##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the Quarter Ended July 31,
    2003                                                     
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-29251

Firepond, Inc.

(Exact Name of Registrant as Specified in its
Charter)


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

(952) 229-2300

(Registrants telephone number, including
area code)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).     Yes o          No þ

As of September 11, 2003 there were
3,671,983 shares of the Registrants Common Stock
outstanding.



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TABLE OF CONTENTS



|                                                                                                 |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION                                                                    
|                                                                                                 | Item 1. Financial Statements (unaudited)                                                     
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                           
|FIREPOND, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                 
|FIREPOND, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|FIREPOND, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|                                                                                                 | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                                                 | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                                                                 | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                                                                      
|                                                                                                 | Item 1. Legal Proceedings                                                                    
|                                                                                                 | Item 6. Exhibits and Reports on Form 8-K                                                     
|                                                                                                 | SIGNATURES                                                                                   
|EX-31.1 SECTION 302 CERTIFICATION (CEO)                                                         
|EX-31.2 SECTION 302 CERTIFICATION (CFO)                                                         
|EX-32.1 SECTION 906 CERTIFICATION (CEO)                                                         
|EX-32.2 SECTION 906 CERTIFICATION (CFO)                                                         



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES

FORM 10-Q


QUARTER ENDED July 31, 2003


TABLE OF CONTENTS

|                                  |  |                                                                                                                     |  |          |    | 
|--------------------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | -------- | -- | 
|                                  |  |                                                                                                                     |  | Page No.
|                                  |  |                                                                                                                     |  |         
|PART I  FINANCIAL
    INFORMATION
|Item 1.                           |  | Financial Statements (unaudited)                                                                                    |  |          |    | 
|                                  |  | Condensed Consolidated Balance Sheets 
    July 31, 2003 and October 31, 2002                                      |  |          | 2  | 
|                                  |  | Condensed Consolidated Statements of
    Operations  Three Months and Nine Months Ended
    July 31, 2003 and 2002 |  |          | 3  | 
|                                  |  | Condensed Consolidated Statements of Cash
    Flows  Nine Months Ended July 31, 2003 and 2002                      |  |          | 4  | 
|                                  |  | Notes to Condensed Consolidated Financial
    Statements                                                            |  |          | 5  | 
|Item 2.                           |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                           |  |          | 14 | 
|Item 3.                           |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                      |  |          | 28 | 
|Item 4.                           |  | Controls and Procedures                                                                                             |  |          | 28 | 
|PART II  OTHER
    INFORMATION   
|Item 1.                           |  | Legal Proceedings                                                                                                   |  |          | 29 | 
|Item 6.                           |  | Exhibits and Reports on Form 8-K                                                                                    |  |          | 30 | 
|                                  |  | SIGNATURES                                                                                                          |  |          | 31 | 
|                                  |  | CERTIFICATIONS                                                                                                      |  |          |    | 

