                               |                            |                |       |                |  |      |       |       |  |   |       |       |  |   |       |       | 
|------------------------------ | -------------------------- | -------------- | ----- | -------------- |  | ---- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                               |                            |                |       |               
|                               |                            | Three Months   |       | Nine Months   
|                               |                            | Ended July 31, |       | Ended July 31,
|                               |                            |                |       |               
|                               |                            | 2000           |       | 2001           |  | 2000 |       | 2001 
|                               |                            |                |       |                |  |      |       |      
|Cost of revenue                |                            | $              | 27    |                |  | $    | 50    |       |  | $ | 79    |       |  | $ | 70    |      
|                              
|                              
|                              
|                              
|Operating expenses:            |                            |                |       |                |  |      |       |       |  |   |       |       |  |   |       |      
|                              
|                              
|                              
|                              
|                               | Sales and marketing        |                |       | 1,017          |  |      |       | 124   |  |   |       | 2,983 |  |   |       | 171   | 
|                              
|                              
|                              
|                              
|                               | Research and development   |                |       | 613            |  |      |       | 138   |  |   |       | 1,317 |  |   |       | 254   | 
|                              
|                              
|                              
|                              
|                               | General and administrative |                |       | 74             |  |      |       | 1,160 |  |   |       | 286   |  |   |       | 2,345 | 
|                               |                            |                |       |                |  |      |       |       |  |   |       |       |  |   |       |      
|Total stock-based compensation |                            | $              | 1,731 |                |  | $    | 1,472 |       |  | $ | 4,665 |       |  | $ | 2,840 |      
|                               |                            |                |       |                |  |      |       |       |  |   |       |       |  |   |       |      

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

4



---



##### Table of Contents






FIREPOND, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


(unaudited)


|                                                              |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |         |       |       |        |         |  
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | --------------------------------------------------------------- | -------------------------- | ----------------------------------------- | ---------------------------------------------------- | - | ------- | ------- | ----- | ----- | ------ | ------- | -
|                                                              |                                                                                            |                                                                
|                                                              |                                                                                            | Nine Months                                                    
|                                                              |                                                                                            | Ended July 31,                                                 
|                                                              |                                                                                            |                                                                
|                                                              |                                                                                            | 2000                                                            |                            | 2001                                     
|                                                              |                                                                                            |                                                                 |                            |                                          
|Cash flows from operating activities:                         |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Net loss                                                                                   |                                                                 | $                          | (13,090                                   | )                                                    |   | $       | (56,603 | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Adjustments to reconcile net loss to net cash
	provided by (used in) operating activities: |                                                                 |                            |                                           |                                                      |   |         |         |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            | Acquired in-process research and development                    |                            |                                           |                                                     |   |         |         | 6,200 |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            | Settlement of claim                                             |                            |                                           |                                                     |   |         |         | (389  | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            | Non-cash restructuring charges                                  |                            |                                           |                                                     |   |         |         | 1,644 |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            | Stock-based compensation expense                                |                            |                                           | 4,665                                                |   |         |         | 2,840 |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            | Depreciation and amortization                                   |                            |                                           | 2,299                                                |   |         |         | 5,793 |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            | Non-cash interest expense                                       |                            |                                           | 467                                                  |   |         |         |      |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            | Loss on early extinguishment of debt                            |                            |                                           | 1,437                                                |   |         |         |      |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            | Changes in assets and liabilities, net of
	acquisition:         |                            |                                           |                                                      |   |         |         |       |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            |                                                                 |                            | Accounts receivable                       |                                                      |   | 3,022   |         |       |       | 6,809  |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            |                                                                 |                            | Unbilled revenue                          |                                                      |   | (414    | )       |       |       | 864    |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            |                                                                 |                            | Prepaid expenses and other current assets |                                                      |   | (712    | )       |       |       | (3,838 | )      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            |                                                                 |                            | Accounts payable                          |                                                      |   | (1,644  | )       |       |       | (4,434 | )      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            |                                                                 |                            | Accrued liabilities                       |                                                      |   | 5,998   |         |       |       | (5,022 | )      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            |                                                                 |                            | Deferred revenue                          |                                                      |   | 3,996   |         |       |       | (5,460 | )      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            |                                                                 |                            | Restructuring accrual                     |                                                      |   | (392    | )       |       |       | 2,623  |        
|                                                              |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|                                                              |                                                                                            |                                                                 |                            |                                           | Net cash provided by (used in) operating
	activities |   |         | 5,632   |       |       |        | (48,973 | )
|                                                              |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|Cash flows from investing activities:                         |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Purchases of short-term investments                                                        |                                                                 |                            | (22,059                                   | )                                                    |   |         | (8,256  | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Proceeds from the sale and maturities of
	short-term investments                           |                                                                 |                            |                                          |                                                      |   |         | 38,970  |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Purchases of property and equipment                                                        |                                                                 |                            | (2,339                                    | )                                                    |   |         | (3,616  | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Increase in restricted cash                                                                |                                                                 |                            |                                          |                                                      |   |         | (177    | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Acquisition of Brightware, Inc., net of cash
	acquired                                     |                                                                 |                            |                                          |                                                      |   |         | (10,105 | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Increase in other assets                                                                   |                                                                 |                            | (243                                      | )                                                    |   |         | (35     | )    
|                                                              |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|                                                              |                                                                                            |                                                                 |                            |                                           | Net cash (used in) provided by investing
	activities |   |         | (24,641 | )     |       |        | 16,781  |  
|                                                              |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|Cash flows from financing activities:                         |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Net repayments on line of credit                                                           |                                                                 |                            | (6,740                                    | )                                                    |   |         |        |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Payments on long-term debt                                                                 |                                                                 |                            | (602                                      | )                                                    |   |         | (332    | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Payments on Brightware debt                                                                |                                                                 |                            |                                          |                                                      |   |         | (4,860  | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Proceeds from common stock issuance, net of
	offering costs                                |                                                                 |                            | 113,800                                   |                                                      |   |         |        |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Proceeds from stock options and warrants exercised                                         |                                                                 |                            | 8,359                                     |                                                      |   |         | 1,550   |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Decrease in subscription receivables                                                       |                                                                 |                            | 13                                        |                                                      |   |         |        |      
|                                                              |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|                                                              |                                                                                            |                                                                 |                            |                                           | Net cash provided by (used in) financing
	activities |   |         | 114,830 |       |       |        | (3,642  | )
|                                                              |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|Effect of exchange rate changes on cash and cash
	equivalents |                                                                                            |                                                                 | (42                        | )                                         |                                                      |   | 11      |        
|                                                              |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|Net increase (decrease) in cash and cash
	equivalents         |                                                                                            |                                                                 | 95,779                     |                                           |                                                      |   | (35,823 | )      
|                                                             
|                                                             
|                                                             
|                                                             
|Cash and cash equivalents, beginning of period                |                                                                                            |                                                                 | 2,120                      |                                           |                                                      |   | 79,500  |        
|                                                              |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|Cash and cash equivalents, end of period                      |                                                                                            | $                                                               | 97,899                     |                                           |                                                      | $ | 43,677  |        
|                                                              |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|Supplemental cash flow information:                           |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Interest paid                                                                              |                                                                 | $                          | 639                                       |                                                      |   | $       | 69      |      
|                                                              |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|Non-cash investing and financing activities:                  |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                                                            | Warrants issued in conjunction with subordinated
	notes payable |                            | $                                         | 1,904                                                |   |         | $       |      |      
|                                                              |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|                                                              |                                                                                            | Conversion of preferred stock into common stock                 |                            | $                                         | 191                                                  |   |         | $       |      |      
|                                                              |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|Purchase of Business, net of cash acquired:                   |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Fair value of assets acquired                                                              |                                                                 | $                          |                                          |                                                      |   | $       | 3,954   |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Liabilities assumed                                                                        |                                                                 |                            |                                          |                                                      |   |         | (11,034 | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Goodwill                                                                                   |                                                                 |                            |                                          |                                                      |   |         | 7,449   |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | In-process research and development                                                        |                                                                 |                            |                                          |                                                      |   |         | 6,200   |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Developed technology and know-how                                                          |                                                                 |                            |                                          |                                                      |   |         | 4,900   |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Assembled workforce                                                                        |                                                                 |                            |                                          |                                                      |   |         | 2,200   |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Cash paid                                                                                  |                                                                 |                            |                                          |                                                      |   |         | (5,228  | )    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Acquisition costs incurred                                                                 |                                                                 |                            |                                          |                                                      |   |         | (2,576  | )    
|                                                              |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        
|                                                              |                                                                                            |                                                                 | Fair value of stock issued |                                           | $                                                    |  |         |         | $     | 5,865 |       
|                                                              |                                                                                            |                                                                 |                            |                                           |                                                      |   |         |        

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

5



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES




NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(unaudited)


1.  Nature of Business and Basis of
Presentation

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

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

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

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

2.  Significant Accounting
Policies

(a) Revenue Recognition

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

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

Product-Related Revenue

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

The Company has concluded that generally, for the
SalesPerformer 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.

6



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


In situations where the Company is not
responsible for implementation services 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, the fee is fixed or
determinable and vendor-specific objective evidence exists to
allocate the total fees to all elements of the arrangement.

