##### 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, 2002
|                                   
|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
(State or Other Jurisdiction of
Incorporation or Organization)       | 41-1462409
(I.R.S. Employer
Identification No.)
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              |                                                
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|8009 S. 34th Avenue, Minneapolis, MN
(Address of principal executive offices) | 55425
(Zip Code)                               

(952) 229-2555
(Registrants telephone number, including area code)

890 Winter Street, Waltham, Massachusetts 02451(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the 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, 2002 there were 3,685,010 shares of the Registrants Common
Stock outstanding.





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TABLE OF CONTENTS



|                           |                                                                                               |                                                      |  |  |  |  |  | 
|-------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|                           |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                           |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                           |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                           |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                           | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                           | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION
|                           | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                           | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                           | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                           | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                           | ITEM 5. OTHER INFORMATION                                                                    
|                           | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                
|                           | Dated: September 16, 2002                                                                    
|CERTIFICATIONS            



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##### Table of Contents



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

TABLE OF CONTENTS

|        |  |                                                                                       |  |                                                                                                             |    |          |    | 
|------- |  | ------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- | -- | -------- | -- | 
|        |  |                                                                                       |  |                                                                                                             |    | Page No.
|        |  |                                                                                       |  |                                                                                                             |    |         
|PART I  |  | FINANCIAL INFORMATION                                                                 |  |                                                                                                             |    |         
|       
|       
|       
|       
|Item 1. |  | Financial Statements (unaudited)                                                      |  |                                                                                                             |    |         
|       
|       
|       
|       
|        |  |                                                                                       |  | Condensed Consolidated Balance Sheets -
October 31, 2001 and July 31, 2002                                  |    |          | 3  | 
|       
|       
|       
|       
|        |  |                                                                                       |  | Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended July 31, 2001 and 2002 |    |          | 4  | 
|       
|       
|       
|       
|        |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows -
Nine Months Ended July 31, 2001 and 2002                  |    |          | 5  | 
|       
|       
|       
|       
|        |  |                                                                                       |  | Notes to Condensed Consolidated Financial Statements                                                        |    |          | 6  | 
|       
|       
|       
|       
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations |  |                                                                                                             | 19 |         
|       
|       
|       
|       
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                                             | 37 |         
|       
|       
|       
|       
|PART II |  | OTHER INFORMATION                                                                     |  |                                                                                                             |    |         
|       
|       
|       
|       
|Item 1. |  | Legal Proceedings                                                                     |  |                                                                                                             | 37 |         
|       
|       
|       
|       
|Item 2. |  | Changes in Securities and Use of Proceeds                                             |  |                                                                                                             | 38 |         
|       
|       
|       
|       
|Item 3. |  | Defaults Upon Senior Securities                                                       |  |                                                                                                             | 38 |         
|       
|       
|       
|       
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                                                                             | 38 |         
|       
|       
|       
|       
|Item 5. |  | Other Information                                                                     |  |                                                                                                             | 38 |         
|       
|       
|       
|       
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                             | 38 |         
|       
|       
|       
|       
|        |  |                                                                                       |  | SIGNATURES                                                                                                  |    |          | 39 | 
|       
|       
|       
|       
|        |  |                                                                                       |  | CERTIFICATION                                                                                               |    |          | 40 | 

2



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##### Table of Contents






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

|                                           |                                           |                                                                                                                                                                            |                           |          |             |        |          |          |        |        | 
|------------------------------------------ | ----------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | -------- | ----------- | ------ | -------- | -------- | ------ | ------ | 
|                                           |                                           |                                                                                                                                                                            |                           |          | October 31, |        | July 31,
|                                           |                                           |                                                                                                                                                                            |                           |          | 2001        |        | 2002    
|                                           |                                           |                                                                                                                                                                            |                           |          |             |        |         
|ASSETS                                    
|                                          
|                                          
|                                          
|                                          
|Current assets:                            |                                           |                                                                                                                                                                            |                           |          |             |        |          |         
|                                          
|                                          
|                                          
|                                          
|                                           | Cash and cash equivalents                 |                                                                                                                                                                            | $                         | 34,660   |             |        | $        | 22,064   |       
|                                          
|                                          
|                                          
|                                          
|                                           | Short-term investments                    |                                                                                                                                                                            |                           | 9,593    |             |        |          | 9,159    |       
|                                          
|                                          
|                                          
|                                          
|                                           | Accounts receivable, net                  |                                                                                                                                                                            |                           | 10,310   |             |        |          | 2,731    |       
|                                          
|                                          
|                                          
|                                          
|                                           | Unbilled revenue                          |                                                                                                                                                                            |                           | 594      |             |        |          | 616      |       
|                                          
|                                          
|                                          
|                                          
|                                           | Restricted cash                           |                                                                                                                                                                            |                           |         |             |        |          | 498      |       
|                                          
|                                          
|                                          
|                                          
|                                           | Prepaid expenses and other current assets |                                                                                                                                                                            |                           | 2,118    |             |        |          | 1,732    |       
|                                           |                                           |                                                                                                                                                                            |                           |          |             |        |          |         
|                                           |                                           |                                                                                                                                                                            | Total current assets      |          |             | 57,275 |          |          |        | 36,800 | 
|                                          
|                                          
|                                          
|                                          
|Property and equipment, net                |                                           |                                                                                                                                                                            | 5,356                     |          |             |        | 2,500    |         
|                                          
|                                          
|                                          
|                                          
|Goodwill and other intangible assets, net  |                                           |                                                                                                                                                                            | 11,114                    |          |             |        | 163      |         
|                                          
|                                          
|                                          
|                                          
|Restricted cash                            |                                           |                                                                                                                                                                            | 550                       |          |             |        | 190      |         
|                                          
|                                          
|                                          
|                                          
|Other assets                               |                                           |                                                                                                                                                                            | 843                       |          |             |        | 790      |         
|                                           |                                           |                                                                                                                                                                            |                           |          |             |        |          |         
|                                           |                                           | $                                                                                                                                                                          | 75,138                    |          |             | $      | 40,443   |         
|                                           |                                           |                                                                                                                                                                            |                           |          |             |        |          |         
|LIABILITIES AND STOCKHOLDERS EQUITY      
|                                          
|                                          
|                                          
|                                          
|Current liabilities:                       |                                           |                                                                                                                                                                            |                           |          |             |        |          |         
|                                          
|                                          
|                                          
|                                          
|                                           | Note payable                              |                                                                                                                                                                            | $                         |         |             |        | $        | 293      |       
|                                          
|                                          
|                                          
|                                          
|                                           | Accounts payable                          |                                                                                                                                                                            |                           | 1,790    |             |        |          | 1,313    |       
|                                          
|                                          
|                                          
|                                          
|                                           | Accrued liabilities                       |                                                                                                                                                                            |                           | 7,752    |             |        |          | 6,444    |       
|                                          
|                                          
|                                          
|                                          
|                                           | Accrued merger and restructuring          |                                                                                                                                                                            |                           | 6,179    |             |        |          | 3,368    |       
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred revenue                          |                                                                                                                                                                            |                           | 10,802   |             |        |          | 4,622    |       
|                                           |                                           |                                                                                                                                                                            |                           |          |             |        |          |         
|                                           |                                           |                                                                                                                                                                            | Total current liabilities |          |             | 26,523 |          |          |        | 16,040 | 
|                                          
|                                          
|                                          
|                                          
|Long-term accrued merger and restructuring |                                           |                                                                                                                                                                            | 1,102                     |          |             |        | 3,619    |         
|                                          
|                                          
|                                          
|                                          
|Stockholders equity (see Note 10):        |                                           |                                                                                                                                                                            |                           |          |             |        |          |         
|                                          
|                                          
|                                          
|                                          
|                                           | Preferred stock, $0.10 par value         |                                                                                                                                                                            |                           |          |             |        |          |          |       
|                                           |                                           | Authorized  5,000,000 shares;Issued and outstanding  none at October 31, 2001 and July 31, 2002                                                                          |                           |          |            |        |          |          |       |       
|                                          
|                                          
|                                          
|                                          
|                                           | Common stock, $0.10 par value            |                                                                                                                                                                            |                           |          |             |        |          |          |       
|                                           |                                           | Authorized  100,000,000 shares at October 31, 2001 and July 31, 2002;
Issued and outstanding  3,731,691 shares at October 31, 2001 and
3,685,010 shares at July 31, 2002 |                           |          | 373         |        |          |          | 369    |       
|                                          
|                                          
|                                          
|                                          
|                                           | Additional paid-in capital                |                                                                                                                                                                            |                           | 202,231  |             |        |          | 198,932  |       
|                                          
|                                          
|                                          
|                                          
|                                           | Accumulated deficit                       |                                                                                                                                                                            |                           | (148,416 | )           |        |          | (172,664 | )     
|                                          
|                                          
|                                          
|                                          
|                                           | Loans receivable                          |                                                                                                                                                                            |                           | (4,407   | )           |        |          | (4,287   | )     
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred compensation                     |                                                                                                                                                                            |                           | (1,285   | )           |        |          | (69      | )     
|                                          
|                                          
|                                          
|                                          
|                                           | Other comprehensive loss                  |                                                                                                                                                                            |                           | (983     | )           |        |          | (1,497   | )     
|                                           |                                           |                                                                                                                                                                            |                           |          |             |        |          |         
|                                           |                                           | Total stockholders equity                                                                                                                                                 |                           |          | 47,513      |        |          |          | 20,784 |       
|                                           |                                           |                                                                                                                                                                            |                           |          |             |        |          |         
|                                           |                                           | $                                                                                                                                                                          | 75,138                    |          |             | $      | 40,443   |         
|                                           |                                           |                                                                                                                                                                            |                           |          |             |        |          |         