1



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES












CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                         |                                                                                  |                                                                                                             |        |             |        |   |        |          |        | 
|---------------------------------------- | -------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------ | ----------- | ------ | - | ------ | -------- | ------ | 
|                                         |                                                                                  | July 31,                                                                                                    |        | October 31,
|                                         |                                                                                  | 2003                                                                                                        |        | 2002       
|                                         |                                                                                  |                                                                                                             |        |            
|                                         |                                                                                  |                                                                                                            
|                                         |                                                                                  | (Unaudited)                                                                                                
|                                         |                                                                                  |                                                                                                            
|                                         |                                                                                  | (In thousands, except share                                                                                
|                                         |                                                                                  | and per share data)                                                                                        
|ASSETS                                  
|Current assets:                          |                                                                                  |                                                                                                             |        |             |        |   |        |         
|                                         | Cash and cash equivalents                                                        |                                                                                                             | $      | 13,504      |        |   | $      | 13,479   |       
|                                         | Short-term investments                                                           |                                                                                                             |        | 6,143       |        |   |        | 15,690   |       
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $190 and $463 |                                                                                                             |        | 1,766       |        |   |        | 2,798    |       
|                                         | Unbilled revenue                                                                 |                                                                                                             |        | 153         |        |   |        | 268      |       
|                                         | Restricted cash                                                                  |                                                                                                             |        |            |        |   |        | 199      |       
|                                         | Prepaid expenses and other current assets                                        |                                                                                                             |        | 1,822       |        |   |        | 982      |       
|                                         |                                                                                  |                                                                                                             |        |             |        |   |        |         
|                                         |                                                                                  | Total current assets                                                                                        |        |             | 23,388 |   |        |          | 33,416 | 
|Property and equipment, net              |                                                                                  |                                                                                                             | 998    |             |        |   | 2,105  |         
|Other intangible assets, net             |                                                                                  |                                                                                                             | 60     |             |        |   | 137    |         
|Restricted cash                          |                                                                                  |                                                                                                             | 190    |             |        |   | 190    |         
|Other assets                             |                                                                                  |                                                                                                             | 489    |             |        |   | 511    |         
|                                         |                                                                                  |                                                                                                             |        |             |        |   |        |         
|                                         |                                                                                  | $                                                                                                           | 25,125 |             |        | $ | 36,359 |         
|                                         |                                                                                  |                                                                                                             |        |             |        |   |        |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                  |                                                                                                             |        |             |        |   |        |         
|                                         | Accounts payable                                                                 |                                                                                                             | $      | 363         |        |   | $      | 1,546    |       
|                                         | Accrued liabilities                                                              |                                                                                                             |        | 3,534       |        |   |        | 5,062    |       
|                                         | Accrued restructuring                                                            |                                                                                                             |        | 657         |        |   |        | 2,266    |       
|                                         | Deferred revenue                                                                 |                                                                                                             |        | 4,343       |        |   |        | 5,952    |       
|                                         |                                                                                  |                                                                                                             |        |             |        |   |        |         
|                                         |                                                                                  | Total current liabilities                                                                                   |        |             | 8,897  |   |        |          | 14,826 | 
|Long-term accrued restructuring          |                                                                                  |                                                                                                             | 116    |             |        |   | 160    |         
|Stockholders equity:                    |                                                                                  |                                                                                                             |        |             |        |   |        |         
|                                         | Preferred stock, $0.10 par value 
    Authorized  5,000,000 shares;            |                                                                                                             |        |             |        |   |        |          |       
|                                         |                                                                                  | Issued and outstanding  none at
    July 31, 2003 and October 31, 2002                                     |        |             |       |   |        |          |       | 
|                                         | Common stock, $0.10 par value                                                   |                                                                                                             |        |             |        |   |        |          |       
|                                         |                                                                                  | Authorized  100,000,000                                                                                    |        |             |        |   |        |          |        | 
|                                         |                                                                                  | Issued and outstanding 
    3,671,983 shares at July 31, 2003 and
    3,684,983 shares at October 31, 2002 |        |             | 367    |   |        |          | 369    | 
|                                         | Additional paid-in capital                                                       |                                                                                                             |        | 198,899     |        |   |        | 198,935  |       
|                                         | Accumulated deficit                                                              |                                                                                                             |        | (176,819    | )      |   |        | (172,094 | )     
|                                         | Loans receivable                                                                 |                                                                                                             |        | (4,015      | )      |   |        | (4,287   | )     
|                                         | Deferred compensation                                                            |                                                                                                             |        | (5          | )      |   |        | (10      | )     
|                                         | Accumulated other comprehensive loss                                             |                                                                                                             |        | (2,315      | )      |   |        | (1,540   | )     
|                                         |                                                                                  |                                                                                                             |        |             |        |   |        |         
|                                         |                                                                                  | Total stockholders equity                                                                                  |        |             | 16,112 |   |        |          | 21,373 | 
|                                         |                                                                                  |                                                                                                             |        |             |        |   |        |         
|                                         |                                                                                  | $                                                                                                           | 25,125 |             |        | $ | 36,359 |         
|                                         |                                                                                  |                                                                                                             |        |             |        |   |        |         