In situations where the Company is not
responsible for implementation services 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 eServices 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, the fee is fixed or
determinable and vendor-specific objective evidence exists to
allocate the total fees to all elements of the arrangement. The
Company has determined that implementation services are not
essential to the functionality of the eServices product.

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

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

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

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

|                            |  |                |        |          |  |   |        | 
|--------------------------- |  | -------------- | ------ | -------- |  | - | ------ | 
|                            |  | October 31,    |        | July 31,
|                            |  | 2000           |        | 2001    
|                            |  |                |        |         
|                            |  |               
|                            |  | (in thousands)
|                           
|                           
|                           
|                           
|Product license             |  | $              | 8,740  |          |  | $ | 5,700  | 
|                           
|                           
|                           
|                           
|Product-related services    |  |                | 1,344  |          |  |   | 1,841  | 
|                           
|                           
|                           
|                           
|Product-related maintenance |  |                | 2,865  |          |  |   | 2,886  | 
|                           
|                           
|                           
|                           
|Custom development services |  |                | 2,258  |          |  |   | 407    | 
|                            |  |                |        |          |  |   |        | 
|                            |  | $              | 15,207 |          |  | $ | 10,834 | 
|                            |  |                |        |          |  |   |        | 

Unbilled revenue of $1,676,000 at
October 31, 2000 and $812,000 at July 31, 2001
represents amounts due to the Company under license, service and
maintenance agreements for work performed that had not been
billed but for which revenue was recognized as of the period
end. Product license fees for which the Company has not billed
based on contract terms nor has the Company recognized or
deferred revenue totaled $5,923,000 at October 31, 2000 and
$1,339,000 at July 31, 2001.

7



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


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.

(b) Cash and Cash Equivalents

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

|                           |                       |                                 |   |          |        |  |   |        |        | 
|-------------------------- | --------------------- | ------------------------------- | - | -------- | ------ |  | - | ------ | ------ | 
|                           |                       | October 31,                     |   | July 31,
|                           |                       | 2000                            |   | 2001    
|                           |                       |                                 |   |         
|                           |                       |                                
|                           |                       | (In thousands)                 
|                          
|                          
|                          
|                          
|Cash and cash equivalents: |                       |                                 |   |          |        |  |   |       
|                          
|                          
|                          
|                          
|                           | Cash                  |                                 | $ | 7,186    |        |  | $ | 4,163  |       
|                          
|                          
|                          
|                          
|                           | Money market accounts |                                 |   | 4,095    |        |  |   | 7,871  |       
|                          
|                          
|                          
|                          
|                           | Commercial paper      |                                 |   | 68,219   |        |  |   | 28,847 |       
|                          
|                          
|                          
|                          
|                           | Discount notes        |                                 |   |         |        |  |   | 2,796  |       
|                           |                       |                                 |   |          |        |  |   |       
|                           |                       | Total cash and cash equivalents |   | $        | 79,500 |  |   | $      | 43,677 | 
|                           |                       |                                 |   |          |        |  |   |       

(c) Short-term Investments

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

|                        |                                                                                                                         |                              |   |          |        |  |   |       |       | 
|----------------------- | ----------------------------------------------------------------------------------------------------------------------- | ---------------------------- | - | -------- | ------ |  | - | ----- | ----- | 
|                        |                                                                                                                         | October 31,                  |   | July 31,
|                        |                                                                                                                         | 2000                         |   | 2001    
|                        |                                                                                                                         |                              |   |         
|                        |                                                                                                                         |                             
|                        |                                                                                                                         | (In thousands)              
|                       
|                       
|                       
|                       
|Short-term investments: |                                                                                                                         |                              |   |          |        |  |   |      
|                       
|                       
|                       
|                       
|                        | Commercial paper (average 64 days to maturity
	for
	October 31, 2000)                                                   |                              | $ | 15,329   |        |  | $ |      |      
|                       
|                       
|                       
|                       
|                        | Corporate notes and bonds (average 148 and
	100 days to maturity for October 31, 2000 and
	July 31, 2001, respectively) |                              |   | 21,404   |        |  |   | 6,066 |      
|                        |                                                                                                                         |                              |   |          |        |  |   |      
|                        |                                                                                                                         | Total short-term investments |   | $        | 36,733 |  |   | $     | 6,066 | 
|                        |                                                                                                                         |                              |   |          |        |  |   |      

8



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


(d) Comprehensive Income (Loss)

The components of comprehensive loss for the
three and nine months ended July 31, 2000 and 2001 are as
follows:

|                    |                          |                                                                 |        |                |     |      |         |         |     |   |         |         |      |   |         |         |     | 
|------------------- | ------------------------ | --------------------------------------------------------------- | ------ | -------------- | --- | ---- | ------- | ------- | --- | - | ------- | ------- | ---- | - | ------- | ------- | --- | 
|                    |                          |                                                                 |        |               
|                    |                          | Three Months                                                    |        | Nine Months   
|                    |                          | Ended July 31,                                                  |        | Ended July 31,
|                    |                          |                                                                 |        |               
|                    |                          | 2000                                                            |        | 2001           |     | 2000 |         | 2001   
|                    |                          |                                                                 |        |                |     |      |         |        
|                    |                          |                                                                 |        |               
|                    |                          | (In thousands)                                                  |        | (In thousands)
|                   
|                   
|                   
|                   
|Comprehensive loss: |                          |                                                                 |        |                |     |      |         |         |     |   |         |         |      |   |         |        
|                   
|                   
|                   
|                   
|                    | Net loss                 |                                                                 | $      | (2,686         | )   |      | $       | (21,355 | )   |   | $       | (13,090 | )    |   | $       | (56,603 | )  
|                    | Other comprehensive loss |                                                                 |        |                |     |      |         |         |     |   |         |         |      |   |         |         |    
|                   
|                   
|                   
|                   
|                    |                          | Unrealized (loss) gain on short-term and
	long-term investments |        |                | (10 | )    |         |         | (15 | ) |         |         | (51  | ) |         |         | 34  | 
|                   
|                   
|                   
|                   
|                    |                          | Foreign currency translation                                    |        |                | 107 |      |         |         | (90 | ) |         |         | (463 | ) |         |         | 169 | 
|                    |                          |                                                                 |        |                |     |      |         |         |     |   |         |         |      |   |         |        
|Comprehensive loss  |                          | $                                                               | (2,589 | )              |     | $    | (21,460 | )       |     | $ | (13,604 | )       |      | $ | (56,400 | )      
|                    |                          |                                                                 |        |                |     |      |         |         |     |   |         |         |      |   |         |        

(e) Recent Accounting Pronouncements

On June 30, 2001, the FASB issued SFAS
No. 141, Accounting for Business Combinations and SFAS
No. 142, Accounting for Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for
under the purchase method. In accordance with SFAS 142,
goodwill will no longer be amortized, rather goodwill will be
subject to an assessment of impairment by applying a fair-value
based test at least annually. There is no impact as of
July 31, 2001, however, as of October 31, 2001,
goodwill will cease to be amortized. The Company has not yet
assessed the impairment, if any, that would be recognized
utilizing a fair-value based goodwill impairment test.

3.  Accrued Liabilities

Accrued liabilities consists of:

|                          |                           |                |       |          |  |   |       |        | 
|------------------------- | ------------------------- | -------------- | ----- | -------- |  | - | ----- | ------ | 
|                          |                           | October 31,    |       | July 31,
|                          |                           | 2000           |       | 2001    
|                          |                           |                |       |         
|                          |                           |               
|                          |                           | (In thousands)
|                         
|                         
|                         
|                         
|Payroll and related costs |                           | $              | 4,142 |          |  | $ | 1,495 |       
|                         
|                         
|                         
|                         
|Restructuring costs       |                           |                |      |          |  |   | 3,530 |       
|                         
|                         
|                         
|                         
|Other                     |                           |                | 9,656 |          |  |   | 8,379 |       
|                          |                           |                |       |          |  |   |       |       
|                          | Total accrued liabilities |                | $     | 13,798   |  |   | $     | 13,404 | 
|                          |                           |                |       |          |  |   |       |       

4.  Net Loss Per Share

(a) Net Loss Per Share

Net loss per share is computed based on the
guidance of SFAS No. 128, Earnings per Share. SFAS
No. 128 requires companies to report both basic loss per
share, which is computed by dividing the net loss applicable to
common stockholders by the weighted average number of common
shares outstanding, and diluted loss per share, which is
computed by dividing the net loss applicable to common
stockholders by the weighted average number of common shares
outstanding plus the weighted average dilutive potential common
shares outstanding using the treasury stock method. As a result
of the losses incurred by the Company for both the three and
nine months ended July 31, 2000 and 2001, all potential
common shares were antidilutive and were excluded from the
diluted net loss per share calculations. The calculation of
weighted average shares

9



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


outstanding for the three and nine months ended
July 31, 2001 excludes contingently issuable shares of
2,607,183 representing shares issued but held in escrow in
connection with the acquisition of Signature Software and
Brightware (see Note 5(b)).

As of July 31, 2000 and 2001 common stock
options and warrants outstanding which were not included in the
calculation of diluted net loss per share since their inclusion
would be antidilutive were 9,793,000 and 9,774,000, respectively.