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

3



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##### Table of Contents






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

|                                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |       |        |        | 
|----------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- | ----------------------------- | ----- | -------------- | ------ | -------------- | ----- | ----- | ------ | ------- | ------ | ------ | ------ | ------- | ----- | ------ | ------ | 
|                                                                  |                                                                                               |                                                 |                               |       | Three Months   |        | Nine Months   
|                                                                  |                                                                                               |                                                 |                               |       | Ended July 31, |        | Ended July 31,
|                                                                  |                                                                                               |                                                 |                               |       |                |        |               
|                                                                  |                                                                                               |                                                 |                               |       | 2001           |        | 2002           |       | 2001  |        | 2002   
|                                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |        
|Revenue:                                                          |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Product-related revenue:                                                                      |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |       |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                               | License                                         |                               | $     | 3,924          |        |                | $     | 638   |        |         | $      | 11,589 |        |         | $     | 4,851  |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                               | Services and maintenance                        |                               |       | 5,329          |        |                |       | 3,302 |        |         |        | 21,509 |        |         |       | 11,179 |       
|                                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |       |        |       
|                                                                  |                                                                                               |                                                 | Total product-related revenue |       |                | 9,253  |                |       |       | 3,940  |         |        |        | 33,098 |         |       |        | 16,030 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Custom development services                                                                   |                                                 |                               | 861   |                |        |                | 378   |       |        |         | 3,878  |        |        |         | 1,188 |       
|                                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |       |        |       
|                                                                  |                                                                                               |                                                 | Total revenue                 |       |                | 10,114 |                |       |       | 4,318  |         |        |        | 36,976 |         |       |        | 17,218 | 
|                                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |       |        |       
|Cost of revenue:                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                               | License                                         |                               |       | 145            |        |                |       | 4     |        |         |        | 369    |        |         |       | 101    |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                               | Product-related services and maintenance (1)    |                               |       | 6,381          |        |                |       | 2,148 |        |         |        | 24,176 |        |         |       | 7,686  |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                               | Custom development services (1)                 |                               |       | 217            |        |                |       | 158   |        |         |        | 1,039  |        |         |       | 527    |       
|                                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |       |        |       
|                                                                  |                                                                                               |                                                 | Total cost of revenue         |       |                | 6,743  |                |       |       | 2,310  |         |        |        | 25,584 |         |       |        | 8,314  | 
|                                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |       |        |       
|Gross profit                                                      |                                                                                               |                                                 | 3,371                         |       |                |        | 2,008          |       |       |        | 11,392  |        |        |        | 8,904   |      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Operating expenses:                                               |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                               | Sales and marketing (1)                         |                               |       | 6,574          |        |                |       | 2,036 |        |         |        | 21,985 |        |         |       | 6,247  |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                               | Research and development (1)                    |                               |       | 4,540          |        |                |       | 2,290 |        |         |        | 15,816 |        |         |       | 7,801  |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                               | General and administrative (1)                  |                               |       | 2,904          |        |                |       | 1,992 |        |         |        | 8,838  |        |         |       | 5,648  |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                               | Stock-based compensation (credit)               |                               |       | 1,472          |        |                |       | (701  | )      |         |        | 2,840  |        |         |       | 734    |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                               | Amortization of goodwill and other intangibles  |                               |       | 1,331          |        |                |       | 26    |        |         |        | 2,278  |        |         |       | 460    |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                               | Restructuring and other special charges         |                               |       | 8,129          |        |                |       | 5,894 |        |         |        | 11,150 |        |         |       | 5,894  |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                               | Settlement of claim                             |                               |       |               |        |                |       |      |        |         |        | 1,211  |        |         |       |       |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                               | Acquired in-process research and development    |                               |       |               |        |                |       |      |        |         |        | 6,200  |        |         |       |       |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                               | Impairment of developed technology and know-how |                               |       |               |        |                |       |      |        |         |        |       |        |         |       | 3,120  |       
|                                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |       |        |       
|                                                                  |                                                                                               |                                                 | Total operating expenses      |       |                | 24,950 |                |       |       | 11,537 |         |        |        | 70,318 |         |       |        | 29,904 | 
|                                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |       |        |       
|Loss from operations                                              |                                                                                               |                                                 | (21,579                       | )     |                |        | (9,529         | )     |       |        | (58,926 | )      |        |        | (21,000 | )    
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Interest income                                                   |                                                                                               |                                                 | 605                           |       |                |        | 144            |       |       |        | 3,385   |        |        |        | 484     |      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Other income (expense), net                                       |                                                                                               |                                                 | (381                          | )     |                |        | 308            |       |       |        | (1,062  | )      |        |        | 240     |      
|                                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |       |        |       
|Loss before cumulative effect of a change in
accounting principle |                                                                                               |                                                 | (21,355                       | )     |                |        | (9,077         | )     |       |        | (56,603 | )      |        |        | (20,276 | )    
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Cumulative effect of a change in accounting principle             |                                                                                               |                                                 |                              |       |                |        |               |       |       |        |        |        |        |        | (3,973  | )    
|                                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |       |        |       
|Net loss                                                          |                                                                                               | $                                               | (21,355                       | )     |                | $      | (9,077         | )     |       | $      | (56,603 | )      |        | $      | (24,249 | )    
|                                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |       |        |       
|Net loss per share:                                               |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Basic and diluted loss per share before cumulative
effect of a change in accounting principle |                                                 | $                             | (5.90 | )              |        | $              | (2.46 | )     |        | $       | (15.74 | )      |        | $       | (5.54 | )     
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Cumulative effect of a change in accounting principle                                         |                                                 |                               |      |                |        |                |      |       |        |         |       |        |        |         | (1.08 | )     
|                                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |       |        |       
|                                                                  | Basic and diluted net loss per share                                                          |                                                 | $                             | (5.90 | )              |        | $              | (2.46 | )     |        | $       | (15.74 | )      |        | $       | (6.62 | )     
|                                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |       |        |       
|Basic and diluted weighted average common shares
outstanding      |                                                                                               |                                                 | 3,620                         |       |                |        | 3,684          |       |       |        | 3,595   |        |        |        | 3,665   |      
|                                                                  |                                                                                               |                                                 |                               |       |                |        |                |       |       |        |         |        |        |        |         |       |        |       



---

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

|                               |                            |   |                |       |                |   |      |      |      |   |       |       |  |   |     |     | 
|------------------------------ | -------------------------- | - | -------------- | ----- | -------------- | - | ---- | ---- | ---- | - | ----- | ----- |  | - | --- | --- | 
|                               |                            |   | Three Months   |       | Nine Months   
|                               |                            |   | Ended July 31, |       | Ended July 31,
|                               |                            |   |                |       |               
|                               |                            |   | 2001           |       | 2002           |   | 2001 |      | 2002
|                               |                            |   |                |       |                |   |      |      |     
|Cost of revenue                |                            | $ | 50             |       |                | $ | (40  | )    |      | $ | 70    |       |  | $ | 72  |    
|                              
|                              
|                              
|                              
|Operating expenses:            |                            |   |                |       |                |   |      |      |      |   |       |       |  |   |     |    
|                              
|                              
|                              
|                              
|                               | Sales and marketing        |   |                | 124   |                |   |      | (30  | )    |   |       | 171   |  |   |     | 2   | 
|                              
|                              
|                              
|                              
|                               | Research and development   |   |                | 138   |                |   |      | (77  | )    |   |       | 254   |  |   |     | 110 | 
|                              
|                              
|                              
|                              
|                               | General and administrative |   |                | 1,160 |                |   |      | (554 | )    |   |       | 2,345 |  |   |     | 550 | 
|                               |                            |   |                |       |                |   |      |      |      |   |       |       |  |   |     |    
|Total stock-based compensation |                            | $ | 1,472          |       |                | $ | (701 | )    |      | $ | 2,840 |       |  | $ | 734 |    
|                               |                            |   |                |       |                |   |      |      |      |   |       |       |  |   |     |    

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

4



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##### Table of Contents






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

|                                                             |                                                                                           |                                                        |                            |                                                     |       |                |         |         |       |   |         |  
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------- | ------------------------------------------------------ | -------------------------- | --------------------------------------------------- | ----- | -------------- | ------- | ------- | ----- | - | ------- | -
|                                                             |                                                                                           |                                                        |                            |                                                     |       | Nine Months   
|                                                             |                                                                                           |                                                        |                            |                                                     |       | Ended July 31,
|                                                             |                                                                                           |                                                        |                            |                                                     |       |               
|                                                             |                                                                                           |                                                        |                            |                                                     |       | 2001           |         | 2002   
|                                                             |                                                                                           |                                                        |                            |                                                     |       |                |         |        
|Cash flows from operating activities:                        |                                                                                           |                                                        |                            |                                                     |       |                |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net loss                                                                                  |                                                        | $                          | (56,603                                             | )     |                | $       | (24,249 | )    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | 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 and other special charges       |                            |                                                     | 1,644 |                |         |         | 1,165 |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                           | Stock-based compensation expense                       |                            |                                                     | 2,840 |                |         |         | 734   |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                           | Depreciation and amortization                          |                            |                                                     | 5,793 |                |         |         | 2,413 |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                           | Impairment of developed technology and know-how        |                            |                                                     |      |                |         |         | 3,120 |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                           | Cumulative effect of change in accounting principle    |                            |                                                     |      |                |         |         | 3,973 |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                           | Changes in assets and liabilities, net of acquisition: |                            |                                                     |       |                |         |         |       |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                           |                                                        |                            | Accounts receivable                                 |       |                | 6,809   |         |       |   | 7,281   |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                           |                                                        |                            | Unbilled revenue                                    |       |                | 864     |         |       |   | (22     | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                           |                                                        |                            | Prepaid expenses and other current assets           |       |                | (3,838  | )       |       |   | 371     |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                           |                                                        |                            | Accounts payable                                    |       |                | (4,434  | )       |       |   | (607    | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                           |                                                        |                            | Accrued liabilities                                 |       |                | (6,262  | )       |       |   | (1,425  | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                           |                                                        |                            | Deferred revenue                                    |       |                | (5,460  | )       |       |   | (6,180  | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                                           |                                                        |                            | Accrued merger and restructuring                    |       |                | 3,863   |         |       |   | (294    | )
|                                                             |                                                                                           |                                                        |                            |                                                     |       |                |         |         |      
|                                                             |                                                                                           |                                                        |                            | Net cash used in operating activities               |       |                | (48,973 | )       |       |   | (13,720 | )
|                                                             |                                                                                           |                                                        |                            |                                                     |       |                |         |         |      
|Cash flows from investing activities:                        |                                                                                           |                                                        |                            |                                                     |       |                |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Purchases of short-term investments                                                       |                                                        |                            | (8,256                                              | )     |                |         | (24,127 | )    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Proceeds from the sale and maturities of short-term investments                           |                                                        |                            | 38,970                                              |       |                |         | 24,550  |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Purchases of property and equipment                                                       |                                                        |                            | (3,616                                              | )     |                |         | (248    | )    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Return of cash from escrow                                                                |                                                        |                            |                                                    |       |                |         | 617     |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Increase in restricted cash                                                               |                                                        |                            | (177                                                | )     |                |         | (138    | )    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Acquisition of Brightware, Inc., net of cash acquired                                     |                                                        |                            | (10,105                                             | )     |                |         |        |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Increase in other assets                                                                  |                                                        |                            | (35                                                 | )     |                |         |        |      
|                                                             |                                                                                           |                                                        |                            |                                                     |       |                |         |         |      
|                                                             |                                                                                           |                                                        |                            | Net cash provided by investing activities           |       |                | 16,781  |         |       |   | 654     |  
|                                                             |                                                                                           |                                                        |                            |                                                     |       |                |         |         |      
|Cash flows from financing activities:                        |                                                                                           |                                                        |                            |                                                     |       |                |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Borrowings on note payable                                                                |                                                        |                            |                                                    |       |                |         | 880     |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Payments on note payable                                                                  |                                                        |                            |                                                    |       |                |         | (591    | )    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Payments on long-term debt                                                                |                                                        |                            | (332                                                | )     |                |         |        |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Payments on Brightware debt                                                               |                                                        |                            | (4,860                                              | )     |                |         |        |      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Proceeds from stock options and warrants exercised                                        |                                                        |                            | 1,550                                               |       |                |         | 79      |      
|                                                             |                                                                                           |                                                        |                            |                                                     |       |                |         |         |      
|                                                             |                                                                                           |                                                        |                            | Net cash provided by (used in) financing activities |       |                | (3,642  | )       |       |   | 368     |  
|                                                             |                                                                                           |                                                        |                            |                                                     |       |                |         |         |      
|Effect of exchange rate changes on cash and cash
equivalents |                                                                                           |                                                        | 11                         |                                                     |       |                | 102     |        
|                                                             |                                                                                           |                                                        |                            |                                                     |       |                |         |         |      
|Net decrease in cash and cash equivalents                    |                                                                                           |                                                        | (35,823                    | )                                                   |       |                | (12,596 | )      
|                                                            
|                                                            
|                                                            
|                                                            
|Cash and cash equivalents, beginning of period               |                                                                                           |                                                        | 79,500                     |                                                     |       |                | 34,660  |        
|                                                             |                                                                                           |                                                        |                            |                                                     |       |                |         |         |      
|Cash and cash equivalents, end of period                     |                                                                                           | $                                                      | 43,677                     |                                                     |       | $              | 22,064  |        
|                                                             |                                                                                           |                                                        |                            |                                                     |       |                |         |         |      
|Supplemental cash flow information:                          |                                                                                           |                                                        |                            |                                                     |       |                |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Interest paid                                                                             |                                                        | $                          | 69                                                  |       |                | $       | 118     |      
|                                                             |                                                                                           |                                                        |                            |                                                     |       |                |         |         |      
|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



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##### Table of Contents






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

1. Nature of Business and Basis of Presentation

Firepond, Inc., together with its wholly owned subsidiaries (the
Company) is a leading provider of solutions that optimize the lead-to-order
process, helping companies more profitably acquire and retain customers. The
Companys product lines leverage advanced intelligence engines and patented
automation technology to drive new revenue streams, increase profitability, and
manage customer interactions across all channels and throughout the
lead-to-order process.

On February 15, 2001, the Company acquired 100% of the issued and
outstanding shares of capital stock of Brightware, Inc. (Brightware). The
acquisition was accounted for as a purchase. Accordingly, the results of
operations of Brightware have been included in the Companys results of
operations since the date of acquisition.