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

2



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##### Table of Contents






FIREPOND, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                      |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |        |        | 
|--------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------------------------------------- | ------ | -------------- | ----- | ---- | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------- | ------ | ------ | 
|                                                                      |                                                                                                   |                                       |        |               
|                                                                      |                                                                                                   | Three Months                          |        | Nine Months   
|                                                                      |                                                                                                   | Ended July 31,                        |        | Ended July 31,
|                                                                      |                                                                                                   |                                       |        |               
|                                                                      |                                                                                                   | 2003                                  |        | 2002           |       | 2003 |        | 2002 
|                                                                      |                                                                                                   |                                       |        |                |       |      |        |      
|                                                                      |                                                                                                   |                                      
|                                                                      |                                                                                                   | (Unaudited)                          
|                                                                      |                                                                                                   |                                      
|                                                                      |                                                                                                   | (In thousands, except per share data)
|Revenue:                                                              |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       
|                                                                      | License                                                                                           |                                       | $      | 111            |       |      | $      | 638   |        |   | $      | 1,666 |        |   | $       | 4,851  |       
|                                                                      | Services and maintenance                                                                          |                                       |        | 2,156          |       |      |        | 3,680 |        |   |        | 7,727 |        |   |         | 12,367 |       
|                                                                      |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       
|                                                                      |                                                                                                   | Total revenue                         |        |                | 2,267 |      |        |       | 4,318  |   |        |       | 9,393  |   |         |        | 17,218 | 
|                                                                      |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       
|Cost of revenue:                                                      |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       
|                                                                      | License                                                                                           |                                       |        | 57             |       |      |        | 4     |        |   |        | 97    |        |   |         | 101    |       
|                                                                      | Services and maintenance(1)                                                                       |                                       |        | 979            |       |      |        | 2,306 |        |   |        | 3,846 |        |   |         | 8,213  |       
|                                                                      |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       
|                                                                      |                                                                                                   | Total cost of revenue                 |        |                | 1,036 |      |        |       | 2,310  |   |        |       | 3,943  |   |         |        | 8,314  | 
|                                                                      |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       
|Gross profit                                                          |                                                                                                   |                                       | 1,231  |                |       |      | 2,008  |       |        |   | 5,450  |       |        |   | 8,904   |       
|Operating expenses:                                                   |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       
|                                                                      | Sales and marketing(1)                                                                            |                                       |        | 1,052          |       |      |        | 2,036 |        |   |        | 3,396 |        |   |         | 6,247  |       
|                                                                      | Research and development(1)                                                                       |                                       |        | 1,077          |       |      |        | 2,290 |        |   |        | 3,252 |        |   |         | 7,801  |       
|                                                                      | General and administrative(1)                                                                     |                                       |        | 1,110          |       |      |        | 1,992 |        |   |        | 3,421 |        |   |         | 5,648  |       
|                                                                      | Stock-based compensation (credit)                                                                 |                                       |        | 4              |       |      |        | (701  | )      |   |        | 240   |        |   |         | 734    |       
|                                                                      | Amortization of intangible assets                                                                 |                                       |        | 26             |       |      |        | 26    |        |   |        | 78    |        |   |         | 460    |       
|                                                                      | Restructuring charge                                                                              |                                       |        | 391            |       |      |        | 5,894 |        |   |        | 1,041 |        |   |         | 5,894  |       
|                                                                      | Impairment of developed technology and know-how                                                   |                                       |        |               |       |      |        |      |        |   |        |      |        |   |         | 3,120  |       
|                                                                      |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       
|                                                                      |                                                                                                   | Total operating expenses              |        |                | 3,660 |      |        |       | 11,537 |   |        |       | 11,428 |   |         |        | 29,904 | 
|                                                                      |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       
|Loss from operations                                                  |                                                                                                   |                                       | (2,429 | )              |       |      | (9,529 | )     |        |   | (5,978 | )     |        |   | (21,000 | )     
|Interest income                                                       |                                                                                                   |                                       | 71     |                |       |      | 144    |       |        |   | 260    |       |        |   | 484     |       
|Other income (expense), net                                           |                                                                                                   |                                       | 273    |                |       |      | 308    |       |        |   | 993    |       |        |   | 240     |       
|                                                                      |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       
|Loss before cumulative effect of a change in
    accounting principle |                                                                                                   |                                       | (2,085 | )              |       |      | (9,077 | )     |        |   | (4,725 | )     |        |   | (20,276 | )     
|Cumulative effect of a change in accounting
    principle             |                                                                                                   |                                       |       |                |       |      |       |       |        |   |       |       |        |   | (3,973  | )     
|                                                                      |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       
|Net loss                                                              |                                                                                                   | $                                     | (2,085 | )              |       | $    | (9,077 | )     |        | $ | (4,725 | )     |        | $ | (24,249 | )     
|                                                                      |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       
|Net loss per share:                                                   |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       
|                                                                      | Basic and diluted loss per share before
    cumulative effect of a change in accounting principle |                                       | $      | (0.57          | )     |      | $      | (2.46 | )      |   | $      | (1.28 | )      |   | $       | (5.54  | )     
|                                                                      | Cumulative effect of a change in accounting
    principle                                         |                                       |        |               |       |      |        |      |        |   |        |      |        |   |         | (1.08  | )     
|                                                                      |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       
|                                                                      | Basic and diluted net loss per share applicable
    to common stockholders                        |                                       | $      | (0.57          | )     |      | $      | (2.46 | )      |   | $      | (1.28 | )      |   | $       | (6.62  | )     
|                                                                      |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       
|                                                                      | Basic and diluted weighted average common shares
    outstanding                                  |                                       |        | 3,672          |       |      |        | 3,684 |        |   |        | 3,677 |        |   |         | 3,665  |       
|                                                                      |                                                                                                   |                                       |        |                |       |      |        |       |        |   |        |       |        |   |         |       



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

|                               |                            |                |   |                |  |      |      |      |   |   |     |     |  |   |     |     | 
|------------------------------ | -------------------------- | -------------- | - | -------------- |  | ---- | ---- | ---- | - | - | --- | --- |  | - | --- | --- | 
|                               |                            |                |   |               
|                               |                            | Three Months   |   | Nine Months   
|                               |                            | Ended July 31, |   | Ended July 31,
|                               |                            |                |   |               
|                               |                            | 2003           |   | 2002           |  | 2003 |      | 2002
|                               |                            |                |   |                |  |      |      |     
|Cost of revenue                |                            | $              |  |                |  | $    | (40  | )    |   | $ | 83  |     |  | $ | 72  |    
|Operating expenses:            |                            |                |   |                |  |      |      |      |   |   |     |     |  |   |     |    
|                               | Sales and marketing        |                |   |               |  |      |      | (30  | ) |   |     |    |  |   |     | 2   | 
|                               | Research and development   |                |   |               |  |      |      | (77  | ) |   |     | 3   |  |   |     | 110 | 
|                               | General and administrative |                |   | 4              |  |      |      | (554 | ) |   |     | 154 |  |   |     | 550 | 
|                               |                            |                |   |                |  |      |      |      |   |   |     |     |  |   |     |    
|Total stock-based compensation |                            | $              | 4 |                |  | $    | (701 | )    |   | $ | 240 |     |  | $ | 734 |    
|                               |                            |                |   |                |  |      |      |      |   |   |     |     |  |   |     |    