(b) Pro Forma Net Loss Per Share

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

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

|                             |                                                                                                              |                |  |                |  |      |  |        |  |  |  |        |  |  |  |        | 
|---------------------------- | ------------------------------------------------------------------------------------------------------------ | -------------- |  | -------------- |  | ---- |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|                             |                                                                                                              |                |  |               
|                             |                                                                                                              | Three Months   |  | Nine Months   
|                             |                                                                                                              | Ended July 31, |  | Ended July 31,
|                             |                                                                                                              |                |  |               
|                             |                                                                                                              | 2000           |  | 2001           |  | 2000 |  | 2001  
|                             |                                                                                                              |                |  |                |  |      |  |       
|                             |                                                                                                              |                |  |               
|                             |                                                                                                              | (In thousands) |  | (In thousands)
|                            
|                            
|                            
|                            
|Pro forma basic and diluted: |                                                                                                              |                |  |                |  |      |  |        |  |  |  |        |  |  |  |       
|                            
|                            
|                            
|                            
|                             | Weighted average common shares outstanding used
	in computing basic and diluted net loss per share           |                |  | 34,835         |  |      |  | 36,200 |  |  |  | 26,111 |  |  |  | 35,947 | 
|                            
|                            
|                            
|                            
|                             | Weighted average common shares issuable upon the
	conversion of preferred stock                              |                |  |               |  |      |  |       |  |  |  | 4,696  |  |  |  |       | 
|                            
|                            
|                            
|                            
|                             | Weighted average common shares issuable upon
	settlement of the priority payments                            |                |  |               |  |      |  |       |  |  |  | 1,336  |  |  |  |       | 
|                            
|                            
|                            
|                            
|                             | Weighted average common shares issuable upon
	Exercise of series F preferred stock warrants                  |                |  |               |  |      |  |       |  |  |  | 87     |  |  |  |       | 
|                             |                                                                                                              |                |  |                |  |      |  |        |  |  |  |        |  |  |  |       
|                             | Weighted average common shares outstanding used
	in computing pro forma basic and diluted net loss per share |                |  | 34,835         |  |      |  | 36,200 |  |  |  | 32,230 |  |  |  | 35,947 | 
|                             |                                                                                                              |                |  |                |  |      |  |        |  |  |  |        |  |  |  |       

5.  Stockholders
Equity

(a) Stock Options and Warrants

The Company granted stock options to employees
and consultants that require the recognition of stock-based
compensation expense. Additionally, the Company granted stock
warrants to certain customers and to strategic business
partners. Stock-based compensation related to grants to
employees represents the amortization, over the vesting period
of the option, of the difference between the exercise price of
options granted to employees and the fair market value of its
common stock for financial reporting purposes. Stock-based
compensation related to grants to non-employees and warrants
issued represents the fair market value as computed using an
established option valuation formula. As of July 31, 2001,
the deferred compensation balance was $2,149,000 and will be
recognized as an expense over the vesting period of the
underlying stock options for options granted to employees and as
earned for non-employees and customers/strategic business
partners in accordance with EITF 96-18.

On June 26, 2001, the Company commenced 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 the

10



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


Companys 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. The Company accepted 7,179,285 stock options for
exchange and issued 5,384,384 stock options in exchange for such
tendered options. As a result of the cancellation of the
outstanding options, the unamortized deferred compensation of
approximately $783,000 was amortized and recorded as stock based
compensation during the three months ended July 31, 2001.

In the future, the Company may incur compensation
expense as a result of the issuance of the new options. The new
options will be subject to variable plan accounting in
accordance with APB No. 25 whereby, the Company will be
required to record, as compensation expense, increases in the
fair value of these options between the grant date of the option
and the date the option is exercised or the measurement date.
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 granted options to employees to
purchase 7,168,553 and 10,685,634 shares of common stock at a
weighted-average exercise price of $0.79 and $1.94 per share
during the three and nine months ended July 31, 2001,
respectively. At July 31, 2001, 8,879,316 options were
outstanding.

(b) Common Stock Outstanding

Common stock outstanding at July 31, 2001
includes 207,199 shares issued but held in escrow in connection
with the Companys acquisition of Signature Software, Inc.
in September 2000. These shares will be released from escrow
based on the retention of Signature Software employees over a
two-year period. It also includes 2,399,984 shares issued but
held in escrow in connection with the Companys acquisition
of Brightware, Inc. in February 2001. The shares held in escrow
related to Brightware are subject to release as follows;
(i) 899,993 shares are subject to release pending the
settlement of the general indemnification and warranty period
and (ii) 1,499,991 shares are subject to release based on
achievement of specified financial performance objectives. The
Company has requested the release of all shares held in escrow
based on Brightwares failure to meet specified financial
performance objectives and to satisfy certain other claims.

(c) Officer Loan 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 August 21, 2001, the Board of
Directors amended the facility to extend the maturity to
December 8, 2005. 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.
Amounts totaling $4,000,000 plus accrued interest have been
advanced to Mr. Besier under this facility as of
July 31, 2001.

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,

11



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


or decision-making group, in making decisions how
to allocate resources and assess performance. The Companys
chief operating decision maker, as defined under SFAS
No. 131, is its chief executive officer.

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

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

The majority of the Companys revenue is
derived from the United States with approximately 33% and 35%
coming from foreign countries for the three and nine months
ended July 31, 2001. Revenue from contracts entered into by
our United Kingdom subsidiaries contributed approximately 17%
and 12% of our revenue for the three and nine months ended
July 31, 2001, respectively. Revenue from contracts entered
into by our Netherlands subsidiaries contributed
approximately 9% and 17% of our revenue for the three and nine
months ended July 31, 2001, respectively.

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, the issuance of stock
in the amount of $5,865,000, and $2,576,000 in acquisition
related fees and expenses. The value of approximately 1,500,000
shares of Firepond common stock and cash payments totaling
$3,250,000 have been excluded from purchase price as this
consideration was contingent on achieving financial performance
objectives as measured on April 30, 2001. The Company has
notified the former Brightware stockholders that their
performance objectives were not achieved and the Company is
entitled to receive 1.5 million shares of its stock and
$3.2 million of cash returned from escrow. The cash has
been reflected on the financial statements as restricted
cash and the shares are included in the amount as
outstanding as of July 31, 2001. See note 5(b).
In addition, the Company notified the Brightware shareholders of
a claim for damages and requested the release of approximately
900,000 shares of its stock and approximately $650,000 held in
general escrow. 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.

12



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


The following table summarizes the transaction:

|                           |                                     |                |        |         |  
|-------------------------- | ----------------------------------- | -------------- | ------ | ------- | -
|                           |                                     | Amount        
|                           |                                     |               
|                           |                                     | (in thousands)
|                          
|                          
|                          
|                          
|Acquisition of Brightware: |                                     |                |        |        
|                          
|                          
|                          
|                          
|                           | Fair value of assets acquired       |                | $      | 3,954   |  
|                          
|                          
|                          
|                          
|                           | Liabilities assumed                 |                |        | (11,034 | )
|                          
|                          
|                          
|                          
|                           | In-process research and development |                |        | 6,200   |  
|                          
|                          
|                          
|                          
|                           | Developed technology and know-how   |                |        | 4,900   |  
|                          
|                          
|                          
|                          
|                           | Assembled workforce                 |                |        | 2,200   |  
|                          
|                          
|                          
|                          
|                           | Goodwill                            |                |        | 7,449   |  
|                           |                                     |                |        |        
|                           |                                     | $              | 13,669 |        
|                           |                                     |                |        |        

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

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

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

The excess of the purchase price over the fair
value of identified intangible net assets of approximately
$7,449,000 was allocated to goodwill. During the quarter ended
July 31, 2001, the Company reassessed the potential loss on
certain operating lease commitments assumed in the acquisition
and increased its liabilities assumed which resulted in
additional goodwill of approximately $1,166,000. Goodwill is
being amortized over a period of three years.

Accumulated amortization of developed technology,
assembled workforce and goodwill was $748,611, $336,111 and
$1,125,228 as of July 31, 2001, respectively.

13



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


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

|                                       |  |                |         |                |  |      |         |   |  |   |         |  
|-------------------------------------- |  | -------------- | ------- | -------------- |  | ---- | ------- | - |  | - | ------- | -
|                                       |  |                |         |               
|                                       |  | Three Months   |         | Nine Months   
|                                       |  | Ended July 31, |         | Ended July 31,
|                                       |  |                |         |               
|                                       |  | 2000           |         | 2000           |  | 2001
|                                       |  |                |         |                |  |     
|                                       |  |                |         |               
|                                       |  | (In thousands) |         | (In thousands)
|                                      
|                                      
|                                      
|                                      
|Net sales                              |  | $              | 19,612  |                |  | $    | 56,143  |   |  | $ | 39,299  |  
|                                      
|                                      
|                                      
|                                      
|Net loss before extraordinary item     |  |                | (11,888 | )              |  |      | (28,475 | ) |  |   | (61,033 | )
|                                      
|                                      
|                                      
|                                      
|Net loss                               |  |                | (11,888 | )              |  |      | (29,912 | ) |  |   | (61,033 | )
|                                      
|                                      
|                                      
|                                      
|Net loss per share  basic and diluted |  | $              | (0.33   | )              |  | $    | (1.09   | ) |  | $ | (1.67   | )

8.     Settlement of
Claim

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

9.     Restructuring
Charge

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

The significant components of the restructuring
charge in the quarter ended April 30, 2001 were as follows:

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

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

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

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

During the quarter ended July 31, 2001, as a
result of a continued slowdown of global information technology
spending, specifically in the Customer Relationship Management
market, the Company took

14



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


actions to extend the first restructuring to
better align the Companys cost structure with economic
realities and preserve cash.