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

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

The accompanying condensed consolidated financial statements for the three and
nine months ended July 31, 2001 and 2002 are unaudited and have been prepared
on a basis consistent with the October 31, 2001 audited financial statements
and include normal recurring adjustments which are, in the opinion of
management, necessary for the fair presentation of the results of these periods
with the exception of a 1-for-10 reserve stock split effective August 16, 2002
and the adoption of SFAS 142 as disclosed in Note 10 and Note 7, respectively,
of the Notes to Consolidated Financial Statements of this quarterly report.
All references in the Companys consolidated financial statements and notes
thereto to common stock share and per share amounts including options and
warrants to purchase common stock have been retroactively restated to reflect
the stock split. These condensed consolidated financial statements should be
read in conjunction with the Companys consolidated financial statements and
notes thereto for the fiscal year ended October 31, 2001 included in the
Companys Form 10-K. The results of operations for the three and nine months
ended July 31, 2002 are not necessarily indicative of results to be expected
for the entire year or any other period.

On May 31, 2002, the Company announced that its senior management had
discovered that its acting vice president of sales was engaged in fraudulent
behavior, including misrepresenting three customer transactions. The
fraudulent transactions involved three contracts with license amounts totaling
approximately $5 million, including a contract announced in the quarter ended
January 31, 2002. The other two fraudulent transactions were announced in the
Companys May 22, 2002 earnings release as new license contracts for the second
quarter ended April 30, 2002. The Companys January 31, 2002 condensed
consolidated financial statements have been restated as reflected in the
Companys Form 10-Q/A for the quarter ended January 31, 2002 as filed with the
Securities and Exchange Commission on June 19, 2002, to reflect the reversal of
the first fraudulent transaction. In addition, the remaining two fraudulent
transactions were reversed and not included in the results for the quarter
ended April 30, 2002. The Company has completed its investigation of this
matter and has determined that no other transactions were affected. The
Securities and Exchange Commission has initiated a formal inquiry into this
matter and the Company is cooperating with the Securities and Exchange
Commission. In addition, the Company has filed a civil lawsuit against this
individual seeking damages.

2. Significant Accounting Policies

(a) Use of Estimates

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

6



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##### Table of Contents



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

(b) Revenue Recognition

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

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

Product-Related Revenue

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

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.

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

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

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

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

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

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

7



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##### Table of Contents



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

Accordingly, software license revenue is recognized under the residual method
in arrangements in which software is licensed with professional services,
training, and maintenance and support services.

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

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,
|                            |  | 2001           |        | 2002    
|                            |  |                |        |         
|                            |  | (in thousands)
|Product license             |  | $              | 5,073  |          |  | $ | 892   | 
|                           
|                           
|                           
|                           
|Product-related services    |  |                | 1,957  |          |  |   | 966   | 
|                           
|                           
|                           
|                           
|Product-related maintenance |  |                | 3,379  |          |  |   | 2,624 | 
|                           
|                           
|                           
|                           
|Custom development services |  |                | 393    |          |  |   | 140   | 
|                            |  |                |        |          |  |   |       | 
|                            |  | $              | 10,802 |          |  | $ | 4,622 | 
|                            |  |                |        |          |  |   |       | 

Unbilled revenue of $594,000 at October 31, 2001 and $616,000 at July 31,
2002 represents amounts due to the Company under license, service and
maintenance agreements for work performed that had not been billed but for
which revenue was recognized as of the period end. Product license fees for
which the Company has not billed based on contract terms nor has the Company
recognized or deferred revenue totaled $343,000 at October 31, 2001 and $42,000
at July 31, 2002.

Custom Development Services Revenue

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

(c) Cash and Cash Equivalents

The Company accounts for cash equivalents based on the guidance in
Statement of Financial Accounting Standards, or SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Cash equivalents are
short-term, highly liquid investments with original maturity dates of three
months or less. Cash equivalents are carried at cost, which approximates fair
market value and consisted of the following:

|                           |                                |                                 |   |                |        |          |   |       |        | 
|-------------------------- | ------------------------------ | ------------------------------- | - | -------------- | ------ | -------- | - | ----- | ------ | 
|                           |                                |                                 |   | October 31,    |        | July 31,
|                           |                                |                                 |   | 2001           |        | 2002    
|                           |                                |                                 |   |                |        |         
|                           |                                |                                 |   | (In thousands)
|Cash and cash equivalents: |                                |                                 |   |                |        |          |   |      
|                          
|                          
|                          
|                          
|                           | Interest bearing bank deposits |                                 | $ | 2,776          |        |          | $ | 2,384 |       
|                          
|                          
|                          
|                          
|                           | Money market accounts          |                                 |   | 10,765         |        |          |   | 9,142 |       
|                          
|                          
|                          
|                          
|                           | Commercial paper               |                                 |   | 19,748         |        |          |   | 7,246 |       
|                          
|                          
|                          
|                          
|                           | Discount notes                 |                                 |   | 1,371          |        |          |   | 2,293 |       
|                          
|                          
|                          
|                          
|                           | Treasury bills                 |                                 |   |               |        |          |   | 999   |       
|                           |                                |                                 |   |                |        |          |   |       |       
|                           |                                | Total cash and cash equivalents |   | $              | 34,660 |          |   | $     | 22,064 | 
|                           |                                |                                 |   |                |        |          |   |       |       

8



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##### Table of Contents



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

(d) Short-term Investments

In accordance with SFAS No. 115 and based on the Companys intentions
regarding these instruments, the Company has classified all short-term
investments as available-for-sale. These investments consist primarily of
commercial paper, corporate notes and bonds and discount notes with an original
maturity of less than a year. Other comprehensive loss in stockholders equity
included an unrealized holding gain of $9,000 for October 31, 2001 and an
unrealized holding loss of $1,000 for July 31, 2002.

|                        |                                                                                                            |  |                              |       |                |       |          |       |   |       | 
|----------------------- | ---------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ----- | -------------- | ----- | -------- | ----- | - | ----- | 
|                        |                                                                                                            |  |                              |       | October 31,    |       | July 31,
|                        |                                                                                                            |  |                              |       | 2001           |       | 2002    
|                        |                                                                                                            |  |                              |       |                |       |         
|                        |                                                                                                            |  |                              |       | (In thousands)
|Short-term investments: |                                                                                                            |  |                              |       |                |       |          |      
|                       
|                       
|                       
|                       
|                        | Commercial paper (average 57 and 50 days to maturity for October
31, 2001 and July 31, 2002, respectively) |  | $                            | 3,089 |                |       | $        | 3,749 |  
|                       
|                       
|                       
|                       
|                        | Corporate notes and bonds (average 21 days to maturity for October
31, 2001)                               |  |                              | 4,512 |                |       |          |      |  
|                       
|                       
|                       
|                       
|                        | Discount notes (average 71 and 35 days to maturity for October 31,
2001 and July 31, 2002, respectively)   |  |                              | 1,992 |                |       |          | 5,410 |  
|                        |                                                                                                            |  |                              |       |                |       |          |       |   |      
|                        |                                                                                                            |  | Total short-term investments |       | $              | 9,593 |          |       | $ | 9,159 | 
|                        |                                                                                                            |  |                              |       |                |       |          |       |   |      

(e) Comprehensive Income (Loss)

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

|                    |                          |                                                                |         |                |     |                |        |        |      |      |         |         |     |   |         |         |      |  
|------------------- | ------------------------ | -------------------------------------------------------------- | ------- | -------------- | --- | -------------- | ------ | ------ | ---- | ---- | ------- | ------- | --- | - | ------- | ------- | ---- | -
|                    |                          |                                                                |         | Three Months   |     | Nine Months   
|                    |                          |                                                                |         | Ended July 31, |     | Ended July 31,
|                    |                          |                                                                |         |                |     |               
|                    |                          |                                                                |         | 2001           |     | 2002           |        | 2001   |      | 2002
|                    |                          |                                                                |         |                |     |                |        |        |      |     
|                    |                          |                                                                |         | (In thousands) |     | (In thousands)
|Comprehensive loss: |                          |                                                                |         |                |     |                |        |        |      |      |         |         |     |   |         |        
|                   
|                   
|                   
|                   
|                    | Net loss                 |                                                                | $       | (21,355        | )   |                | $      | (9,077 | )    |      | $       | (56,603 | )   |   | $       | (24,249 | )   
|                   
|                   
|                   
|                   
|                    | Other comprehensive loss |                                                                |         |                |     |                |        |        |      |      |         |         |     |   |         |         |     
|                   
|                   
|                   
|                   
|                    |                          | Unrealized (loss) gain on
short-term and long-term
investments |         |                | (15 | )              |        |        | 1    |      |         |         | 34  |   |         |         | (11  | )
|                   
|                   
|                   
|                   
|                    |                          | Foreign currency translation                                   |         |                | (90 | )              |        |        | (374 | )    |         |         | 169 |   |         |         | (503 | )
|                    |                          |                                                                |         |                |     |                |        |        |      |      |         |         |     |   |         |         |     
|Comprehensive loss  |                          | $                                                              | (21,460 | )              |     | $              | (9,450 | )      |      | $    | (56,400 | )       |     | $ | (24,763 | )      
|                    |                          |                                                                |         |                |     |                |        |        |      |      |         |         |     |   |         |         |     

(f) Recent Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (SFAS No. 146) which nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). This accounting standard, which is
effective for exit or disposal activities that are initiated after December 31,
2002, addresses financial accounting and reporting for costs associated with
exit or disposal activities.

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

In April 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS
No. 145). This accounting standard, which is effective for fiscal years
beginning after May 15, 2002, requires, among other things, that debt
extinguishments used as a part of an entitys risk management strategy no
longer meet the criteria for classification as extraordinary items. The
adoption of SFAS No. 145 is not expected to have a material effect on the
Companys financial position or results of operations.

Effective November 1, 2001, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets, which establishes financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion
No. 17, Intangible Assets. SFAS No. 142 requires that goodwill and intangible
assets that have indefinite useful lives not be amortized but, instead, tested
at least annually for impairment. See Note 7 of the Notes to Consolidated
Financial Statements of this quarterly report for a further discussion of the
impact of this statement on the Companys consolidated financial statements.

Effective November 1, 2001, the Company adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. This statement supercedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of Accounting Principles Board (APB) Opinion No. 30, Reporting the
Results of Operations  Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. Under this statement it is required that one accounting model be
used for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and it broadens the presentation of discontinued
operations to include more disposal transactions. See Note 6 of the Notes to
Consolidated Financial Statements of this quarterly report for a further
discussion of the impact of this statement on the Companys consolidated
financial statements.

3. Net Loss Per Share

Net loss per share is computed based on the guidance of SFAS No. 128,
Earnings per Share. SFAS No. 128 requires companies to report both basic loss
per share, which is computed by dividing the net loss by the weighted average
number of common shares outstanding, and diluted loss per share, which is
computed by dividing the net loss by the weighted average number of common
shares outstanding plus the weighted average dilutive potential common shares
outstanding using the treasury stock method. As a result of the losses incurred
by the Company for the three and nine months ended July 31, 2001 and 2002, all
potential common shares were antidilutive and were excluded from the diluted
net loss per share calculations. The calculation of weighted average shares
outstanding for the three and nine months ended July 31, 2002 excludes
contingently issuable shares of 1,243 representing shares issued but held in
escrow in connection with the acquisition of Signature Software (see Note
4(b)).

As of July 31, 2001 and 2002 common stock options and warrants outstanding
which were not included in the calculation of diluted net loss per share since
their inclusion would be antidilutive were 977,400 and 652,400, respectively.

4. Stockholders Equity

(a) Stock Options and Warrants

The Company granted stock options to employees that require the
recognition of stock-based compensation expense. Until July 2001, stock-based
compensation relating to employee grants represented the amortization, over the
vesting period of the option, of the difference between the exercise price of
options granted to employees and the fair market value on the date of grant of
the Companys common stock for financial reporting purposes. In July 2001, the
Company completed a stock option exchange program in which its directors and
eligible employees were offered the opportunity to exchange existing stock
options for new stock options with an exercise price equal to the current
market value of the Companys common stock. Participants in the exchange
program received new options to purchase seventy-five percent (75%) of the
number of shares of

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

the 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 $6.60 per share. The Company accepted
717,929 stock options for exchange and issued 538,438 stock options in exchange
for such tendered options. All option grants issued in conjunction with the
stock option exchange program are subject to variable plan accounting in
accordance with APB No. 25, whereby the Company is required to record, as
compensation expense, increases and decreases in the value of these options
between the grant date of the option and the date the option is exercised. The
greater the increase in the market value of the Companys common stock
following the date of grant, the greater the compensation expense the Company
will be required to record.