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 CASH
FLOWS

|                                                                 |                                                                                 |                                                           |                                   |                                           |       |        |         |         |       |        |         |  
|---------------------------------------------------------------- | ------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------- | ----------------------------------------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | -
|                                                                 |                                                                                 |                                                          
|                                                                 |                                                                                 | Nine Months                                              
|                                                                 |                                                                                 | Ended July 31,                                           
|                                                                 |                                                                                 |                                                          
|                                                                 |                                                                                 | 2003                                                      |                                   | 2002                                     
|                                                                 |                                                                                 |                                                           |                                   |                                          
|                                                                 |                                                                                 |                                                          
|                                                                 |                                                                                 | (Unaudited)                                              
|                                                                 |                                                                                 |                                                          
|                                                                 |                                                                                 | (In thousands)                                           
|Cash flows from operating activities:                            |                                                                                 |                                                           |                                   |                                           |       |        |         |        
|                                                                 | Net loss                                                                        |                                                           | $                                 | (4,725                                    | )     |        | $       | (24,249 | )    
|                                                                 | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                           |                                   |                                           |       |        |         |         |      
|                                                                 |                                                                                 | Non-cash restructuring and other special charges          |                                   |                                           |      |        |         |         | 1,165 |       
|                                                                 |                                                                                 | Stock-based compensation expense                          |                                   |                                           | 240   |        |         |         | 734   |       
|                                                                 |                                                                                 | Depreciation and amortization                             |                                   |                                           | 1,375 |        |         |         | 2,413 |       
|                                                                 |                                                                                 | Impairment of developed technology and know-how           |                                   |                                           |      |        |         |         | 3,120 |       
|                                                                 |                                                                                 | Cumulative effect of a change in accounting
    principle |                                   |                                           |      |        |         |         | 3,973 |       
|                                                                 |                                                                                 | Changes in assets and liabilities:                        |                                   |                                           |       |        |         |         |       |       
|                                                                 |                                                                                 |                                                           | Accounts receivable               |                                           |       | 907    |         |         |       | 7,281  |        
|                                                                 |                                                                                 |                                                           | Unbilled revenue                  |                                           |       | 111    |         |         |       | (22    | )      
|                                                                 |                                                                                 |                                                           | Prepaid expenses and other assets |                                           |       | (1,173 | )       |         |       | 371    |        
|                                                                 |                                                                                 |                                                           | Accounts payable                  |                                           |       | (1,200 | )       |         |       | (607   | )      
|                                                                 |                                                                                 |                                                           | Accrued liabilities               |                                           |       | (1,828 | )       |         |       | (1,425 | )      
|                                                                 |                                                                                 |                                                           | Accrued restructuring             |                                           |       | (1,653 | )       |         |       | (294   | )      
|                                                                 |                                                                                 |                                                           | Deferred revenue                  |                                           |       | (1,796 | )       |         |       | (6,180 | )      
|                                                                 |                                                                                 |                                                           |                                   |                                           |       |        |         |        
|                                                                 |                                                                                 |                                                           |                                   | Net cash used in operating activities     |       |        | (9,742  | )       |       |        | (13,720 | )
|                                                                 |                                                                                 |                                                           |                                   |                                           |       |        |         |        
|Cash flows from investing activities:                            |                                                                                 |                                                           |                                   |                                           |       |        |         |        
|                                                                 | Purchases of short-term investments                                             |                                                           |                                   | (997                                      | )     |        |         | (24,127 | )    
|                                                                 | Proceeds from the sale and maturities of
    short-term investments             |                                                           |                                   | 10,581                                    |       |        |         | 24,550  |      
|                                                                 | Purchases of property and equipment                                             |                                                           |                                   | (57                                       | )     |        |         | (248    | )    
|                                                                 | Decrease (increase) in restricted cash                                          |                                                           |                                   | 199                                       |       |        |         | (138    | )    
|                                                                 | Return of cash from the Brightware acquisition
    escrow                       |                                                           |                                   |                                          |       |        |         | 617     |      
|                                                                 |                                                                                 |                                                           |                                   |                                           |       |        |         |        
|                                                                 |                                                                                 |                                                           |                                   | Net cash provided by investing activities |       |        | 9,726   |         |       |        | 654     |  
|                                                                 |                                                                                 |                                                           |                                   |                                           |       |        |         |        
|Cash flows from financing activities:                            |                                                                                 |                                                           |                                   |                                           |       |        |         |        
|                                                                 | Borrowings on note payable                                                      |                                                           |                                   |                                          |       |        |         | 880     |      
|                                                                 | Payments on note payable                                                        |                                                           |                                   |                                          |       |        |         | (591    | )    
|                                                                 | Proceeds from stock options and warrants exercised                              |                                                           |                                   |                                          |       |        |         | 79      |      
|                                                                 |                                                                                 |                                                           |                                   |                                           |       |        |         |        
|                                                                 |                                                                                 |                                                           |                                   | Net cash provided by financing activities |       |        |        |         |       |        | 368     |  
|                                                                 |                                                                                 |                                                           |                                   |                                           |       |        |         |        
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                 |                                                           | 41                                |                                           |       |        | 102     |        
|                                                                 |                                                                                 |                                                           |                                   |                                           |       |        |         |        
|Net increase (decrease) in cash and cash
    equivalents         |                                                                                 |                                                           | 25                                |                                           |       |        | (12,596 | )      
|Cash and cash equivalents, beginning of period                   |                                                                                 |                                                           | 13,479                            |                                           |       |        | 34,660  |        
|                                                                 |                                                                                 |                                                           |                                   |                                           |       |        |         |        
|Cash and cash equivalents, end of period                         |                                                                                 | $                                                         | 13,504                            |                                           |       | $      | 22,064  |        
|                                                                 |                                                                                 |                                                           |                                   |                                           |       |        |         |        