The significant components of the restructuring
charge in the quarter ended July 31, 2001 were as follows:

|                         |  |                |       | 
|------------------------ |  | -------------- | ----- | 
|                         |  | Amount        
|                         |  |               
|                         |  | (in thousands)
|                        
|                        
|                        
|                        
|Employee severance costs |  | $              | 3,296 | 
|                        
|                        
|                        
|                        
|Facilities related costs |  |                | 1,884 | 
|                        
|                        
|                        
|                        
|Property and equipment   |  |                | 1,530 | 
|                        
|                        
|                        
|                        
|Contract termination fee |  |                | 1,050 | 
|                        
|                        
|                        
|                        
|Other                    |  |                | 369   | 
|                         |  |                |       | 
|                         |  | $              | 8,129 | 
|                         |  |                |       | 

The employee severance cost component of the
restructuring charge was related to reductions in headcount.
Under the plan, the Company terminated 13 general and
administrative employees, 60 sales and marketing employees, 56
services employees, 28 development employees as well as one
contractor.

The facilities related cost component consisted
of idle lease space as a result of the reduction-in-force and
the closing of our Australia and Malaysia offices.

The property and equipment consist of excess
computer equipment resulting from the reduction-in-force and
leasehold write-offs associated with the aforementioned office
closings.

On July 1, 2001, the Company entered into a
settlement agreement with Epam Systems, LLC and Epam Systems,
Inc. Among other items, the Company agreed to pay these
companies $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 these
companies. As part of this agreement, the relationship has been
restructured to reduce our monthly commitment to 50 Epam
consultants through February 2002 and 30 Epam consultants
through May 2002 in furtherance of our cost reduction measures.

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

|                                  |  |                |        |  
|--------------------------------- |  | -------------- | ------ | -
|                                  |  | Amount        
|                                  |  |               
|                                  |  | (In thousands)
|                                 
|                                 
|                                 
|                                 
|Balance at April 30, 2001         |  | $              | 1,963  |  
|                                 
|                                 
|                                 
|                                 
|Additional provision              |  |                | 8,129  |  
|                                 
|                                 
|                                 
|                                 
|Severance payments                |  |                | (2,855 | )
|                                 
|                                 
|                                 
|                                 
|Facilities related payments       |  |                | (302   | )
|                                 
|                                 
|                                 
|                                 
|Contract termination fee          |  |                | (1,000 | )
|                                 
|                                 
|                                 
|                                 
|Other payments                    |  |                | (146   | )
|                                 
|                                 
|                                 
|                                 
|Property and equipment write-offs |  |                | (1,522 | )
|                                  |  |                |        |  
|Balance at July 31, 2001          |  | $              | 4,267  |  
|                                  |  |                |        |  

10.     Subsequent
Event

Since August 1, 2001, a number of securities
class action complaints were filed against the Company, the
underwriters of the Companys initial public offering, and
certain of the Companys executives in the United States
District Court for the Southern District of New York. The
complaints allege that the underwriters of the Companys
initial public offering, the Company and the other named
defendants violated federal securities

15



---



##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


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, an underwriter of the Companys initial
public offering, solicited and received excessive and
undisclosed commissions from several investors in exchange for
which FleetBoston Robertson Stephens allocated to these
investors material portions of the restricted number of shares
of common stock issued in connection with the Companys
initial public offering. The complaints further allege that
FleetBoston Robertson Stephens entered into agreements with its
customers in which FleetBoston Robertson Stephens agreed to
allocate the common stock sold in the Companys initial
public offering to certain customers in exchange for which such
customers agreed to purchase additional shares of the
Companys common stock in the after-market at
pre-determined prices. 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.

16



---



##### 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.

Recent Events

On August 22, 2001, we received a letter
from The Nasdaq Stock Market, Inc., notifying us of our failure
to maintain a minimum bid price of $1.00 per share during the
preceding 30 consecutive business days. The letter stated
that we must demonstrate compliance with Nasdaqs minimum
bid rule by November 20, 2001, and that if we are not in
compliance by that date, Nasdaq will notify us that our common
stock will be delisted from the Nasdaq National Market. If such
event occurs, we may appeal the decision to a Nasdaq Listing
Qualifications Panel. 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.

Overview

We are a leading provider of comprehensive
selling and customer service solutions that help companies more
profitably acquire and retain customers. Our product lines
leverage proven intelligence engines and patented automation
technology to drive new revenue streams, increase profitability,
and manage customer interactions across all channels and
throughout the sales and service cycle. From our inception in
1983 through 1997, we generated revenue primarily through
providing custom development services. These services consisted
of the development of highly customized applications utilizing
core software technology, and related software maintenance and
data maintenance services. In early fiscal 1997, we undertook a
plan to change our strategic focus from a custom development
services company to a software product company providing more
standardized solutions. Our first packaged software product was
introduced in May 1997. We released the Firepond Application
Suite in October 1999 and renamed and repackaged the FirePond
Application Suite as the SalesPerformer Suite in December 2000.
As a result of these efforts, product-related revenue as a
percentage of total revenue increased from 1.5% in fiscal 1997
to 76.5% in fiscal 2000 and to 89.5% in the nine months ended
July 31, 2001.

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

As a result of a global slowdown in information
technology spending and the Companys acquisition of
Brightware, the Company undertook a plan to restructure its
operations during the quarter ended April 30, 2001. A
reduction-in-force of 81 employees and 89 contractors was
necessary to align the Companys cost structure with the
market conditions and eliminate redundant operations. In
addition, in the quarter ended July 31, 2001 as a result of
the continued slow down in information technology spending and
the resulting

17



---



##### Table of Contents



effects on our revenue, we took further action to
reduce our costs by reducing our employee base by an additional
157 employees and one contractor to better align the
Companys cost structure with economic realities and
preserve cash. We will see the full impact of the restructuring
in the fourth quarter of 2001, as we expect expenses to decrease.


On July 1, 2001, we entered into a
settlement agreement with Epam Systems, LLC and Epam Systems,
Inc. Among other items, we agreed to pay these companies
$1,000,000 in cash and granted options to purchase
100,000 shares of our common stock in return for
restructuring the relationship and a release of claims including
those claims previously filed against us by these companies. As
part of this agreement, our relationship with Epam has been
restructured to reduce our monthly commitment to 50 Epam
consultants through February 2002 and 30 Epam consultants
through May 2002 in furtherance of our cost reduction measures.

We have incurred quarterly and annual losses
intermittently since we were formed, and regularly since we
began transitioning to a software product business in early
fiscal 1997. We incurred net losses of $28.9 million for
fiscal 1999, $16.3 million for fiscal 2000, and
$56.6 million for the nine months ended July 31, 2001.
We currently plan on achieving break-even by the second quarter
of our fiscal 2002 and expect to continue to incur losses on a
quarterly basis until that time.

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

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

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

For our eServices product line, which was
acquired in connection with the Brightware transaction, we
recognize revenue when persuasive evidence of an agreement
exists, delivery of the product has occurred, the fee is fixed
or determinable and collectability is probable. We have
determined that implementation services are not essential to the
functionality of the eServices product.

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.

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

18



---



##### Table of Contents



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

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

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

We have granted stock options to employees and
consultants that require us to record stock-based compensation
expense. We have also granted stock warrants to certain
customers and to strategic business partners. Stock-based
compensation related to grants to employees represents the
amortization, over the vesting period of the option, of the
difference between the exercise price of options granted to
employees and the fair market value of our common stock for
financial reporting purposes. 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. We recorded stock-based
compensation expense of approximately $1.7 million and
$1.5 million for the three months ended July 31, 2000
and July 31, 2001, respectively, and $4.7 million and
$2.8 million for the nine months ended July 31, 2000
and July 31, 2001, respectively. As of July 31, 2001,
the deferred compensation balance was approximately
$2.2 million and will be amortized over the remaining
vesting period of the options and warrants.

On June 26, 2001, we commenced 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 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. As a result of the
cancellation of the outstanding options, the unamortized
deferred compensation of approximately $783,000 was amortized
and recorded as stock based compensation during the three months
ended July 31, 2001.

We may incur compensation expense as a result of
the issuance of the new options because the new options will be
subject to variable plan accounting in accordance with APB
No. 25, accordingly, we will be required to record as a
compensation expense, chargeable against our reported earnings,
all increases in the fair 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.

Our series A, series C and
series G preferred stock, as well as shares of our common
stock outstanding on May 20, 1997 other than those shares
held by General Atlantic Partners, had rights that allow holders
to receive a priority payment upon the completion of our initial
public offering. These priority payments totaled

19



---



##### Table of Contents



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


As of October 31, 2000, we had available a
net operating loss carryforward of approximately
$53.0 million to reduce future federal and state income
taxes, if any. This carryforward expires beginning in 2012 and
may be subject to review and possible adjustment by the Internal
Revenue Service. The Tax Reform Act of 1986 contains provisions
that may limit the amount of net operating loss carryforwards
that we may utilize in any one year in the event of cumulative
changes in ownership over a three-year period in excess of 50%.
The Companys wholly owned foreign subsidiaries have net
operating loss carryforwards of approximately $16 million
as of October 31, 2000.