As of July 31, 2002, a total of 434,278 options to purchase shares of
common stock are subject to variable plan accounting as a result of the stock
option exchange program. As of July 31, 2002, the Company has recorded no
deferred compensation associated with these options because the fair market
value of the Companys common stock fell below the option price.

The Company granted options to employees to purchase 4,200 shares of
common stock at a weighted-average exercise price of $5.81 per share during the
three months ended July 31, 2002. At July 31, 2002, 634,724 options were
outstanding.

The Company also granted stock options to non-employees and issued
warrants to certain customers and to strategic business partners that require
the recognition of stock-based compensation expense. Stock-based compensation
related to these grants represents the fair market value as computed using an
established option valuation formula. As of July 31, 2002, the deferred
compensation balance associated with these grants was $10,000 and will be
recognized as an expense as earned in accordance with EITF 96-18.

(b) Common Stock Outstanding

Common stock outstanding at July 31, 2002 includes 1,243 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.
The shares issued but held in escrow related to the Companys acquisition of
Brightware, Inc. were released from escrow during the quarter ended April 30,
2002.

(c) Loans Receivable

On November 28, 2000, the Companys Board of Directors approved a loan
facility to Klaus Besier, the Companys Chairman and Chief Executive Officer,
allowing borrowings up to $3,000,000 bearing interest at the applicable federal
rate in effect during the term of the note. On January 9, 2001, the Companys
Board of Directors approved an increase in the loan facility to $4,000,000.
Originally the outstanding principal together with unpaid interest was due and
payable on the earlier of October 31, 2001, an event of default, or an event of
maturity, as defined. On December 11, 2001, the Board of Directors amended the
facility to extend the maturity to May 1, 2006. Due to the modification of the
facility, all amounts outstanding have been reclassified as a component of
stockholders equity. The promissory note is secured by a pledge of 50,000
shares of the Companys common stock and is generally not a recourse obligation
of the borrower, with specified exceptions. Amounts totaling $4,000,000 plus
accrued interest have been advanced to Mr. Besier under this facility as of
July 31, 2002.

In addition, the Company issued notes to two former officers of the
Company totaling $270,000 and to a former employee of the Company in the amount
of $125,000. During the quarter ended January 31, 2002, in connection with the
termination of one of the former officers employment with the Company, the
Company acquired the shares securing the note, in the amount of $120,000, from
the officer in satisfaction of the amounts due under the note. This amount was
charged to operations during the period.

11



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

5. Segment Reporting

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

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

Revenue from the United States, Japan and the United Kingdom contributed
approximately 52% 19% and 11% of our revenue, respectively for the three months
ended July 31, 2002, and revenue from the United States contributed
approximately 67% of our revenue for the three months ended July 31, 2001.
Revenue from the United States, the United Kingdom and Japan contributed
approximately 46%, 16% and 11% of our revenue, respectively for the nine months
ended July 31, 2002, and revenue from the United States and Switzerland
contributed approximately 67% and 10% of our revenue, respectively for the nine
months ended July 31, 2001.

6. 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 Company markets the acquired product as its
eServicesPerformer product line. The original purchase price of the
acquisition was $13,669,000, which was composed of $5,228,000 in cash, 130,000
shares of Firepond common stock valued at $5,865,000, and $2,576,000 in
acquisition related costs. The value of approximately 150,000 shares of
Firepond common stock and cash payments totaling $3,250,000 were excluded from
the purchase price as this consideration was contingent on achieving financial
performance objectives as measured on April 30, 2001 which subsequently were
not achieved. In addition, the consideration was subject to a final accounting
of Brightwares net assets as of February 15, 2001. The acquisition was
accounted for using the purchase method in accordance with APB No. 16 and
accordingly, the results of operations of Brightware from the date of
acquisition have been included in the results of operations of the Company. The
consideration payable was subject to a final accounting of Brightwares net
assets as of February 15, 2001 and a portion of the consideration was placed in
escrow to satisfy claims for damages. In connection therewith, during the
quarter ended January 31, 2002, the Company received $520,000 of cash and
55,300 shares of Firepond common stock previously escrowed to satisfy claims in
connection with the transaction. This release from escrow had the effect of
reducing the purchase price recorded by the Company by approximately $2,968,000
to $10,701,000. During the quarter ended April 30, 2002, the Company received
approximately $98,000 of cash and 7,498 shares of Firepond common stock
previously escrowed to satisfy claims for damages. This release from escrow had
the effect of reducing the purchase price recorded by the Company by an
additional approximately $430,000 to $10,271,000.

12



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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   |  
|                          
|                          
|                          
|                          
|                           | Fair value of liabilities assumed   |  |                | (11,034 | )
|                          
|                          
|                          
|                          
|                           | In-process research and development |  |                | 6,200   |  
|                          
|                          
|                          
|                          
|                           | Developed technology and know-how   |  |                | 4,900   |  
|                          
|                          
|                          
|                          
|                           | Assembled workforce                 |  |                | 2,200   |  
|                          
|                          
|                          
|                          
|                           | Goodwill                            |  |                | 4,051   |  
|                           |                                     |  |                |        
|                           | Total purchase price                |  | $              | 10,271  |  
|                           |                                     |  |                |        

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

In making its purchase price allocation, management considered the present
value calculation of income, an analysis of project accomplishments and
remaining outstanding items, an assessment of overall contributions, as well as
project risks. The value assigned to purchased in-process research and
development was determined by estimating the costs to develop the
acquired technology into commercially viable products, estimating the resulting
net cash flows from the projects, and discounting the net cash flows to their
present value. The revenue projection used to value the in-process research and
development was based on estimates of relevant market sizes and growth factors,
expected trends in technology, and the nature and expected timing of new
product introductions by the Company and its competitors. The resulting net
cash flows from such projects were 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. Assembled workforce is the presence of a skilled workforce that
is knowledgeable about company procedures and possesses expertise in certain
fields that are important to continued profitability and growth of a company.
Both developed technology and assembled workforce were being amortized over a
period of three years. The excess of the purchase price over the fair value of
identified intangible assets was allocated to goodwill.

During the quarter ended January 31, 2002, the Company lowered its
estimates of the expected cash flows from the eServices product and determined
that developed technology and know-how was significantly impaired. As such, in
accordance with SFAS No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company recorded a $3,120,000 charge to write-off the
impaired portion of developed technology and know-how leaving a balance of
approximately $215,000 as of January 31, 2002. The circumstances leading to
the impairment related directly to the Companys strategic decision to focus on
its core value proposition in the lead-to-order market with its
SalesPerformer product because of the continued global slow down in information
technology spending and the Companys need to focus its resources to reach
profitability. As a result of the change in strategic direction, the Company
lowered the eServices revenue forecasts, operating profits and cash flows,
resulting in the impairment charge of the developed technology and know-how.

Through October 31, 2001, the Company amortized goodwill over a period of
three years. However, the Company adopted SFAS 142, Accounting for Goodwill and
Other Intangible Assets,effective November 1, 2001. SFAS 142 requires that
goodwill, including amounts related to assembled workforce, no longer be
amortized, instead, goodwill will be subject to

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

an assessment of impairment by applying a fair-value based test at least
annually. As such, in accordance with SFAS 142, the net book value of assembled
workforce was reclassified to goodwill and as a result of an independent
valuation, the Company determined that, without regard to the reduction in
expected cash flows from the eServices product determined during the quarter
ended January 31, 2002, the goodwill was fully impaired upon adoption and,
accordingly, recorded a cumulative effect of a change in accounting principle
of $3,973,000 (see Note 7).

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

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

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

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

In accordance with SFAS No. 142 the fair value used to determine the
impairment was based on a combination of earnings multiples and discounted cash
flow valuation techniques. The circumstances leading to the goodwill impairment
related to both a global slow down in information technology spending as well
as a significant decrease in comparable company market valuations. The negative
economic trend lowered the eServices operating profits and cash flows and is
evidence that initial growth expectations when Brightware was acquired have not
materialized. The decline in comparable company market valuations resulted in
reduced earnings multiples.

The following is the pro-forma effect on net income and net income per
share had SFAS No. 142 been in effect for the three and nine months ended July
31, 2001 (table in thousands, except per share amounts):

|                                                        |  |                    |         |                   |  |   |         |  
|------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | - | ------- | -
|                                                        |  | Three Months Ended |         | Nine Months Ended
|                                                        |  | July 31, 2001      |         | July 31, 2001    
|                                                        |  |                    |         |                  
|Net loss                                                |  | $                  | (21,355 | )                 |  | $ | (56,603 | )
|                                                       
|                                                       
|                                                       
|                                                       
|Add back: Impact of goodwill and workforce amortization |  |                    | 804     |                   |  |   | 1,474   |  
|                                                        |  |                    |         |                   |  |   |         |  
|Pro forma net loss                                      |  | $                  | (20,551 | )                 |  | $ | (55,129 | )
|                                                        |  |                    |         |                   |  |   |         |  
|Net loss per share, basic and diluted                   |  | $                  | (5.90   | )                 |  | $ | (15.74  | )
|                                                       
|                                                       
|                                                       
|                                                       
|Add back: Impact of goodwill and workforce amortization |  |                    | 0.22    |                   |  |   | 0.41    |  
|                                                        |  |                    |         |                   |  |   |         |  
|Pro forma net loss per share, basic and diluted         |  | $                  | (5.68   | )                 |  | $ | (15.33  | )
|                                                        |  |                    |         |                   |  |   |         |  

14



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

8. Restructuring and Other Special Charges

(a) 2001

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

The significant components of the restructuring and other special charges
were as follows:

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

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

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

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

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

15



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

(b) 2002

During the quarter ended July 31, 2002, the Company undertook plans to
restructure our operations as a result of a prolonged slowdown of global
information technology spending, specifically within the enterprise software
marketplace. As such, the Company announced a strategic realignment to further
enhance our focus on the lead-to-order market as well as measures to better
align our cost structure with projected revenue and preserve cash. The Company
reduced headcount and facilities as well as wrote off excess equipment and
terminated and restructured certain contractual relationships. Overall, the
Company terminated 19 general and administrative, 19 sales and marketing, 25
professional services and 30 development employees. The restructuring and other
special charge for the quarter ended July 31, 2002 totaled $5.9 million. As a
result of these actions, our expenses in the three and nine months ended July
31, 2002 significantly decreased compared to the same periods of the prior
year.

The significant components of the restructuring and other special charges
were as follows:

|                                                    |  |               |       | 
|--------------------------------------------------- |  | ------------- | ----- | 
|                                                    |  | Quarter Ended
|                                                    |  |              
|                                                    |  | July 31,     
|                                                    |  | 2002         
|                                                    |  |              
|Employee severance costs                            |  | $             | 1,931 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Facilities related costs                            |  |               | 2,886 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Impairment of property and equipment                |  |               | 824   | 
|                                                   
|                                                   
|                                                   
|                                                   
|Excess contractual commitments and termination fees |  |               | 188   | 
|                                                   
|                                                   
|                                                   
|                                                   
|Other                                               |  |               | 65    | 
|                                                    |  |               |       | 
|                                                    |  | $             | 5,894 | 
|                                                    |  |               |       | 

The facilities related cost component consist of idle lease space and
lease termination fees associated with closing the Companys Netherlands,
United Kingdom and San Rafael, California facilities. The Companys assumptions
considered current market value of similar properties and ability, if any, to
sublease the idle space or any other future use.

The impairment of property and equipment charges consisted of excess
computer equipment and furniture and fixtures as well as leasehold write-offs
resulting from reductions-in-force and office closures.