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)


1.     Nature of
Business and Basis of Presentation

Firepond, Inc., together with its wholly owned
subsidiaries (Firepond or the Company),
considers itself to be a leading provider in sales configuration
systems that help companies reduce the cost of selling complex
products, regardless of the sales channel. Companies may achieve
a measurable and meaningful return on investment in Firepond
technology by converting more leads into accurate orders,
whether they sell through a direct sales force, an indirect
channel network, or via the web. Firepond also offers an online
customer assistance solution. Marketed as Brightware eService
Performer, this product line leverages advanced intelligence
engines and natural language processing technology to manage a
companys online customer interaction channels, with an
emphasis on email response management.

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,
2003 and 2002 are unaudited and have been prepared on a basis
consistent with the October 31, 2002 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. The Company has
combined its product-related revenue and custom development
services reporting into one segment. Management determined that
the custom development services segment was insufficient in size
to warrant separately viewing and managing the engagements and
resources. Prior year financials have been reclassified to
include custom development services in product-related revenue.
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, 2002 included in the Companys
Form 10-K. The results of operations for the three and nine
months ended July 31, 2003 are not necessarily indicative
of results to be expected for the entire year or any other
period.

2.     Recent
Accounting Pronouncements

In January 2003, the Financial Accounting
Standards Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities. This
interpretation addresses the consolidation of certain variable
interest entities for which a controlling financial interest
exists. The interpretation applies immediately to variable
interest entities created after January 31, 2003. It
applies in the first interim period beginning after
June 15, 2003 to pre-existing entities. The adoption of
this interpretation did not affect the Companys financial
statements.

In December 2002, the Financial Accounting
Standards Board issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. This interpretation expands the disclosures to be
made by a guarantor in its annual and interim financial
statements about its obligations under certain guarantees. It
also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. As required by
the interpretation, the Company adopted the disclosure and
recognition requirements for the quarter ended January 31,
2003. In connection with the sale of its products in the
ordinary course of business, the Company often makes
representations affirming that its products do not infringe on
the intellectual property rights of others and agrees to
indemnify customers against third-party claims for such
infringement. Also, the Companys amended and restated
by-laws provide for indemnification by the Company of its
directors, officers and certain non-officer employees under
certain circumstances

5



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

against expenses, including attorneys fees,
judgments, fines and amounts paid in settlement, reasonably
incurred in connection with the defense or settlement of any
threatened, pending or completed legal proceeding in which any
such person is involved by reason of the fact that such person
is or was a director, officer or employee of the Company if such
person acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the
Company, and, with respect to criminal actions or proceedings,
if such person had no reasonable cause to believe his or her
conduct was unlawful. The Company has not been required to make
any material payments under such provisions.

In December 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of SFAS No. 123(SFAS No. 148) which provides alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the Companys
method of accounting for stock-based employee compensation and
the effect of the method used on reported results. The
transition and annual disclosure requirements of
SFAS No. 148 are effective for fiscal years ending
after December 15, 2002. The interim disclosure
requirements are effective for interim periods beginning after
December 15, 2002. The Company adopted the disclosure
requirements effective in the quarter ended April 30, 2003.

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 requires that
liabilities associated with exit or disposal activities be
recognized and measured at fair value when incurred, as opposed
to at the date an entity commits to the exit or disposal plans.
The Company has adopted this standard for its fiscal 2003
restructuring activities.

3.     Accrued
Liabilities

Accrued liabilities consist of the following:

|                                 |                           |                |       |             |  |   |       |       | 
|-------------------------------- | ------------------------- | -------------- | ----- | ----------- |  | - | ----- | ----- | 
|                                 |                           | July 31,       |       | October 31,
|                                 |                           | 2003           |       | 2002       
|                                 |                           |                |       |            
|                                 |                           |               
|                                 |                           | (In thousands)
|Consulting and professional fees |                           | $              | 816   |             |  | $ | 1,054 |      
|Compensation and benefits        |                           |                | 719   |             |  |   | 898   |      
|Sales, use and other taxes       |                           |                | 1,592 |             |  |   | 1,338 |      
|Facilities and office expenses   |                           |                | 27    |             |  |   | 908   |      
|Other                            |                           |                | 380   |             |  |   | 864   |      
|                                 |                           |                |       |             |  |   |       |      
|                                 | Total accrued liabilities |                | $     | 3,534       |  |   | $     | 5,062 | 
|                                 |                           |                |       |             |  |   |       |      