Results of Operations

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

|                    |                                                       |                          |                               |                |      |       |      |      |      |       |      |      |      |       |      |      |      |       | 
|------------------- | ----------------------------------------------------- | ------------------------ | ----------------------------- | -------------- | ---- | ----- | ---- | ---- | ---- | ----- | ---- | ---- | ---- | ----- | ---- | ---- | ---- | ----- | 
|                    |                                                       |                          |                               |               
|                    |                                                       | Three Months             |                               | Nine Months   
|                    |                                                       | Ended July 31,           |                               | Ended July 31,
|                    |                                                       |                          |                               |               
|                    |                                                       | 2000                     |                               | 2001           |      | 2000  |      | 2001
|                    |                                                       |                          |                               |                |      |       |      |     
|Revenue:            |                                                       |                          |                               |                |      |       |      |      |      |       |      |      |      |       |      |     
|                   
|                   
|                   
|                   
|                    | Product-related revenue:                              |                          |                               |                |      |       |      |      |      |       |      |      |      |       |      |      |     
|                   
|                   
|                   
|                   
|                    |                                                       | License                  |                               |                | 39.2 | %     |      |      | 38.8 | %     |      |      | 36.4 | %     |      |      | 31.3 | %    
|                   
|                   
|                   
|                   
|                    |                                                       | Services and maintenance |                               |                | 37.5 |       |      |      | 52.7 |       |      |      | 37.4 |       |      |      | 58.2 |      
|                    |                                                       |                          |                               |                |      |       |      |      |      |       |      |      |      |       |      |     
|                    |                                                       |                          | Total product-related revenue |                |      | 76.7  |      |      |      | 91.5  |      |      |      | 73.8  |      |      |      | 89.5  | 
|                   
|                   
|                   
|                   
|                    | Custom development services                           |                          |                               | 23.3           |      |       |      | 8.5  |      |       |      | 26.2 |      |       |      | 10.5 |     
|                    |                                                       |                          |                               |                |      |       |      |      |      |       |      |      |      |       |      |     
|                    |                                                       |                          | Total revenue                 |                |      | 100.0 |      |      |      | 100.0 |      |      |      | 100.0 |      |      |      | 100.0 | 
|                    |                                                       |                          |                               |                |      |       |      |      |      |       |      |      |      |       |      |     
|Cost of revenue:    |                                                       |                          |                               |                |      |       |      |      |      |       |      |      |      |       |      |     
|                   
|                   
|                   
|                   
|                    | License                                               |                          |                               | 0.9            |      |       |      | 1.4  |      |       |      | 1.0  |      |       |      | 1.0  |     
|                   
|                   
|                   
|                   
|                    | Product-related services and maintenance              |                          |                               | 25.8           |      |       |      | 63.2 |      |       |      | 22.3 |      |       |      | 65.4 |     
|                   
|                   
|                   
|                   
|                    | Custom development services                           |                          |                               | 7.9            |      |       |      | 2.1  |      |       |      | 10.2 |      |       |      | 2.8  |     
|                    |                                                       |                          |                               |                |      |       |      |      |      |       |      |      |      |       |      |     
|                    |                                                       |                          | Total cost of revenue         |                |      | 34.6  |      |      |      | 66.7  |      |      |      | 33.5  |      |      |      | 69.2  | 
|                    |                                                       |                          |                               |                |      |       |      |      |      |       |      |      |      |       |      |     
|Gross profit        |                                                       |                          | 65.4                          |                |      |       | 33.3 |      |      |       | 66.5 |      |      |       | 30.8 |     
|                   
|                   
|                   
|                   
|Operating expenses: |                                                       |                          |                               |                |      |       |      |      |      |       |      |      |      |       |      |     
|                   
|                   
|                   
|                   
|                    | Sales and marketing                                   |                          |                               | 45.7           |      |       |      | 65.0 |      |       |      | 49.0 |      |       |      | 59.5 |     
|                   
|                   
|                   
|                   
|                    | Research and development                              |                          |                               | 20.1           |      |       |      | 44.9 |      |       |      | 25.3 |      |       |      | 42.8 |     
|                   
|                   
|                   
|                   
|                    | General and administrative                            |                          |                               | 14.5           |      |       |      | 28.7 |      |       |      | 15.7 |      |       |      | 23.9 |     
|                   
|                   
|                   
|                   
|                    | Stock-based compensation                              |                          |                               | 10.0           |      |       |      | 14.6 |      |       |      | 10.9 |      |       |      | 7.7  |     
|                   
|                   
|                   
|                   
|                    | Amortization of goodwill and other intangible
	assets |                          |                               |               |      |       |      | 13.2 |      |       |      |     |      |       |      | 6.2  |     
|                   
|                   
|                   
|                   
|                    | Restructuring charge (credit)                         |                          |                               |               |      |       |      | 80.3 |      |       |      | (1.2 | )    |       |      | 30.2 |     
|                   
|                   
|                   
|                   
|                    | Settlement of claim                                   |                          |                               |               |      |       |      |     |      |       |      |     |      |       |      | 3.3  |     
|                   
|                   
|                   
|                   
|                    | Acquired in-process research and Development          |                          |                               |               |      |       |      |     |      |       |      |     |      |       |      | 16.8 |     
|                    |                                                       |                          |                               |                |      |       |      |      |      |       |      |      |      |       |      |     
|                    |                                                       |                          | Total operating expenses      |                |      | 90.3  |      |      |      | 246.7 |      |      |      | 99.7  |      |      |      | 190.4 | 
|                    |                                                       |                          |                               |                |      |       |      |      |      |       |      |      |      |       |      |     

20



---



##### Table of Contents



|                                   |  |                |       |                |  |      |        |      |  |  |       |    |  |  |        |   
|---------------------------------- |  | -------------- | ----- | -------------- |  | ---- | ------ | ---- |  |  | ----- | -- |  |  | ------ | --
|                                   |  |                |       |               
|                                   |  | Three Months   |       | Nine Months   
|                                   |  | Ended July 31, |       | Ended July 31,
|                                   |  |                |       |               
|                                   |  | 2000           |       | 2001           |  | 2000 |        | 2001
|                                   |  |                |       |                |  |      |        |     
|Loss from operations               |  |                | (24.9 | )              |  |      | (213.4 | )    |  |  | (33.2 | )  |  |  | (159.6 | ) 
|                                  
|                                  
|                                  
|                                  
|Interest income                    |  |                | 10.4  |                |  |      | 6.0    |      |  |  | 5.2   |    |  |  | 9.2    |   
|                                  
|                                  
|                                  
|                                  
|Other income (expense), net        |  |                | (1.0  | )              |  |      | (3.8   | )    |  |  | 0.8   |    |  |  | (2.9   | ) 
|                                   |  |                |       |                |  |      |        |      |  |  |       |    |  |  |        |   
|Net loss before extraordinary item |  |                | (15.5 | )              |  |      | (211.2 | )    |  |  | (27.2 | )  |  |  | (153.3 | ) 
|                                  
|                                  
|                                  
|                                  
|Loss on extinguishment of debt     |  |                |      |                |  |      |       |      |  |  | (3.4  | )  |  |  |       |   
|                                   |  |                |       |                |  |      |        |      |  |  |       |    |  |  |        |   
|Net loss                           |  |                | (15.5 | )%             |  |      | (211.2 | )%   |  |  | (30.6 | )% |  |  | (153.3 | )%
|                                   |  |                |       |                |  |      |        |      |  |  |       |    |  |  |        |   

Comparison of Three Months Ended July 31,
2000 and 2001

Revenue.Total
revenue decreased $7.2 million, or 41.6%, to
$10.1 million in the three months ended July 31, 2001
from $17.3 million in the three months ended July 31,
2000. This decrease is attributable to a 78.6% decrease in
custom development revenue and a 30.4% decrease in
product-related revenue.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | License.License
	revenue decreased $2.9 million, or 42.2%, to $3.9 million
	in the three months ended July 31, 2001 from
	$6.8 million in the three months ended July 31, 2000.
	License revenue as a percentage of total revenue decreased to
	38.8% in the three months ended July 31, 2001 from 39.2% in
	the three months ended July 31, 2000. We believe the
	decrease in absolute dollars and as a percentage of total
	revenue is attributable to a global slow down in information
	technology spending experienced by software companies in our
	market segment. Over the long-term we are planning for license
	revenue growth as a result of additional license sales resulting
	from increased market acceptance of our products, a growing
	customer base, the success of our marketing efforts, and
	improved productivity of our sales force.
|
| | Product service and maintenance.Product service and maintenance
	revenue decreased $1.2 million, or 17.9%, to
	$5.3 million in the three months ended July 31, 2001
	from $6.5 million in the three months ended July 31,
	2000. Product services and maintenance revenue as a percentage
	of total revenue increased to 52.7% in the three months ended
	July 31, 2001 from 37.5% in the three months ended
	July 31, 2000. The decrease in absolute dollars is
	attributable to fewer SalesPerformer engagements. The increase
	in the percentage of total revenue is due to lower license
	revenue and increased post implementation consulting services
	provided. Over the long-term we are planning for product service
	and maintenance revenue growth as a result of additional
	customer implementations related to additional license sales.      
|
| | Custom development services.Custom development services revenue
	decreased $3.2 million, or 78.6%, to $861,000 in the three
	months ended July 31, 2001 from $4.0 million in the
	three months ended July 31, 2000. Custom development
	services revenue as a percentage of total revenue decreased to
	8.5% in the three months ended July 31, 2001 from 23.3% in
	the three months ended July 31, 2000. The decrease in
	absolute dollars and as a percentage of total revenue is due to
	the change of our strategic focus. We expect custom development
	services revenue to remain at current levels or decline.                                                                                                                                                                                                                                       