(c) Accrued Merger and Restructuring

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

|                                  |                              |                                        |   |                |        |  
|--------------------------------- | ---------------------------- | -------------------------------------- | - | -------------- | ------ | -
|                                  |                              |                                        |   | (In thousands)
|Accrued merger and restructuring: |                              |                                        |   |               
|                                 
|                                 
|                                 
|                                 
|                                  | Balance, at October 31, 2001 |                                        | $ | 7,281          |       
|                                 
|                                 
|                                 
|                                 
|                                  |                              | Provision                              |   |                | 5,894  |  
|                                 
|                                 
|                                 
|                                 
|                                  |                              | Severance payments                     |   |                | (2,813 | )
|                                 
|                                 
|                                 
|                                 
|                                  |                              | Facilities related payments            |   |                | (1,165 | )
|                                 
|                                 
|                                 
|                                 
|                                  |                              | Contract termination fees              |   |                | (683   | )
|                                 
|                                 
|                                 
|                                 
|                                  |                              | Other payments                         |   |                | (542   | )
|                                 
|                                 
|                                 
|                                 
|                                  |                              | Property and equipment write-offs, net |   |                | (985   | )
|                                  |                              |                                        |   |               
|                                  | Balance, at July 31, 2002    |                                        | $ | 6,987          |       
|                                  |                              |                                        |   |               

The remainder of the payments for the restructuring and other special
charges will be paid out as follows: severance payments through January 2003,
facilities related payments through August 2010 and contract termination fees
and other payments through July 2003. Therefore, the long-term portion is
specifically related to facilities payments.

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##### Table of Contents



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

The restructuring and other special charges taken in fiscal 2001 and 2002
included a component for idle lease space. The Companys assumptions considered
current market value of similar properties and the ability, if any, to sublease
the idle space or any other future use. If actual market conditions are less
favorable than those projected by the Company, additional charges may be
required related to this idle lease space

9. Commitments and Contingencies

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

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

The Company is 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 their business, financial condition
or results of operations.

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##### Table of Contents



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

10. Subsequent Event

On August 16, 2002, the Company effected a 1-for-10 reverse stock split of
the outstanding shares of common stock and adjusted the par value to $.10 per
share as previously disclosed in the Companys Form 8-K filed with the
Securities and Exchange Commission on August 15, 2002. All references in the
Companys consolidated financial statements and notes thereto, to common stock
share and per share amounts, including options and warrants to purchase common
stock have been retroactively restated to reflect the reverse stock split.

18



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##### Table of Contents






|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------

Certain statements in the Managements Discussion and Analysis of
Financial Condition and Results of Operations are forward-looking statements
that involve risks and uncertainties. Words such as anticipates, expects,
intends, plans, believes, seeks, estimates and similar expressions identify
such forward-looking statements. The forward-looking statements contained
herein are based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from these
expressed in such forward-looking statements. Factors that might cause such a
difference include, among other things, those set forth under Overview,
Liquidity and Capital Resources and Risk Factors included in these sections
and those appearing elsewhere in this Form 10-Q. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
managements analysis only as of the date hereof. We assume no obligation to
update these forward-looking statements to reflect actual results or changes in
factors or assumptions affecting forward-looking statements.

Overview

We are a leading provider of solutions that optimize the lead-to-order
process, helping companies more profitably acquire and retain customers. Our
product lines leverage intelligence engines and patented automation technology
to drive new revenue streams, increase profitability, and manage customer
interactions across all channels and throughout the lead-to-order process. From
our inception in 1983 through 1997, we generated revenue primarily through
providing custom development services. These services consisted of the
development of highly customized applications utilizing core software
technology, and related software maintenance and data maintenance services. In
early fiscal 1997, we undertook a plan to change our strategic focus from a
custom development services company to a software product company providing
more standardized solutions. Our first packaged software product was introduced
in May 1997. We released the Firepond Application Suite in October 1999 and
renamed and repackaged the FirePond Application Suite as the SalesPerformer
Suite in December 2000. As a result of these efforts, product-related revenue
as a percentage of total revenue increased from 1.5% in fiscal 1997 to 90.2% in
fiscal 2001 and to 93.1% in the nine months ended July 31, 2002.

On February 15, 2001, we acquired 100% of the issued and outstanding
shares of capital stock of Brightware, Inc., located in San Rafael, California.
The acquisition was accounted for as a purchase and accordingly, the results of
operations of Brightware have been included in our results of operations since
the date of acquisition. In addition, on September 27, 2000, we acquired 100%
of the issued and outstanding shares of capital stock of Signature Software,
Inc. (Signature). This acquisition was also accounted for using the purchase
method. Accordingly, the results of operations of Signature from the date of
acquisition have been included in our results of operations.

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

On May 31, 2002, we announced that our senior management had discovered that
our acting vice president of sales was engaged in fraudulent behavior,
including misrepresenting three customer transactions. The fraudulent
transactions involved three contracts with license amounts totaling
approximately $5 million, including a contract announced in the first quarter
ended January 31, 2002, and two additional transactions that were announced in
our May 22, 2002 earnings release as new license contracts for the second
quarter ended April 30, 2002. These two fraudulent transactions were reversed
and not included in the results for the quarter ended April 30, 2002. We have
completed our investigation of this matter and determined that no other
transactions were affected. The Securities and Exchange Commission has
initiated a formal inquiry into this matter and we are cooperating with the
Securities and Exchange Commission. In addition, we have filed a civil lawsuit
against this individual seeking damages.

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During the quarter ended July 31, 2002, we announced a strategic
realignment to further enhance our focus on the lead-to-order market as well
as measures to better align costs with the current economic conditions. In
addition, as a result of a prolonged slowdown of global information technology
spending, specifically within the enterprise software marketplace, we undertook
a plan to restructure our operations. These actions sought to better align our
cost structure with projected revenue in the future and preserve cash. We
reduced headcount and facilities as well as wrote off excess equipment and
terminated and restructured certain contractual relationships. Overall, we
terminated 19 general and administrative, 19 sales and marketing, 25
professional services and 30 development employees. The restructuring and other
special charge for the quarter ended July 31, 2002 totaled $5.9 million. As a
result of these actions, our expenses in the three and nine months ended July
31, 2002 significantly decreased compared to the same periods of the prior
year.

On August 16, 2002, we effected a 1-for-10 reverse stock split of the
outstanding shares of common stock and adjusted the par value to $.10 per share
as previously disclosed in our Form 8-K filed with the Securities and Exchange
Commission on August 15, 2002. All references in our consolidated financial
statements and notes thereto, to common stock share and per share amounts
including, options and warrants to purchase common stock, have been
retroactively restated to reflect the reverse stock split.

We have incurred quarterly and annual losses intermittently since we were
formed, and regularly since we began transitioning to a software product
business in early fiscal 1997. We incurred net losses of $28.9 million for
fiscal 1999, $16.3 million for fiscal 2000, $70.3 million for fiscal 2001, and
$24.2 million in the nine months ended July 31, 2002. We currently plan to
incur an annual net loss for fiscal 2002 and are uncertain as to when we will
reach profitability due to low visibility with regard to expected revenue in
the future.

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

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

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

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

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

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

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

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We execute contracts that govern the terms and conditions of each software
license, maintenance arrangement and other services arrangements. Revenue under
multiple element arrangements, which may include several different software
products and services sold together, is allocated to each element based on the
residual method in accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position No. 98-9, Software Revenue
Recognition with Respect to Certain Arrangements.

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

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

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

We historically have provided services to develop highly customized
applications utilizing core software technology. We no longer accept new
custom development service projects and anticipate custom development services
revenue will continue to decline, as we have strategically de-emphasized that
business and do not plan to accept new custom development contracts. We will
continue to earn custom development services revenue until existing custom
development contracts and related maintenance agreements are completed. Custom
development services revenue in the future will be primarily from ongoing
software maintenance and data maintenance services that we provide under custom
development services contracts. Revenue from these ongoing arrangements is
recognized as the services are performed.

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

We have granted stock options to employees that require the recognition of
stock-based compensation expense. Until July 2001, stock-based compensation
relating to employee grants represented the amortization, over the vesting
period of the option, of the difference between the exercise price of options
granted to employees and the fair market value on the date of grant of our
common stock for financial reporting purposes. In July 2001, we completed a
stock option exchange program in which our directors and eligible employees
were offered the opportunity to exchange existing stock options for new stock
options with an exercise price equal to the then current market value of our
common stock. Participants in the exchange program received new options to
purchase seventy-five percent (75%) of the number of shares of our common stock
subject to the options that were exchanged and canceled. The new options were
granted on July 31, 2001, with an exercise price of $6.60 per share. We
accepted 717,929 stock options for exchange and issued 538,438 stock options in
exchange for such tendered options. All option grants issued in connection with
the stock option exchange program are subject to variable plan accounting in
accordance with APB No. 25, whereby we are required to record, as compensation
expense, increases and decreases in the value of these options between the
grant date of the option and the date the option is exercised. In addition, we
have granted stock options to non-employees and issued warrants to certain
customers and to strategic business partners. Stock-based compensation related
to grants to non-employees represents the fair market value of the options and
warrants granted as computed using an established option valuation formula.

In connection with the Signature acquisition, we issued 27,627 shares of
restricted common stock, valued at approximately $3.9 million, subject to
vesting through September 27, 2002. Vesting of these shares is based on the
retention of certain Signature employees measured on a quarterly basis, as
defined. The value of these restricted shares is being recorded as stock-

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based compensation on a pro rata basis over the vesting period.
Accordingly, we recognized approximately $162,000 of stock-based compensation
for these shares in fiscal 2000, $2,404,000 in fiscal 2001 and $541,000 for the
nine months ended July 31, 2002. In fiscal 2001 we also recognized
approximately $733,000 in stock-based compensation due to the acceleration of
the vesting of certain shares of restricted common stock related to one
employee termination.

In the aggregate, we recorded stock-based compensation expense of
approximately $2.8 million and $734,000 for the nine months ended July 31, 2001
and July 31, 2002. As of July 31, 2002, all of our deferred compensation
balance of approximately $69,000 will be amortized over the remaining vesting
period of the options, warrants and restricted common stock.

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

We have adopted SFAS No. 142 Goodwill and Other Intangible Assets
effective November 1, 2001. In accordance with SFAS 142, the net book value of
assembled workforce was reclassified to goodwill and as a result of an
independent valuation, we determined that without regard to the reduction in
expected cash flows from the eServicesPerformer product determined during the
quarter ended January 31, 2002, the goodwill was fully impaired upon adoption
and, accordingly, recorded a cumulative effect of a change in accounting
principle of $4.0 million.

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

Critical Accounting Policies

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

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

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

Lease Loss Estimates.Our restructuring and other special charges taken in
fiscal 2001 and 2002 included a component for idle lease space. Our assumptions
considered current market value of similar properties and the ability, if any,
to sublease the idle space or any other future use. If actual market conditions
are less favorable than those projected by us, additional charges may be
required related to this idle lease space.