6



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Comprehensive
Loss

The components of comprehensive loss for the
three and nine months ended July 30, 2003 and 2002 are as
follows:

|                    |                          |                                       |        |                   |      |      |        |        |      |   |        |        |      |   |         |         |      |  
|------------------- | ------------------------ | ------------------------------------- | ------ | ----------------- | ---- | ---- | ------ | ------ | ---- | - | ------ | ------ | ---- | - | ------- | ------- | ---- | -
|                    |                          |                                       |        |                  
|                    |                          | Three Months Ended                    |        | Nine Months Ended
|                    |                          | July 31,                              |        | July 31,         
|                    |                          |                                       |        |                  
|                    |                          | 2003                                  |        | 2002              |      | 2003 |        | 2002  
|                    |                          |                                       |        |                   |      |      |        |       
|                    |                          |                                       |        |                  
|                    |                          | (In thousands)                        |        | (In thousands)   
|Comprehensive loss: |                          |                                       |        |                   |      |      |        |        |      |   |        |        |      |   |         |        
|                    | Net loss                 |                                       | $      | (2,085            | )    |      | $      | (9,077 | )    |   | $      | (4,725 | )    |   | $       | (24,249 | )   
|                    | Other comprehensive loss |                                       |        |                   |      |      |        |        |      |   |        |        |      |   |         |         |     
|                    |                          | Unrealized (loss) gain on investments |        |                   | (8   | )    |        |        | 1    |   |        |        | 37   |   |         |         | (11  | )
|                    |                          | Foreign currency translation          |        |                   | (150 | )    |        |        | (374 | ) |        |        | (812 | ) |         |         | (503 | )
|                    |                          |                                       |        |                   |      |      |        |        |      |   |        |        |      |   |         |        
|Comprehensive loss  |                          | $                                     | (2,243 | )                 |      | $    | (9,450 | )      |      | $ | (5,500 | )      |      | $ | (24,763 | )      
|                    |                          |                                       |        |                   |      |      |        |        |      |   |        |        |      |   |         |        

5.     Stockholders
Equity



| |                                   
| | ----------------------------------
| | (a) Stock Options and
    Warrants

The Company granted stock options to employees
and directors in July 2001 in conjunction with a stock option
exchange program that required the recognition of stock-based
compensation expense. As of July 31, 2003, a total of
approximately 306,424 options to purchase shares of the
Companys common stock were subject to variable accounting
as a result of the stock option exchange program. As of
July 31, 2003, the Company recorded no deferred
compensation associated with these options because the fair
market value of the Companys common stock was below the
option price.

The Company also granted stock options to
non-employees and issued warrants to certain customers and
strategic business partners that require the recognition of
stock-based compensation expense. Stock-based compensation
relating to these grants represents the fair market value as
computed using the Black-Scholes option pricing model. As of
July 31, 2003, the deferred compensation balance associated
with these grants was approximately $5,000.



| |                                           
| | ------------------------------------------
| | (b) Pro Forma Stock-Based
    Compensation

Under SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure  an amendment of
SFAS No. 123, the Company is required to disclose
the pro forma effects on net income (loss) and net income
(loss) per share as if the Company had elected to use the
fair value approach to account for its entire employee
stock-based compensation plans.

The Company has computed the pro forma
disclosures required under SFAS No. 148 for options
granted during the three and nine months ended July 31,
2003 and 2002 using the Black-Scholes option pricing model
prescribed by SFAS No. 148. The weighted average
assumptions used were as follows:

|                        |  |      |     |      |  |  |     |  
|----------------------- |  | ---- | --- | ---- |  |  | --- | -
|                        |  | 2003 |     | 2002
|                        |  |      |     |     
|Risk-free interest rate |  |      | 2.8 | %    |  |  | 4.0 | %
|Expected lives          |  |      | 5.0 |      |  |  | 5.0 |  
|Expected volatility     |  |      | 116 | %    |  |  | 117 | %

7



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Had compensation cost for the Companys plan
been determined consistent with the fair value approach
enumerated in SFAS No. 148, the Companys pro
forma net loss and net loss per share would have been as follows:

|                                                                                                                    |  |                                       |        |                   |  |      |         |      |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ----------------- |  | ---- | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                                                                    |  |                                       |        |                  
|                                                                                                                    |  | Three Months Ended                    |        | Nine Months Ended
|                                                                                                                    |  | July 31,                              |        | July 31,         
|                                                                                                                    |  |                                       |        |                  
|                                                                                                                    |  | 2003                                  |        | 2002              |  | 2003 |         | 2002
|                                                                                                                    |  |                                       |        |                   |  |      |         |     
|                                                                                                                    |  |                                      
|                                                                                                                    |  | (In thousands, except per share data)
|Net loss applicable to shareholders, as reported                                                                    |  | $                                     | (2,085 | )                 |  | $    | (9,077  | )    |  | $ | (4,725 | ) |  | $ | (24,249 | )
|Add: Stock-based employee compensation expense
    included in reported net loss                                    |  |                                       |       |                   |  |      | (814    | )    |  |   |       |   |  |   | (18     | )
|Deduct: Total stock based employee compensation
    expense determined under fair value based method for all awards |  |                                       | (1,257 | )                 |  |      | (2,675  | )    |  |   | (4,600 | ) |  |   | (9,448  | )
|                                                                                                                    |  |                                       |        |                   |  |      |         |      |  |   |        |   |  |   |         |  
|Net loss applicable to stockholders, pro forma                                                                      |  | $                                     | (3,342 | )                 |  | $    | (12,566 | )    |  | $ | (9,325 | ) |  | $ | (33,715 | )
|                                                                                                                    |  |                                       |        |                   |  |      |         |      |  |   |        |   |  |   |         |  
|Basic and diluted net loss per share, as reported                                                                   |  | $                                     | (0.57  | )                 |  | $    | (2.46   | )    |  | $ | (1.28  | ) |  | $ | (6.62   | )
|Basic and diluted net loss per share, pro forma                                                                     |  |                                       | (0.91  | )                 |  |      | (3.41   | )    |  |   | (2.54  | ) |  |   | (9.20   | )