Cost of revenue.Total cost of revenue increased
$748,000, or 12.5%, to $6.7 million in the three months
ended July 31, 2001 from $6.0 million in the three
months ended July 31, 2000. Total cost of revenue as a
percentage of total revenue increased to 66.7% in the three
months ended July 31, 2001 from 34.6% in the three months
ended July 31, 2000.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of license revenue.Cost of license revenue consists
	primarily of costs of royalties, media, product packaging, and
	other production costs. Cost of license revenue decreased
	$14,000, or 8.8% to $145,000 in the three months ended
	July 31, 2001 from $159,000 in the three months ended
	July 31, 2000. Cost of license revenue as a percentage of
	license revenue increased to 3.7% in the three months ended
	July 31, 2001 from 2.3% in the three months ended
	July 31, 2000. The increase in cost of license revenue as a
	percentage of license revenue is due primarily to increased
	third party license costs.

21



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of product-related services and
	maintenance revenue.Cost of
	product-related services and maintenance revenue consists
	primarily of salaries and related costs for consulting, training
	and customer support personnel, including cost of services
	provided by third-party consultants engaged by us. Cost of
	product-related services and maintenance revenue increased
	$1.9 million, or 42.8%, to $6.4 million in the three
	months ended July 31, 2001 from $4.5 million in the
	three months ended July 31, 2000. Cost of product-related
	services and maintenance revenue as a percentage of
	product-related services and maintenance revenue increased to
	119.7% in the three months ended July 31, 2001 from 68.9%
	in the three months ended July 31, 2000. The increase in
	absolute dollars was primarily due to increased staff and
	consulting resources. The increase as a percentage of revenue
	was due to the company maintaining consulting staff in excess of
	the current customer demand for services. We expect costs of
	product-related services to decline for the remainder of this
	fiscal year as a result of the actions we have taken to reduce
	our employee base and related costs.
|
| | Cost of custom development services revenue.Cost of custom development services
	revenue consists primarily of salaries and related costs for
	development, consulting, training and customer support personnel
	related to our custom development projects, including cost of
	services provided by third-party consultants engaged by us. Cost
	of custom development services revenue decreased
	$1.1 million, or 84.1%, to $217,000 in the three months
	ended July 31, 2001 from $1.4 million in the three
	months ended July 31, 2000. Cost of custom development
	services as a percentage of custom development services revenue
	decreased to 25.2% in the three months ended July 31, 2001
	from 33.9% in the three months ended July 31, 2000. The
	decrease in absolute dollars is primarily due to decreased staff
	supporting fewer custom development services engagements. The
	decrease as a percentage of custom development services revenue
	is primarily due to higher utilization as a result of decreased
	staffing. We expect the cost of custom development services
	revenue to remain at current levels or decline.                                                                                  

Sales and marketing expenses.Sales and marketing expenses consist
primarily of salaries, commissions and bonuses for sales and
marketing personnel and promotional expenses. Sales and
marketing expenses decreased $1.3 million, or 17.0%, to
$6.6 million in the three months ended July 31, 2001
from $7.9 million in the three months ended July 31,
2000. Sales and marketing expenses as a percentage of total
revenue increased to 65.0% in the three months ended
July 31, 2001 from 45.7% in the three months ended
July 31, 2000. These expenses decreased in absolute dollars
as a result of the actions we have taken to reduce our
workforce, partially offset by incremental sales and marketing
expenses incurred by the addition of the eServices product line.
The increase in the percentage of total revenue is a result of
lower revenues. We expect sales and marketing expenses will
decline for the remainder of this fiscal year due to reduced
payroll and other expenses. We plan to continue to invest in
marketing programs in order to achieve planned revenue levels.

Research and development expenses.Research and development expenses
consist primarily of salaries and personnel-related costs and
the costs of contractors associated with the development of new
products, the enhancement of existing products, and the
performance of quality assurance and documentation activities.
Research and development expenses increased $1.1 million,
or 30.3%, to $4.5 million in the three months ended
July 31, 2001 from $3.5 million in the three months
ended July 31, 2000. Research and development expenses as a
percentage of total revenue increased to 44.9% in the three
months ended July 31, 2001 from 20.1% in the three months
ended July 31, 2000. These expenses increased in absolute
dollars due to increased headcount associated with the
acquisition of the eServices product line. These expenses
increased as a percentage of total revenue due to lower
revenues. We expect research and development expenses will
decline for the remainder of this fiscal year as a result of the
actions we have taken to reduce our workforce which will result
in reduced payroll and other expenses. We plan to continue to
make necessary investments to enhance our existing products and
develop new products in order to achieve planned revenue levels.

General and administrative expenses.General and administrative expenses
consist primarily of salaries, and other personnel-related costs
for executive, financial, human resource, information services,
and other administrative functions, as well as legal and
accounting costs. General and administrative expenses increased
$397,000, or 15.8%, to $2.9 million in the three months
ended July 31, 2001 from $2.5 million in the three
months ended July 31, 2000. General and administrative
expenses as a percentage of total revenue increased to 28.7% in
the three months ended July 31, 2001 from 14.5% in the
three months ended July 31, 2000. These

22



---



##### Table of Contents



expenses increased in absolute dollars due to
increased headcount from Brightware transitional staff that were
handling integration issues. The increase as a percentage of
total revenue is a result of lower revenues. We expect that
general and administrative expenses will remain approximately
flat or decline through the remainder of the fiscal year.


Stock-based compensation expense.Stock-based compensation expense
decreased $259,000, or 15.0%, to $1.5 million in the three
months ended July 31, 2001 from $1.7 million in the
three months ended July 31, 2000. Stock-based compensation
expense as a percentage of total revenue increased to 14.6% in
the three months ended July 31, 2001 from 10.0% in the
three months ended July 31, 2000. The decrease in absolute
dollars is primarily due to lower charges associated with option
grants subject to fair value accounting, whereby the fair market
value of the stock price at the beginning of the period was
higher than at the end of the period. If we had allocated our
stock-based compensation to the departments for which the
services were performed in the three months ended July 31,
2001, the allocation would have increased cost of revenue by
$50,000, increased sales and marketing expenses by $124,000,
increased research and development expenses by $138,000 and
increased general and administrative expenses by
$1.2 million. For the three months ended July 31,
2000, the allocation would have increased cost of revenue by
$27,000, sales and marketing expenses by $1.0 million,
research and development expenses by $613,000 and general and
administrative expenses by $74,000. The primary components of
stock based compensation expense in the third quarter of fiscal
2001 was a $682,000 charge for amortization of deferred stock
compensation related to retention of Signature Software
employees associated with the acquisition of Signature Software
in September 2000 and a $783,000 charge in connection with the
stock option exchange program resulting in the cancellation of
outstanding options. Due to our stock option exchange program
there are options to purchase approximately 5.4 million
shares of our common stock that are subject to variable plan
accounting, which may result in potentially large stock-based
compensation expense in the future.

Amortization of goodwill and other intangible
assets.In conjunction with our
acquisition of Brightware, we allocated approximately
$6.3 million to goodwill which was adjusted by
approximately $1.2 million in the quarter ended
July 31, 2001 to $7.5 million, $4.9 million to
developed technology and know-how and $2.2 million to
assembled workforce. Developed technology represents patented
and unpatented technology and know-how related to
Brightwares current eService product offering founded on a
combination of artificial intelligence, knowledge-manager
technology and internet enterprise applications. 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. Intangible assets are being amortized
over three years. For the three months ended July 31, 2001,
we recognized $1.3 million in amortization. We will adopt
SFAS 142, Goodwill and Other Intangible Asseton
November 1, 2001, and going forward goodwill, as defined,
will be adjusted periodically for impairments and no goodwill
amortization expense will be recorded.

Restructuring charge (credit).During the quarter ended July 31,
2001, the Company announced a restructuring of its operations
due to a continued global slowdown in technology spending. In
connection with this plan, we incurred $8.1 million of
restructuring charges in the three months ended July 31,
2001, which includes $3.3 million of employee severance
costs, $1.9 million of facilities related costs,
$1.5 million of excess property and equipment costs, $1.0
million of contract termination fees and $369,000 of other costs.

Interest income.Interest income (expense), net, decreased $1.2 million, or
66.5%, to $605,000 of income in the three months ended
July 31, 2001 from $1.8 million of income in the three
months ended July 31, 2000. The decrease is primarily due
to our decreased cash and cash equivalents and short-term
investments.