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##### Table of Contents



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,
|                                                                  |                                                      |  |                          |                               |  |                |        |               
|                                                                  |                                                      |  |                          |                               |  | 2001           |        | 2002           |   | 2001 |        | 2002
|                                                                  |                                                      |  |                          |                               |  |                |        |                |   |      |        |     
|Revenue:                                                          |                                                      |  |                          |                               |  |                |        |                |   |      |        |      |  |      |        |     
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Product-related revenue:                             |  |                          |                               |  |                |        |                |   |      |        |      |  |      |        |      | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                      |  | License                  |                               |  | 38.8           | %      |                |   | 14.8 | %      |      |  | 31.3 | %      |      |  | 28.2 | %    
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                      |  | Services and maintenance |                               |  | 52.7           |        |                |   | 76.4 |        |      |  | 58.2 |        |      |  | 64.9 |      
|                                                                  |                                                      |  |                          |                               |  |                |        |                |   |      |        |      |  |      |        |     
|                                                                  |                                                      |  |                          | Total product-related revenue |  |                | 91.5   |                |   |      | 91.2   |      |  |      | 89.5   |      |  |      | 93.1  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Custom development services                          |  |                          | 8.5                           |  |                |        | 8.8            |   |      |        | 10.5 |  |      |        | 6.9  | 
|                                                                  |                                                      |  |                          |                               |  |                |        |                |   |      |        |      |  |      |        |     
|                                                                  |                                                      |  |                          | Total revenue                 |  |                | 100.0  |                |   |      | 100.0  |      |  |      | 100.0  |      |  |      | 100.0 | 
|                                                                  |                                                      |  |                          |                               |  |                |        |                |   |      |        |      |  |      |        |     
|Cost of revenue:                                                  |                                                      |  |                          |                               |  |                |        |                |   |      |        |      |  |      |        |     
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | License                                              |  |                          | 1.4                           |  |                |        | 0.1            |   |      |        | 1.0  |  |      |        | 0.6  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Product-related services and
maintenance             |  |                          | 63.2                          |  |                |        | 49.7           |   |      |        | 65.4 |  |      |        | 44.6 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Custom development services                          |  |                          | 2.1                           |  |                |        | 3.7            |   |      |        | 2.8  |  |      |        | 3.1  | 
|                                                                  |                                                      |  |                          |                               |  |                |        |                |   |      |        |      |  |      |        |     
|                                                                  |                                                      |  |                          | Total cost of revenue         |  |                | 66.7   |                |   |      | 53.5   |      |  |      | 69.2   |      |  |      | 48.3  | 
|                                                                  |                                                      |  |                          |                               |  |                |        |                |   |      |        |      |  |      |        |     
|Gross profit                                                      |                                                      |  | 33.3                     |                               |  |                | 46.5   |                |   |      | 30.8   |      |  |      | 51.7   |     
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Operating expenses:                                               |                                                      |  |                          |                               |  |                |        |                |   |      |        |      |  |      |        |     
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Sales and marketing                                  |  |                          | 65.0                          |  |                |        | 47.2           |   |      |        | 59.5 |  |      |        | 36.3 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Research and development                             |  |                          | 44.9                          |  |                |        | 53.0           |   |      |        | 42.8 |  |      |        | 45.3 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | General and administrative                           |  |                          | 28.7                          |  |                |        | 46.1           |   |      |        | 23.9 |  |      |        | 32.8 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Stock-based compensation                             |  |                          | 14.6                          |  |                |        | (16.2          | ) |      |        | 7.7  |  |      |        | 4.3  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Amortization of goodwill and other
intangible assets |  |                          | 13.2                          |  |                |        | 0.6            |   |      |        | 6.2  |  |      |        | 2.7  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Restructuring and other special
charges              |  |                          | 80.3                          |  |                |        | 136.5          |   |      |        | 30.2 |  |      |        | 34.2 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Settlement of claim                                  |  |                          |                              |  |                |        |               |   |      |        | 3.3  |  |      |        |     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Acquired in-process research and
development         |  |                          |                              |  |                |        |               |   |      |        | 16.8 |  |      |        |     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Impairment
of developed technology
and know-how      |  |                          |                              |  |                |        |               |   |      |        |     |  |      |        | 18.1 | 
|                                                                  |                                                      |  |                          |                               |  |                |        |                |   |      |        |      |  |      |        |     
|                                                                  |                                                      |  |                          | Total operating expenses      |  |                | 246.7  |                |   |      | 267.2  |      |  |      | 190.4  |      |  |      | 173.7 | 
|                                                                  |                                                      |  |                          |                               |  |                |        |                |   |      |        |      |  |      |        |     
|Loss from operations                                              |                                                      |  | (213.4                   | )                             |  |                | (220.7 | )              |   |      | (159.6 | )    |  |      | (122.0 | )   
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Interest income                                                   |                                                      |  | 6.0                      |                               |  |                | 3.4    |                |   |      | 9.2    |      |  |      | 2.8    |     
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Other income (expense), net                                       |                                                      |  | (3.8                     | )                             |  |                | 7.1    |                |   |      | (2.9   | )    |  |      | 1.4    |     
|                                                                  |                                                      |  |                          |                               |  |                |        |                |   |      |        |      |  |      |        |     
|Loss before cumulative effect of a
change in accounting principle |                                                      |  | (211.2                   | )                             |  |                | (210.2 | )              |   |      | (153.3 | )    |  |      | (117.8 | )   
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Cumulative effect of a change in
accounting principle             |                                                      |  |                         |                               |  |                |       |                |   |      |       |      |  |      | (23.0  | )   
|                                                                  |                                                      |  |                          |                               |  |                |        |                |   |      |        |      |  |      |        |     
|Net loss                                                          |                                                      |  | (211.2                   | )%                            |  |                | (210.2 | )%             |   |      | (153.3 | )%   |  |      | (140.8 | )%  
|                                                                  |                                                      |  |                          |                               |  |                |        |                |   |      |        |      |  |      |        |     

Comparison of Three Months Ended July 31, 2001 and 2002

Revenue.Total revenue decreased $5.8 million, or 57.3%, to $4.3 million
in the three months ended July 31, 2002 from $10.1 million in the three months
ended July 31, 2001. This decrease is attributable to a 57.4% decrease in
product-related revenue and 56.1% decrease in custom development service
revenue.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | License.License revenue decreased $3.3 million, or 83.7%, to $638,000
in the three months ended July 31, 2002 from $3.9 million in the three months
ended July 31, 2001. License revenue as a percentage of total revenue
decreased to 14.8% in the three months ended July 31, 2002 from 38.8% in the
three months ended July 31, 2001. We believe the overall decline is
attributable to a global slow down in information technology spending
experienced by software companies in our industry. We expect the difficult
economic conditions to continue to adversely affect our license revenue in
the future.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Product service and maintenance.Product service and maintenance
revenue decreased $2.0 million, or 38.0%, to $3.3 million in the three months
ended July 31, 2002 from $5.3 million in the three months ended July 31,
2001. Product services and maintenance revenue as a percentage of total
revenue increased to 76.4% in the three months ended July 31, 2002 from 52.7%
in the three months ended July 31, 2001. The decrease in absolute dollars is
attributable to the decrease in consulting engagements and maintenance
agreements related to the decreased license revenue in this period as
compared to the prior year period. We expect product services and
maintenance to continue to be adversely affected by the difficult economic
conditions.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Custom development services.Custom development services revenue
decreased $483,000, or 56.1%, to $378,000 in the three months ended July 31,
2002 from $861,000 in the three months ended July 31, 2001. Custom
development services revenue as a percentage of total revenue increased to
8.8% in the three months ended July 31, 2002 from 8.5% in the three months
ended July 31, 2001. The decrease in absolute dollars is due to the change of
our strategic focus. We expect custom development services revenue to
continue to decline.

Cost of revenue.Total cost of revenue decreased $4.4 million, or 65.7%,
to $2.3 million in the three months ended July 31, 2002 from $6.7 million in
the three months ended July 31, 2001. Total cost of revenue as a percentage of
total revenue decreased to 53.5% in the three months ended July 31, 2002 from
66.7% in the three months ended July 31, 2001.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 $141,000, or 97.2%, to $4,000 in the three
months ended July 31, 2002 from $145,000 in the three months ended July 31,
2001. Cost of license revenue as a percentage of license revenue decreased to
..6% in the three months ended July 31, 2002 from 3.7% in the three months
ended July 31, 2001. The decrease in absolute dollars and as a percentage of
license revenue is due primarily to a decrease in royalties due for license
transactions during the current quarter.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of product-related services and maintenance revenue.Cost of
product-related services and maintenance revenue consists primarily of
salaries and related costs for consulting, training and customer support
personnel, including cost of services provided by third-party consultants
engaged by us. Cost of product-related services and maintenance revenue
decreased $4.2 million, or 66.3%, to $2.1 million in the three months ended
July 31, 2002 from $6.4 million in the three months ended July 31, 2001. Cost
of product-related services and maintenance revenue as a percentage of
product-related services and maintenance revenue decreased to 65.1% in the
three months ended July 31, 2002 from 119.7% in the three months ended July
31, 2001. The decrease in absolute dollars and as a percentage of total
product-related services and maintenance revenue was primarily due to
decreased staff and consulting resources, increased utilization rate and our
effort to cut 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 $59,000, or 27.2%, to $158,000 in the three months ended
July 31, 2002 from $217,000 in the three months ended July 31, 2001. Cost of
custom development services as a percentage of custom development services
revenue increased to 41.8% in the three months ended July 31, 2002 from 25.2%
in the three months ended July 31, 2001. The decrease in absolute dollars is
primarily due to fewer custom development projects.

Sales and marketing expenses.Sales and marketing expenses consist
primarily of salaries, commissions and bonuses for sales and marketing
personnel and promotional expenses. Sales and marketing expenses decreased $4.5
million, or 69.0%, to $2.0 million in the three months ended July 31, 2002 from
$6.6 million in the three months ended July 31, 2001. Sales and marketing
expenses as a percentage of total revenue decreased to 47.2% in the three
months ended July 31, 2002 from 65.0% in the three months ended July 31, 2001.
Sales and marketing expenses decreased in absolute dollars and as a percentage
of total revenue primarily due to the decrease in headcount in our sales and
marketing operations as a result of the action we took to restructure our
operations in fiscal 2001 and the quarter ended July 31, 2002, lower
commissions on fewer license transactions, as well as a decrease in marketing
program spending. We plan to invest in marketing programs as necessary.

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

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products, and the performance of quality assurance and documentation
activities. Research and development expenses decreased $2.2 million, or 49.6%,
to $2.3 million in the three months ended July 31, 2002 from $4.5 million in
the three months ended July 31, 2001. Research and development expenses as a
percentage of total revenue increased to 53.0% in the three months ended July
31, 2002 from 44.9% in the three months ended July 31, 2001. These expenses
decreased in absolute dollars due to a decrease in headcount and decreased
utilization of engineering and product development contractors as a result of
the reduction of our workforce in fiscal 2001 and the quarter ended July 31,
2002. Research and development expenses as a percentage of total revenue
increased primarily due to the lower revenue for the third quarter of fiscal
2002. We will continue to make necessary investments to enhance our existing
products and develop new products.

General and administrative expenses.General and administrative expenses
consist primarily of salaries, and other personnel-related costs for executive,
financial, human resource, information services, and other administrative
functions, as well as legal and accounting costs. General and administrative
expenses decreased $912,000, or 31.4%, to $2.0 million in the three months
ended July 31, 2002 from $2.9 million in the three months ended July 31, 2001.
General and administrative expenses as a percentage of total revenue increased
to 46.1% in the three months ended July 31, 2002 from 28.7% in the three months
ended July 31, 2001. These expenses decreased in absolute dollars primarily as
a result of decreased headcount, which resulted in reduced payroll and other
related expenses. General and administrative expenses as a percentage of total
revenue increased primarily due to the lower revenue for the third quarter of
fiscal 2002. We expect that general and administrative expenses will decline
in the last quarter of fiscal 2002.

Stock-based compensation expense.Stock-based compensation decreased $2.2
million, or 147.6%, to a $701,000 credit in the three months ended July 31,
2002 from $1.5 million in expense for the three months ended July 31, 2001.
Stock-based compensation expense as a percentage of total revenue decreased to
(16.2)% in the three months ended July 31, 2002 from 14.6% in the three months
ended July 31, 2001. If we had allocated our stock-based compensation to the
departments for which the services were performed in the three months ended
July 31, 2002, the allocation would have decreased cost of revenue by $40,000,
sales and marketing expenses by $30,000, research and development expenses by
$77,000 and general and administrative expenses by $554,000. For 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. The decrease in stock-based
compensation expense is primarily the result of a $1.6 million decrease in
charges for employee stock options and a $595,000 decline in the charge from
the Signature acquisition stock grants. The credit to stock based compensation
expense in the quarter end July 31, 2002 is primarily the effect of a drop in
our stock price during the quarter on stock options accounted for under
variable plan accounting.

Amortization of goodwill and other intangible assets.Amortization of
goodwill and other intangible assets decreased $1.3 million, or 98.0%, to
$26,000 in the three months ended July 31, 2002 from $1.3 million in the three
months ended July 31, 2001. Amortization of goodwill and other intangible
assets as a percentage of total revenue decreased to 0.6% in the three months
ended July 31, 2002 from 13.2% in the three months ended July 31, 2001. The
decrease is primarily due to the impairment of goodwill related to the
acquisition of Brightware as a result of the our adoption of SFAS No. 142
Goodwill and Other Intangible Assets, as well as impairment of related
developed technology and know-how under SFAS No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets.