(c) Loans
Receivable

On November 28, 2000, the Companys
Board of Directors approved a loan facility to Klaus P. Besier,
the Companys Chairman, Chief Executive Officer and
President, 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
Directors 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
Companys 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, valued at $162,000 at July 31, 2003, and is
generally not a recourse obligation of the borrower, with
specified exceptions. As of July 31, 2003, the amount
outstanding was approximately $4,000,000.

In addition in prior years, 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, 2003,
management determined that the remaining loan to the former
officer and the loan to the former employee were uncollectible,
resulting in a $230,000 charge to stock-based compensation for
the difference between the value of the shares securing each
note and the $275,000 loan receivable balance. During the
quarter ended January 31, 2002, in connection with the
termination of one of the former officers employment with
the Company, the Company acquired the shares valued at
approximately $7,000 securing the note from the officer in
satisfaction of $120,000 due under the note. As a result,
$113,000 was charged to stock-based compensation during the
quarter ended January 31, 2002.



| |                       
| | ----------------------
| | (d) 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, 2003 and 2002, all potential common

8



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2003 and 2002 excludes contingently
issuable shares of 0 and 12,432, respectively, representing
shares issued but held in escrow in connection with the
acquisition of Signature Software.

As of July 31, 2003 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 822,085 and 652,400, respectively.

6.     Segment
Reporting

At the beginning of fiscal year 2003, the Company
combined product-related services and custom development
services into one reporting segment because management
determined that the custom development services segment was
insufficient in size to warrant separately viewing and managing
the engagements and resources.

Revenue from the United States, Japan and the
United Kingdom contributed approximately 73%, 6% and 10% of
revenue, respectively, for the three months ended July 31,
2003 and revenue from the United States, Japan, and the United
Kingdom contributed approximately 52%, 19%, and 11% of revenue,
respectively for the three months ended July 31, 2002.
Revenue from the United States, Japan and the United Kingdom
contributed approximately 70%, 12%, and 8% of revenue,
respectively, for the nine months ended July 31, 2003 and
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.

7.     Brightware
Acquisition

On February 15, 2001, pursuant to an
Agreement and Plan of Merger between the Company and Brightware,
Inc. (Brightware), the Company acquired 100% of the
issued and outstanding capital stock of Brightware, a supplier
of eCustomer assistance software. As a result of the
identification and valuation of intangibles acquired, the
Company allocated approximately $4,900,000 to developed
technology and know-how. Developed technology was being
amortized over a period of three years. During the quarter ended
January 31, 2002, the Company lowered its estimates of the
expected cash flows from the Brightware product line 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, to be amortized over a two year period.
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 slowdown
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
Brightware revenue forecasts, operating profits and cash flows,
resulting in the impairment charge of the developed technology
and know-how. As of July 31, 2003, accumulated amortization
of developed technology and know-how was $155,000. The
amortization expense for the nine months ended July 31,
2003 and 2002 was $78,000 and $460,000.

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

In July 2001, the Financial Accounting Standards
Board issued SFAS No. 142, Goodwill and Other Intangible
Assets, which establishes financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes
Accounting Principles Board (APB) Opinion No. 17,
Intangible Assets. The Company early adopted SFAS
No. 142 on November 1, 2001, the beginning of its
fiscal year 2002. SFAS No. 142 requires that goodwill and
intangible assets that have indefinite useful lives not be
amortized but,

9



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 slowdown in information
technology spending as well as a significant decrease in
comparable company market valuations. The negative economic
trend lowered the Brightware operating profits and cash flows
and is evidence that initial growth expectations when Brightware
was acquired did not materialize. The decline in comparable
company market valuations resulted in reduced earnings multiples.