Other income (expense), net.Other income (expense), net primarily
consists of foreign currency transaction gains and losses. Other
income (expense), net increased $211,000 to $381,000 in expense
in the three months ended July 31, 2001 from $170,000 in
expense in the three months ended July 31, 2000. The
increase is primarily due to foreign currency transaction losses
in the three months ended July 31, 2001.

23



---



##### Table of Contents



Comparison of
Nine Months Ended July 31, 2000 and 2001

Revenue.Total
revenue decreased $5.9 million, or 13.8%, to
$37.0 million in the nine months ended July 31, 2001
from $42.9 million in the nine months ended July 31,
2000. This decrease is attributable to a 25.8% decrease in
license revenue and a 65.5% decrease in custom development
revenue offset by a 34.4% increase in service and maintenance
revenue.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | License.License
	revenue decreased $4.0 million, or 25.8%, to $11.6 million
	in the nine months ended July 31, 2001 from
	$15.6 million in the nine months ended July 31, 2000.
	License revenue as a percentage of total revenue decreased to
	31.3% in the nine months ended July 31, 2001 from 36.4% in
	the nine months ended July 31, 2000. The decrease in
	license revenue in absolute dollars and as a percentage of total
	revenue is primarily attributable to the decrease in average
	transaction size as a result of a global slowdown in information
	technology spending experienced by software companies in our
	market segment. In addition, in our pursuit of customer
	satisfaction, we have experienced slower revenue recognition
	from our current customer implementations than anticipated due
	to performing professional services outside of the original
	scope of the engagement for no incremental revenue.
|
| | Product service and maintenance.Product service and maintenance
	revenue increased $5.5 million, or 34.4%, to
	$21.5 million in the nine months ended July 31, 2001
	from $16.0 million in the nine months ended July 31,
	2000. Product services and maintenance revenue as a percentage
	of total revenue increased to 58.2% in the nine months ended
	July 31, 2001 from 37.4% in the nine months ended
	July 31, 2000. The increase in absolute dollars and as a
	percentage of total revenue is attributable to an increase in
	the number of maintenance agreements and amount of services
	provided in connection with the license implementations in this
	period as compared to the prior year period.                                                                                                                                                                                                                          
|
| | Custom development services.Custom development services revenue
	decreased $7.4 million, or 65.5%, to $3.9 million in
	the nine months ended July 31, 2001 from $11.2 million
	in the nine months ended July 31, 2000. Custom development
	services revenue as a percentage of total revenue decreased to
	10.5% in the nine months ended July 31, 2001 from 26.2% in
	the nine months ended July 31, 2000. The decrease in
	absolute dollars and as a percentage of total revenue is due to
	the change of our strategic focus.                                                                                                                                                                                                                                                                                                                                                                                                         

Cost of revenue.Total cost of revenue increased
$11.2 million, or 77.9%, to $25.6 million in the nine
months ended July 31, 2001 from $14.4 million in the
nine months ended July 31, 2000. Total cost of revenue as a
percentage of total revenue increased to 69.2% in the nine
months ended July 31, 2001 from 33.5% in the nine months
ended July 31, 2000.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of license revenue.Cost of license revenue decreased
	$57,000, or 13.4% to $369,000 in the nine months ended
	July 31, 2001 from $426,000 in the nine months ended
	July 31, 2000. Cost of license revenue as a percentage of
	license revenue increased to 3.2% in the nine months ended
	July 31, 2001 from 2.7% in the nine months ended
	July 31, 2000. The decrease in absolute dollars is due
	primarily to a decrease in royalty charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Cost of product-related services and
	maintenance revenue.Cost of
	product-related services and maintenance revenue increased
	$14.6 million, or 152.3%, to $24.2 million in the nine
	months ended July 31, 2001 from $9.6 million in the nine
	months ended July 31, 2000. Cost of product-related
	services and maintenance revenue as a percentage of
	product-related services and maintenance revenue increased to
	112.4% in the nine months ended July 31, 2001 from 59.9% in
	the nine months ended July 31, 2000. The increase in
	absolute dollars was primarily due to increased staff and
	consulting resources to support product-related engagements in
	this period. The increase as a percentage of revenue was
	primarily due to lower billing rates realized on certain large
	engagements in this period as well as lower realized average
	revenue per hour on certain fixed price services contracts in
	this period caused by the Company improving customer
	satisfaction and performing services outside of the scope of the
	original engagement for no incremental revenue. In addition, we
	experienced a lower utilization of our consulting staff in this
	period.
|
| | Cost of custom development services revenue.Cost of custom development services
	revenue decreased $3.3 million, or 76.2%, to
	$1.0 million in the nine months ended July 31, 2001
	from                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

24



---



##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | $4.4 million in the nine months ended
	July 31, 2000. Cost of custom development services as a
	percentage of custom development services revenue decreased to
	26.8% in the nine months ended July 31, 2001 from 38.9% in
	the nine months ended July 31, 2000. The decrease in
	absolute dollars and as a percentage of custom development
	services revenue is primarily due to decreased staff supporting
	fewer custom development services engagements.

Sales and marketing expenses.Sales and marketing expenses increased
$978,000, or 4.7%, to $22.0 million in the nine months
ended July 31, 2001 from $21.0 million in the nine
months ended July 31, 2000. Sales and marketing expenses as
a percentage of total revenue increased to 59.5% in the nine
months ended July 31, 2001 from 49.0% in the nine months
ended July 31, 2000. These expenses increased in absolute
dollars and as a percentage of total revenue due to incremental
sales and marketing expenses incurred by the addition of the
eServices product line, offset by reductions in headcount due to
the restructuring that have reduced sales and marketing expenses.

Research and development expenses.Research and development expenses
increased $5.0 million, or 46.0%, to $15.8 million in
the nine months ended July 31, 2001 from $10.8 million
in the nine months ended July 31, 2000. Research and
development expenses as a percentage of total revenue increased
to 42.8% in the nine months ended July 31, 2001 from 25.3%
in the nine months ended July 31, 2000. These expenses
increased in absolute dollars and as a percentage of total
revenue primarily as a result of increased staffing caused in
part by the addition of the eServices product line.

General and administrative expenses.General and administrative expenses
increased $2.1 million, or 31.7%, to $8.8 million in
the nine months ended July 31, 2001 from $6.7 million
in the nine months ended July 31, 2000. General and
administrative expenses as a percentage of total revenue
increased to 23.9% in the nine months ended July 31, 2001
from 15.7% in the nine months ended July 31, 2000. These
expenses increased in absolute dollars and as a percentage of
total revenue primarily as a result of increased headcount and
cost of infrastructure.

Stock-based compensation expense.Stock-based compensation expense
decreased $1.8 million, or 39.1%, to $2.8 million in
the nine months ended July 31, 2001 from $4.7 million
in the nine months ended July 31, 2000. Stock-based
compensation expense as a percentage of total revenue decreased
to 7.7% in the nine months ended July 31, 2001 from 10.9%
in the nine months ended July 31, 2000. The decrease is
primarily due to lower charges associated with option grants
subject to variable accounting, whereby the fair market value of
the stock price at the beginning of the period was higher than
at the end of the period. If we had allocated our stock-based
compensation to the departments for which the services were
performed in the nine months ended July 31, 2001, the
allocation would have increased cost of revenue by $70,000,
sales and marketing expenses by $171,000, research and
development expenses by $254,000 and general and administrative
expenses by $2.3 million. For the nine months ended
July 31, 2000, the allocation would have increased cost of
revenue by $79,000, sales and marketing expenses by
$3.0 million, research and development expenses by
$1.3 million and general and administrative expenses by
$286,000. The primary components of stock-based compensation
expense in the first nine months of fiscal 2001 was
$1.7 million of amortization of deferred stock compensation
related to retention of Signature Software employees associated
with the acquisition of Signature Software in September 2000 and
a $783,000 charge in connection with the stock option exchange
program resulting in the cancellation of outstanding options.

Amortization of goodwill and other intangible
assets.In conjunction with our
acquisition of Brightware, we allocated approximately
$6.3 million to goodwill which was adjusted by
approximately $1.2 million in the quarter ended
July 31, 2001 to $7.5 million, $4.9 million to
developed technology and know-how and $2.2 million to
assembled workforce. Developed technology represents patented
and unpatented technology and know-how related to
Brightwares current eService product offering founded on a
combination of artificial intelligence, knowledge-manager
technology and internet enterprise applications. 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. Intangible assets are being amortized
over three years. For the nine months ended July 31, 2001,
we recognized $2.3 million in amortization.

25



---



##### Table of Contents



Restructuring charge (credit).During the quarter ended
April 30, 2001 the Company announced a restructuring of its
operations due to a global slowdown in technology spending and
the Brightware acquisition resulting in some redundant
operations. During the quarter ended July 31, 2001 the
Company announced an extension of the first restructuring as a
result of a continued slowdown in technology spending. In
connection with this plan, we incurred $11.2 million of
restructuring charges in the nine months ended July 31,
2001, which includes $5.6 million of employee severance
costs, $2.2 million of facilities related costs,
$1.6 million of excess fixed asset costs, $1.0 million
of contract termination fees and $720,000 of other costs.