Restructuring and other special charges.During the quarter ended July
31, 2002, we announced a restructuring of our operations to further enhance our
focus on the lead-to-order market and to better align costs with current
economic conditions. In connection with this plan we incurred $5.9 million of
restructuring and other special charges in the three months ended July 31,
2002, which included $1.9 million of employee severance costs, $2.9 million of
facilities related costs, $824,000 of excess fixed asset costs, $188,000 of
excess contractual commitments and termination fees and $65,000 of other costs.
During the quarter ended July 31, 2001, we 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 and other
special charges in the three months ended July 31, 2001, which included $3.3
million of employee severance costs, $1.9 million of facilities related costs,
$1.5 million of excess fixed asset costs, $1.0 million of contract termination
fees and $369,000 of other costs. As of July 31, 2002, the remainder of the
payments for the restructuring and other special charges will be paid out as
follows: severance payments through January 2003, facilities related payments
through August 2010 and contract termination fees and other payments through
July 2003. Therefore, the long-term portion is specifically related to
facilities payments.

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Interest income.Interest income decreased $461,000, or 76.2%, to
$144,000 in the three months ended July 31, 2002 from $605,000 in the three
months ended July 31, 2001. The decrease is primarily due to our decreased
cash and cash equivalents and short-term investments as well as a decline in
interest rates.

Other income (expense), net.Other income (expense), net primarily
consists of bank fees and foreign currency transaction gains and losses. Other
income (expense), net improved $689,000, or 180.8%, to $308,000 in income in
the three months ended July 31, 2002 from $381,000 in expense in the three
months ended July 31. The improvement is primarily due to foreign currency
transaction gains realized in the three months ended July 31, 2002.

Comparison of Nine Months Ended July 31, 2001 and 2002

Revenue.Total revenue decreased $19.8 million, or 53.4%, to $17.2
million in the nine months ended July 31, 2002 from $37.0 million in the nine
months ended July 31, 2001. This decrease is attributable to a 51.6% decrease
in product-related revenue and 69.4% decrease in custom development service
revenue.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | License.License revenue decreased $6.7 million, or 58.1%, to $4.9
million in the nine months ended July 31, 2002 from $11.6 million in the nine
months ended July 31, 2001. License revenue as a percentage of total revenue
decreased to 28.2% in the nine months ended July 31, 2002 from 31.3% in the
nine months ended July 31, 2001. We believe the overall decline is
attributable to a global slow down in information technology spending
experienced by software companies in our industry. The decrease in the
license revenue was partially offset by the following transactions which
occurred in the first quarter of fiscal 2002. We successfully completed a
large customer implementation resulting in a modification of the estimate to
complete and the acceleration of license revenue recognition of $1.2 million.
Also, additional license revenue of $1.2 million was recognized resulting
from the resolution of certain contingencies for two other customers.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Product service and maintenance.Product service and maintenance
revenue decreased $10.3 million, or 48.0%, to $11.2 million in the nine
months ended July 31, 2002 from $21.5 million in the nine months ended July
31, 2001. Product services and maintenance revenue as a percentage of total
revenue increased to 64.9% in the nine months ended July 31, 2002 from 58.2%
in the nine months ended July 31, 2001. The decrease in absolute dollars is
attributable to the decrease in consulting engagements and maintenance
agreements related to the decreased license revenue in this period as
compared to the prior year period.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Custom development services.Custom development services revenue
decreased $2.7 million, or 69.4%, to $1.2 million in the nine months ended
July 31, 2002 from $3.9 million in the nine months ended July 31, 2001.
Custom development services revenue as a percentage of total revenue
decreased to 6.9% in the nine months ended July 31, 2002 from 10.5% in the
nine months ended July 31, 2001. 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 decreased $17.3 million, or 67.5%,
to $8.3 million in the nine months ended July 31, 2002 from $25.6 million in
the nine months ended July 31, 2001. Total cost of revenue as a percentage of
total revenue decreased to 48.3% in the nine months ended July 31, 2002 from
69.2% in the nine months ended July 31, 2001.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of license revenue.Cost of license revenue decreased $268,000, or
72.6%, to $101,000 in the nine months ended July 31, 2002 from $369,000 in
the nine months ended July 31, 2001. Cost of license revenue as a percentage
of license revenue decreased to 2.1% in the nine months ended July 31, 2002
from 3.2% in the nine months ended July 31, 2001. The decrease in absolute
dollars of cost of license revenue is due primarily to a decrease in royalty
charges due for license transactions in the current period.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of product-related services and maintenance revenue.Cost of
product-related services and maintenance revenue decreased $16.5 million, or
68.2%, to $7.7 million in the nine months ended July 31, 2002 from $24.2
million in the nine months ended July 31, 2001. Cost of product-related
services and maintenance revenue as a percentage of product-related services
and maintenance revenue decreased to 68.8% in the nine months ended July 31,
2002 from 112.4% in the nine months ended July 31, 2001. The decrease in
absolute dollars and as a percentage of total product-related services and
maintenance revenue was primarily due to decreased staff and consulting
resources which resulted in reduced payroll and other expenses and our
continued effort to cut costs.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of custom development services revenue.Cost of custom development
services revenue decreased $512,000, or 49.3%, to $527,000 in the nine months
ended July 31, 2002 from $1.0 million in the nine months ended July 31, 2001.
Cost of custom development services as a percentage of custom development
services revenue increased to 44.4% in the nine months ended July 31, 2002
from 26.8% in the nine months ended July 31, 2001. The decrease in absolute
dollars is primarily due to decreased staff supporting fewer custom
development services engagements.

Sales and marketing expenses.Sales and marketing expenses decreased
$15.7 million, or 71.6%, to $6.3 million in the nine months ended July 31, 2002
from $22.0 million in the nine months ended July 31, 2001. Sales and marketing
expenses as a percentage of total revenue decreased to 36.3% in the nine months
ended July 31, 2002 from 59.5% in the nine months ended July 31, 2001. Sales
and marketing expenses decreased in absolute dollars and as a percentage of
total revenue primarily due to the decrease in headcount in our sales and
marketing operations as a result of the actions we took to restructure our
operations in fiscal 2001 and the quarter ended July 31, 2002, lower
commissions on fewer license transactions, as well as a decrease in marketing
program spending.

Research and development expenses.Research and development expenses
decreased $8.0 million, or 50.7%, to $7.8 million in the nine months ended July
31, 2002 from $15.8 million in the nine months ended July 31, 2001. Research
and development expenses as a percentage of total revenue increased to 45.3% in
the nine months ended July 31, 2002 from 42.8% in the nine months ended July
31, 2001. These expenses decreased in absolute dollars primarily due to a
decrease in headcount and decreased utilization of engineering and product
development contractors as a result of reduction of workforce in fiscal 2001
and the quarter ended July 31, 2002.

General and administrative expenses.General and administrative expenses
decreased $3.2 million, or 36.1%, to $5.6 million in the nine months ended July
31, 2002 from $8.8 million in the nine months ended July 31, 2001. General and
administrative expenses as a percentage of total revenue increased to 32.8% in
the nine months ended July 31, 2002 from 23.9% in the nine months ended July
31, 2001. These expenses decreased in absolute dollars primarily as a result of
decreased headcount, which resulted in reduced payroll and other related
expenses.

Stock-based compensation expense.Stock-based compensation expense
decreased $2.1 million, or 74.2%, to $734,000 in the nine months ended July 31,
2002 from $2.8 million in the nine months ended July 31, 2001. Stock-based
compensation expense as a percentage of total revenue decreased to 4.3% in the
nine months ended July 31, 2002 from 7.7% in the nine months ended July 31,
2001. If we had allocated our stock-based compensation to the departments for
which the services were performed in the nine months ended July 31, 2002, the
allocation would have increased cost of revenue by $72,000, sales and marketing
expenses by $2,000, research and development expenses by $110,000 and general
and administrative expenses by $550,000. For 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. The decrease in
stock-based compensation expense is primarily the result of a $1,180,000
decrease in charges for Signature stock option grants and a $1,086,000 decrease
in charges for employee stock options which is primarily the effect of a drop
in our stock price on stock options accounted for under variable plan
accounting.

Amortization of goodwill and other intangible assets.Amortization of
goodwill and other intangible assets decreased $1.8 million, or 79.8%, to
$460,000 in the nine months ended July 31, 2002 from $2.3 million in the nine
months ended July 31, 2001. Amortization of goodwill and other intangible
assets as a percentage of total revenue decreased to 2.7% in the nine months
ended July 31, 2002 from 6.2% in the nine months ended July 31, 2001. The
decrease is primarily due to the impairment of goodwill related to the
acquisition of Brightware as a result of the our adoption of SFAS No. 142
Goodwill and Other Intangible Assets, as well as impairment of related
developed technology and know-how under SFAS No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets.

Restructuring and other special charges.During the quarter ended July 31,
2002, we announced a restructuring of our operations to further enhance our
focus on the lead-to-order market and to better align costs with current
economic conditions. In connection with this plan we incurred $5.9 million of
restructuring and other special charges in the three months ended July 31,
2002, which included $1.9 million of employee severance costs, $2.9 million of
facilities related costs, $824,000 of excess fixed asset costs, $188,000 of
excess contractual commitments and termination fees and $65,000 of other costs.
During the quarter ended April 30, 2001, we announced a restructuring of its
operations due to a global slowdown in technology spending and the Brightware
acquisition resulting in some redundant operations. In connection with this
plan, we

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incurred $3.0 million of restructuring and other special charges in the
three months ended April 30, 2001, which included $2.3 million of employee
severance costs, $270,000 of facilities related costs, $114,000 of excess fixed
asset costs and $351,000 of other costs. During the quarter ended July 31,
2001, we 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 and other special 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. The remainder of the payments for the restructuring and other special
charges will be paid out as follows: severance payments through January 2003,
facilities related payments through August 2010 and contract termination fees
and other payments through July 2003. Therefore, the long-term portion is
specifically related to facilities payments.

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. We
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.We acquired Brightware on
February 15, 2001. 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.

Impairment of developed technology and know-how.During the quarter ended
January 31, 2002, we lowered our estimates of the expected revenue from the
Brightware products and determined that the developed technology and know-how
intangible assets were significantly impaired and, accordingly, recorded a $3.1
million impairment charge in the quarter.

Interest income.Interest income decreased $2.9 million, or 85.7%, to
$484,000 in the nine months ended July 31, 2002 from $3.4 million in the nine
months ended July 31, 2001. The decrease is primarily due to our decreased
cash and cash equivalents and short-term investments as well as a decline in
interest rates.

Other expense.Other income (expense), net improved $1.3 million, or
122.6%, to $240,000 in income in the nine months ended July 31, 2002 from $1.1
million in expense in the nine months ended July 31, 2001. The improvement is
primarily due to foreign currency transaction gains realized in the nine
months ended July 31, 2002.

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

Liquidity and Capital Resources

As of July 31, 2002, cash and cash equivalents were $22.1 million and
short-term investments were $9.2 million as compared with cash and cash
equivalents of $34.7 million and short-term investments of $9.6 million as of
October 31, 2001. Our working capital at July 31, 2002 was $20.8 million,
compared to working capital of $30.8 million at October 31, 2001.

Net cash used in operating activities was $13.7 million in the nine months
ended July 31, 2002, compared with net cash used in operating activities of
$49.0 million in the nine months ended July 31, 2001. Cash used in operating
activities in the nine months ended July 31, 2002 was attributable to our net
loss and decreases in accrued liabilities and deferred revenue

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offset by non-cash restructuring and other special charges, depreciation
and amortization, impairment of developed technology and know-how, cumulative
effect of a change in accounting principle and a decrease in accounts
receivable.

Net cash provided by investing activities was $653,000 in the nine months
ended July 31, 2002, compared with net cash provided by investing activities of
$16.8 million in the nine months ended July 31, 2001. Net cash provided by
investing activities in the nine months ended July 31, 2002 was primarily
attributable to the purchase of short-term investments offset by the sale and
maturity of short-term investments.

Net cash provided by financing activities was $368,000 in the nine months
ended July 31, 2002, compared with net cash used in financing activities of
$3.6 million in the nine months ended July 31, 2001. Net cash provided by
financing activities for the nine months ended July 31, 2002 was primarily from
borrowings and payments on a note payable.

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

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

Recent Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (SFAS No. 146) which nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). This accounting standard, which is
effective for exit or disposal activities that are initiated after December 31,
2002, addresses financial accounting and reporting for costs associated with
exit or disposal activities.

In April 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS
No. 145). This accounting standard, which is effective for fiscal years
beginning after May 15, 2002, requires, among other things, that debt
extinguishments used as a part of an entitys risk management strategy no
longer meet the criteria for classification as extraordinary items. The
adoption of SFAS No. 145 is not expected to have a material effect on the our
financial position or results of operations

Effective November 1, 2001, we adopted SFAS No. 142, Goodwill and Other
Intangible Assets, which establishes financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets. SFAS No. 142 requires that goodwill and intangible
assets that have indefinite useful lives not be amortized but, instead, tested
at least annually for impairment. See Note 7 of the Notes to Consolidated
Financial Statements of this quarterly report for a further discussion of the
impact of this statement on our consolidated financial statements.

Effective November 1, 2001, we adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement supercedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, and the accounting and reporting provisions of
Accounting Principles Board (APB) Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
Under this statement it is required that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously held and used
or newly acquired, and it broadens the presentation of discontinued operations
to include more disposal transactions. See Note 6 of the Notes to
Consolidated

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Financial Statements of this quarterly report for a further discussion of the
impact of this statement on our consolidated financial statements.

Other Events

Gerhard Schulmeyer, a member of our Board of Directors, resigned effective
August 31, 2002. We are undertaking a search for a replacement and are
currently in discussions with a candidate.

Risk Factors

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

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

Average license fees for our SalesPerformer Suite typically range from
approximately several hundred thousand dollars to several million dollars.
Often this represents a significant information technology capital expenditure
for the companies to which we target our sales efforts. In addition,
regardless of the cost of our products, many companies may elect not to pursue
information technology projects which may incorporate either of our product
suites, or our individual components, as a result of the global information
technology spending slowdown. As a result, if the current global slowdown in
information technology 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. In addition, many
customers may pay recurring maintenance fees to us for technical support and
product upgrades. Often, this represents a significant and recurring
information technology capital expenditure for our customers. As a result, if
the global slowdown in information technology should continue, whether
resulting from a weakened economy or other factors, we may be unable to
maintain our maintenance revenues at their current levels and achieve our
targeted revenues.

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 solutions that optimize
the lead-to-order process. The failure of this market to develop, or a delay
in the development of this market, would seriously harm our business. Our
business depends on the successful customer acceptance of our products and we
expect that we will continue to depend on revenue from new and enhanced
versions of the SalesPerformer Suite. Our business would be harmed if our
target customers do not adopt and expand their use of the SalesPerformer Suite
and its component products.

Negative results from the discovery of fraudulent acts by our former acting
vice president of sales could adversely affect our company

As a result of senior managements discovery of three fraudulent transactions
involving license amounts totaling approximately $5 million by our former
acting vice president of sales, in fiscal 2002 we lowered our previously
reported results and reduced our forecasted revenues. This situation may harm
our reputation and, as a result, could adversely affect our relationship with
our current customers as well as harm our ability to sell our product in the
future. In addition, we could be subject to investor criticism. Also, the
Securities and Exchange Commissions investigation into this matter could
result in substantial legal fees and expenses and divert managements attention
and resources.

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

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

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We continue to experience turnover at the senior management level. This
places a significant burden on our management and our internal resources. If we
are not able to maintain adequate infrastructure to support and manage our
operations effectively our business could be harmed.

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

Our success depends in large part upon our ability to attract, train,
motivate and retain highly technical, skilled employees, particularly software
engineers and professional services personnel. In addition, in connection
with our effort to streamline operations, reduce costs and bring our staffing
and infrastructure in line with industry standards, we restructured our
organization and reduced our workforce. During fiscal 2001 we terminated 81
employees and 89 consultants in April 2001, 157 employees and one consultant in
June 2001, and 125 employees in October 2001. During the quarter ended July
31, 2002 we terminated 93 employees. We have incurred aggregate costs of $8.5
million in fiscal 2001 and $5.9 million in the quarter ended July 31, 2002
associated with these workforce reductions related to severance and other
employee-related costs, and may incur further costs. Our restructuring may also
yield unanticipated consequences, such as attrition beyond our planned
reduction in workforce and loss of employee morale and decreased performance.
Continuity of personnel is an important factor in the successful completion of
our business plan and ongoing turnover in our personnel could materially and
adversely impact our sales and marketing efforts, current customer
implementations, and our development projects. We believe that hiring and
retaining qualified individuals at all levels is essential to our success, and
there can be no assurance that we will be successful in attracting and
retaining the necessary personnel.

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

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

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

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

We currently derive a significant portion of our license revenue in each
quarter from a small number of relatively large orders, and we generally
recognize revenue from our SalesPerformer Suite licenses over the related
implementation period. If

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we are unable to recognize revenue from one or more substantial license
sales planned for a particular fiscal quarter, our operating results for that
quarter would be seriously harmed. In addition, the license of our
SalesPerformer Suite typically involves a substantial commitment of resources
by our customers or their consultants over an extended period of time. The time
required to complete an implementation may vary from customer to customer and
may be protracted due to unforeseen circumstances. Because our revenue from
implementation, maintenance and training services are largely correlated with
our license revenue, a decline in license revenue would also cause a decline in
our services revenue in the same quarter and in subsequent quarters. Because
our sales cycle is long, we may have difficulty predicting when we will
recognize revenue. If
our quarterly revenue or operating results fall below the expectations of
investors or securities analysts, the price of our common stock could fall
substantially and we could become subject to securities class-action
litigation. Litigation, if instituted, could result in substantial costs and a
diversion of managements attention and resources, which would materially
adversely affect our business, financial condition and results of operations.

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

We have incurred quarterly and annual losses intermittently since we were
formed in 1983, and regularly since fiscal 1997. We incurred net losses of
$28.9 million for fiscal 1999, $16.3 million for fiscal 2000, $70.3 million for
fiscal 2001 and $9.1 million and $24.2 million for the three and nine months
ended July 31, 2002. We may continue to incur losses on a quarterly basis and
not become profitable. Additionally, we may not grow or generate sufficient
revenue to attain profitability.

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

As a result of our failure to meet the Nasdaq National Market minimum
$1.00 per share bid price requirements, we effected a 1-for-10 reverse stock
split effective August 16, 2002.

While we now meet the minimum price requirement, we are currently trading
at levels that may result in our failure to maintain the minimum $5 million
market value of publicly held share requirements. If the market value of our
publicly held shares falls below $5 million for a period of thirty consecutive
business days, Nasdaq has the right to delist the stock if within ninety days
thereafter the market value of our publicly held shares is not $5 million for a
minimum of ten consecutive business days. In the event the market value of our
publicly held shares does not rise above $5 million for the required ten
consecutive business days, we would have the right to request a hearing to
appeal a Nasdaq determination that our stock should be delisted.

We cannot assure you that we 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.
However, if our common stock loses its Nasdaq National Market status, we may
apply for inclusion in the Nasdaq SmallCap Market. If our common stock loses
its Nasdaq National Market status and we are unable to trade on the Nasdaq
SmallCap Market, shares of our common stock would likely trade in the
over-the-counter market. Consequently, selling our common stock would be more
difficult because smaller quantities of shares would likely be bought and sold,
transactions could be delayed, and security analysts and news media coverage
of us may be reduced. In addition, in the event our common stock is delisted,
broker-dealers have certain regulatory burdens imposed upon them, which may
discourage broker-dealers from effecting transactions in our common stock,
further limiting the liquidity thereof. These factors could result in lower
prices and larger spreads in the bid and ask prices for shares of common stock.

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

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

Our business depends on the success and customer acceptance of our
products and the adoption of future enhancements to those products. Customers
enter into maintenance agreements for the purpose of receiving both customer
support and the

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

Failure to expand our relationships with third party channels may adversely
impact our support and maintenance of existing customers, delay the
implementation of our products and delay the growth of our revenue

Our strategy includes expanding and increasing third party channels which
license and support our products, such as resellers, distributors, OEMs, system
integrators and consulting firms. This often requires that these third parties
recommend our products to their customers and install and support our products
for their customers. To increase our revenue and implementation capabilities,
we must develop and expand our relationships with these third parties. In
addition, if these firms fail to implement our products successfully for their
clients, we may not have the resources to implement our products on the
schedule required by the client which would result in our inability to
recognize revenue from the license of our products to these customers.

We depend upon technology licensed to us by third parties, the loss of which
could adversely affect out competitive position.

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

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.

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

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

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

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

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

On June 26, 2001, we announced an offer to allow our directors and certain
eligible employees to exchange outstanding stock options for new stock options.
The number of options granted was equal to three-fourths of the number of
options that were tendered and accepted for exchange. On July 26, 2001, we
accepted 717,929 options for exchange and, on July 31, 2001 issued 538,438 new
stock options with an exercise price equal to $6.60 per share. For financial
reporting purposes all option grants subject to the tender offer will be
treated as variable awards. Accordingly, we will be required to record as a
compensation expense, chargeable against our reported earnings, all increases
in the value of those options, including any appreciation in the market price
of the underlying option shares, which occurs between the grant date of that
option and the date the option is exercised for those shares or otherwise
terminates unexercised. The greater the increase in the market value of our
common stock following the date of grant, the greater the compensation expense
and effect on our reported earnings.

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

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

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

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

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

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business, financial condition and results of operations.

Failure to increase our international revenue could seriously harm our business

International revenue currently accounts for a significant percentage of
our total revenue. We expect international revenue to continue to account for a
significant percentage of total revenue in the future and we believe that we
must continue to expand our international sales activities to be successful.
However, foreign markets for our products may develop more slowly than
currently anticipated. International revenue as a percentage of total revenue
was 11% in fiscal 1999, 28% in fiscal 2000, 36% for fiscal 2001 and 48% and 54%
for the three and nine months ended July 31, 2002. Our failure to expand our
international sales could have a significant negative impact on our business.

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

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

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

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

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

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

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

Software products as sophisticated 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

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not cover claims brought against us. Product liability claims could require us
to spend significant time and money in litigation or to pay significant
damages. Any product liability claims, whether or not successful, could
seriously damage our reputation and our business.

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

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

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, 2002, our executive officers, directors and entities
associated with them own approximately 48% of the outstanding shares of our
common stock. These stockholders have significant influence over matters
requiring approval by our stockholders, including the election of directors and
the approval of mergers or other business combination transactions. This
concentration of ownership could have the effect of delaying or preventing a
change in our control or discouraging a potential acquirer from attempting to
obtain control of us, which in turn could have a material adverse effect on the
market price of the common stock or prevent our stockholders from realizing a
premium over the market price for their shares of common stock.

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

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

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

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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




PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

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

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

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

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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 August 15, 2002 the Registrant filed a Current Report on Form 8-K
relating to
the Registrants Board of Directors approving a 1-for-10 reverse stock
split of the Registrants outstanding common stock.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

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




Dated: September 16, 2002

| |  |                                                                                                       
| |  | ------------------------------------------------------------------------------------------------------
| |  | FIREPOND, INC.                                                                                        
|
|
|
|
| |  |                                                                                                       
|
|
|
|
| |  | /S/ KLAUS P. BESIER                                                                                   
| |  |                                                                                                       
| |  | Klaus P. Besier
Chairman, Chief Executive
Officer and Director (Principal
Executive Officer)          
|
|
|
|
| |  |                                                                                                       
|
|
|
|
| |  | /S/ SUSAN W. LEDOUX                                                                                   
| |  |                                                                                                       
| |  | Susan W. Ledoux
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)

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CERTIFICATIONS

I, Klaus P. Besier, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Firepond, Inc.;                                                                                                                                                                                                                                                             
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report; and
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.                       

Date: September 16, 2002

|                                                                                                                  | 
|----------------------------------------------------------------------------------------------------------------- | 
|                                                                                                                 
|/S/ KLAUS P. BESIER

Klaus P. Besier
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
|                                                                                                                 

I, Susan W. Ledoux, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Firepond, Inc.;                                                                                                                                                                                                                                                             
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report; and
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.                       

Date: September 16, 2002

|                                                                                           | 
|------------------------------------------------------------------------------------------ | 
|                                                                                          
|/S/ SUSAN W. LEDOUX

Susan W. Ledoux
Chief Financial Officer
(Principal Financial Officer)

40