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

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

Interest income.Interest income (expense), net, increased $1.2 million, or
53.7%, to $3.4 million of income in the nine months ended
July 31, 2001 from $2.2 million of income in the nine
months ended July 31, 2000. The increase is primarily due
to higher average balances of cash and cash equivalents and
short-term investments resulting in higher interest income
earned.

Other income (expense), net.Other income (expense), net decreased
$1.4 million to $1.1 million in expense in the nine months
ended July 31, 2001 from $359,000 in income in the nine
months ended July 31, 2000. The decline is primarily due to
foreign currency transaction losses in the nine months ended
July 31, 2001 as compared to foreign currency transaction
gains in the fiscal 2000 period.

Liquidity and Capital Resources

As of July 31, 2001, cash and cash
equivalents were $43.7 million and short-term investments
were $6.1 million as compared with cash and cash
equivalents of $79.5 million and short-term investments of
$36.7 million as of October 31, 2000. The Company also
has $3.2 million in restricted cash held in escrow in
conjunction with the Brightware acquisition. Our working capital
at July 31, 2001 was $37.5 million, compared to
working capital of $101.6 million at October 31, 2000.

Net cash used in operating activities was
$49.0 million in the nine months ended July 31, 2001,
compared with net cash provided by operating activities of
$5.6 million in the nine months ended July 31, 2000.
Cash used in operating activities in the nine months ended
July 31, 2001 was primarily attributable to our net loss
and to a lesser extent, an increase in prepaid expenses and
other current assets and accrued liabilities and a decrease in
accounts payable and deferred revenue offset by a decrease in
accounts receivable, non-cash expenses, stock-based compensation
expense, depreciation and amortization and acquired in-process
research and development.

Net cash provided by investing activities was
$16.8 million in the nine months ended July 31, 2001,
compared with net cash used in investing activities of
$24.6 million in the nine months ended July 31, 2000.
Net cash provided by investing activities in the nine months
ended July 31, 2001 was primarily attributable to the sale
or maturity of short-term investments offset by the acquisition
of Brightware, net of cash acquired, the purchase of short-term
investments and the purchase of property and equipment.

Net cash used in financing activities was
$3.6 million in the nine months ended July 31, 2001,
compared with net cash provided by financing activities of
$114.8 million in the nine months ended July 31, 2000.
Net

26



---



##### Table of Contents



cash used in financing activities for the nine
months ended July 31, 2001 were primarily from payments on
debt related to the acquisition of Brightware partially offset
by the exercise of stock options.


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

Recent Accounting Pronouncements

On June 30, 2001, the FASB issued SFAS
No. 141, Accounting for Business Combinations and SFAS
No. 142, Accounting for Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for
under the purchase method. In accordance with SFAS 142,
goodwill will no longer be amortized, rather, goodwill will be
subject to an assessment of impairment by applying a fair-value
based test at least annually. There is no impact as of
July 31, 2001, however, as of October 31, 2001,
goodwill will cease to be amortized. The Company has not yet
assessed the impairment, if any, that would be recognized
utilizing a fair-value based goodwill impairment test.

Risk Factors

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

We 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

We must satisfy a number of requirements to
maintain our listing on the Nasdaq National Market, including
maintaining a minimum bid price for our common stock of $1.00
per share and maintaining a market value for our publicly-held
shares of at least $5 million. On August 22, 2001, we
received a letter from The Nasdaq Stock Market, Inc., notifying
us of our failure to maintain a minimum bid price of $1.00 per
share during the preceding 30 consecutive business days.
The letter stated that we must demonstrate compliance with
Nasdaqs minimum bid rule by November 20, 2001, and
that if we are not in compliance by that date, Nasdaq will
notify us that our common stock will be delisted from the Nasdaq
National Market. If such event occurs, we may appeal the
decision to a Nasdaq Listing Qualifications Panel. 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.

27



---



##### Table of Contents



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.


We are the target of several securities class
action complaints and are at risk of securities class action
litigation, which could result in substantial costs and divert
management attention and resources

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 solicited and received excessive
and undisclosed commissions from several investors in exchange
for which FleetBoston Robertson Stephens 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 entered into agreements with its customers in
which FleetBoston Robertson Stephens 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 could result in substantial costs and divert our
managements attention and resources, which could seriously
harm our business.

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

We have incurred quarterly and annual losses
intermittently since we were formed in 1983, and regularly since
fiscal 1997. We incurred net losses of $9.0 million for fiscal
1998, $28.9 million for fiscal 1999, $16.3 million for
fiscal 2000 and $21.4 million and $56.6 million for
the three and nine months ended July 31, 2001,
respectively. Although we currently plan that we will stop
incurring losses by the second quarter 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. Moreover, we expect
to continue to incur significant sales and marketing and
research and development expenses, and, as a result, we will
need to generate significant revenue to achieve and maintain
profitability. We may not grow or generate sufficient revenue to
attain profitability.

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

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

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

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

28



---



##### Table of Contents



and resources, which would materially adversely
affect our business, financial condition and results of
operations.


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 recently
restructured our organization with reductions in our workforce.
We reduced our workforce by 81 full-time positions and 89
consultant positions in April, 2001, and by 157 full-time
positions and one consultant position in June, 2001. We have
incurred costs of $5.6 million associated with the
workforce reduction 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. As a result of these
factors, our remaining personnel may seek employment with
larger, more established companies. Continuity of personnel can
be an important factor in the successful completion of our
development projects, and ongoing turnover in our research and
development personnel could materially and adversely impact our
development and marketing efforts. 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.

Our results of operations will be harmed by
charges associated with stock-based compensation and charges
associated with other securities issuances by us

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 in
exchange therefore. The new stock options have an exercise price
equal to $.66 per share. The new option grants will be treated
for financial reporting purposes as a variable award.
Accordingly, we will be required to record as a compensation
expense, chargeable against our reported earnings, all increases
in the fair 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.

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

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

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

If we pursue a future acquisition, our management
could spend a significant amount of time and effort identifying
and completing the acquisition. If we make a future acquisition,
we could issue equity securities

29



---



##### Table of Contents



which would dilute current stockholders
percentage ownership, incur substantial debt, assume contingent
liabilities, incur a one-time charge or be required to amortize
goodwill.


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

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

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

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

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

We expect to derive 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. We expect that we will
continue to depend on revenue from new and enhanced versions of
the SalesPerformer Suite, and our business would be harmed if
our target customers do not adopt and expand their use of the
SalesPerformer Suite and its component products.

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

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

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

30



---



##### Table of Contents



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

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

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

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

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

Failure to increase our international revenue
could seriously harm our business

International revenue currently accounts for a
significant percentage of our total revenue. We expect
international revenue to continue to account for a significant
percentage of total revenue in the future and we believe that we
must continue to expand our international sales activities to be
successful. However, foreign markets for our products may
develop more slowly than currently anticipated. International
revenue as a percentage of total product-related revenue was 13%
in fiscal 1999, 36% in fiscal 2000 and 36% and 39% for the three
and nine months ended July 31, 2001. 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, the Euro and
the 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
adversely effect our reported earnings.

31



---



##### Table of Contents



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, Massachusetts, California and Belarus,
and our executive officers and other key employees are similarly
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, the expansion of our existing
international operations and entry into additional international
markets will require significant management attention and
financial resources.

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

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

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

The market for integrated e-business sales and
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 e-business selling and customer service
solutions are not widely adopted, we may not be
successful

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

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

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

32



---



##### Table of Contents



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

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

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

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

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

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

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

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

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

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

33



---



##### Table of Contents



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

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

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

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

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 July 31, 2001 our executive officers,
directors and their affiliates own approximately 47% of the
outstanding shares of our common stock. These stockholders have
significant influence over matters requiring approval by our
stockholders, including the election of directors and the
approval of mergers or other business combination transactions.
This concentration of ownership could have the effect of
delaying or preventing a change in our control or discouraging a
potential acquirer from attempting to obtain control of us,
which in turn could have a material adverse effect on the market
price of the common stock or prevent our stockholders from
realizing a premium over the market price for their shares of
common stock.

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

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

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

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

34



---



##### Table of Contents






Item 3. Quantitative and Qualitative
Disclosures About Market Risk

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




PART II.  OTHER
INFORMATION




Item 1. Legal Proceedings

Beginning in August, 2001, a number of 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. 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, and others 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.

On July 1, 2001, we entered into a
settlement agreement with Epam Systems, LLC and Epam Systems,
Inc. Among other items, we agreed to pay these companies
$1,000,000 in cash and granted options to purchase 100,000
shares of our common stock in return for restructuring the
relationship and a release of claims including those claims
previously filed against us by these companies with the American
Arbitration Association and in the Massachusetts Superior Court.
As part of this agreement, our relationship with Epam has been
restructured to reduce our monthly commitment to 50 Epam
consultants through February 2002 and 30 Epam consultants
through May 2002 in furtherance of our cost reduction measures.

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.

35



---



##### 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



| |     
| | ----
| | None

(b)  Reports on Form 8-K



| |     |                                                                                                                                                                                        
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | On June 28, 2001 the Registrant filed a
	Current Report on Form 8-K relating to an exchange of the
	Registrants outstanding stock options for new stock
	options (Item 5 of Form 8-K).

36



---



##### Table of Contents






SIGNATURES

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



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

Dated: September 14, 2001

37