9.     Restructuring
and Other Special Charges



| |                                  
| | ---------------------------------
| | (a) Fiscal 2003
    Restructuring

During the quarter ended April 30, 2003, the
Company undertook plans to restructure its operations as a
result of lower than expected revenues due to a delayed recovery
in global information technology spending. As such, the Company
announced the consolidation of its corporate functions to its
headquarters in Minneapolis, Minnesota and a reorganization of
its European operations. These measures were taken to reduce
global operating expenses to better position the Company to
reach profitability in the future and to preserve cash. Overall,
the Company terminated 7 general and administrative, 8 sales and
marketing, 5 professional services and 1 development employees
which resulted in a net charge of $650,000 in the quarter ended
April 30, 2003. The restructuring activity was completed
during the Companys quarter ended July 31, 2003. The
Company recognized a net restructuring charge in the quarter
ended July 31, 2003 of $391,000, principally for the
closure of excess facilities. This restructuring charge included
an $80,000 reduction of prior restructuring costs primarily due
to lower than expected costs related to the closure of
facilities. Subsequently, in September 2003, management approved
and began to implement a restructuring plan aimed at further
reducing operating expenses. This plan is intended to reduce the
Companys headcount by approximately 25 employees by
the first quarter of fiscal year 2004. As a result of this plan,
the company expects to incur approximately $400,000 to $600,000
of additional restructuring charges, principally for severance,
in the fourth quarter of fiscal year 2003 and the first quarter
of fiscal year 2004.

10



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The significant components of the restructuring
and other special charges were as follows (in thousands):

|                                                        |  |               |     |                   |  |   |       |  
|------------------------------------------------------- |  | ------------- | --- | ----------------- |  | - | ----- | -
|                                                        |  | Quarter Ended |     | Nine Months Ended
|                                                        |  | July 31, 2003 |     | July 31, 2003    
|                                                        |  |               |     |                  
|Employee severance costs                                |  | $             |    |                   |  | $ | 832   |  
|Facilities and other related costs                      |  |               | 416 |                   |  |   | 429   |  
|Excess contractual commitments and termination
    fees |  |               | 55  |                   |  |   | 101   |  
|Reduction of prior restructuring costs                  |  |               | (80 | )                 |  |   | (321  | )
|                                                        |  |               |     |                   |  |   |       |  
|                                                        |  | $             | 391 |                   |  | $ | 1,041 |  
|                                                        |  |               |     |                   |  |   |       |  



| |                                  
| | ---------------------------------
| | (b) Fiscal 2002
    Restructuring

During the quarter ended July 31, 2002, the
Company undertook plans to restructure its 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 its focus on the
lead-to-order market as well as measures to better
align its 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 charges for the
quarter ended July 31, 2002 totaled $5.9 million.

The significant components of the restructuring
and other special charges were as follows (in thousands):

|                                                        |  |               |       | 
|------------------------------------------------------- |  | ------------- | ----- | 
|                                                        |  | Quarter Ended
|                                                        |  | July 31, 2002
|                                                        |  |              
|Employee severance costs                                |  | $             | 1,931 | 
|Facilities and other 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 consisted
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) Lease Termination of Idle
    Space

In November 2002, the Company reached a lease
buy-out settlement for its leased space in California for which
a portion of the estimated lease liability had been accrued in
fiscal 2002 and 2001 restructuring accruals, as well as part of
merger related costs associated with the Brightware acquisition.
The net settlement for this idle facility was $1.6 million.
To reflect the resolution of the idle lease space liability, in
its fourth quarter of fiscal 2002, the Company recorded a
$2.5 million reversal to its previously recorded
restructuring charges for the difference between the amounts
paid in November 2002 and the amounts previously accrued for
estimated future payments.

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FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                              
| | -----------------------------
| | (d) Accrued
    Restructuring

A summary of the activity of short and long-term
accrued restructuring is as follows (in thousands):

|                                                        |  |             |       |           |  |          |       |               |  |            |        |   |  |   |      |   |  |   |     | 
|------------------------------------------------------- |  | ----------- | ----- | --------- |  | -------- | ----- | ------------- |  | ---------- | ------ | - |  | - | ---- | - |  | - | --- | 
|                                                        |  | Balance at  |       |           |  |          |       | Reversal      |  | Balance at
|                                                        |  | October 31, |       |           |  |          |       | of Prior      |  | July 31,  
|                                                        |  | 2002        |       | Provision |  | Payments |       | Restructuring |  | 2003      
|                                                        |  |             |       |           |  |          |       |               |  |           
|Employee severance costs                                |  | $           | 357   |           |  | $        | 832   |               |  | $          | (954   | ) |  | $ | (26  | ) |  | $ | 209 | 
|Facilities and other related costs                      |  |             | 1,932 |           |  |          | 429   |               |  |            | (1,665 | ) |  |   | (176 | ) |  |   | 520 | 
|Excess contractual commitments and termination
    fees |  |             | 137   |           |  |          | 101   |               |  |            | (75    | ) |  |   | (119 | ) |  |   | 44  | 
|                                                        |  |             |       |           |  |          |       |               |  |            |        |   |  |   |      |   |  |   |     | 
|                                                        |  | $           | 2,426 |           |  | $        | 1,362 |               |  | $          | (2,694 | ) |  | $ | (321 | ) |  | $ | 773 | 
|                                                        |  |             |       |           |  |          |       |               |  |            |        |   |  |   |      |   |  |   |     | 

The remainder of the payments for the
restructuring and other special charges will be paid out as
follows: severance through December 2003, facilities related
payments through December 2004, and contract termination fees
and other payments through April 2004.

The restructuring and other special charges
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.

10.     Commitments
and Contingencies

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. A Motion for Summary
Judgment was filed on our behalf in December 2002. An opposition
to the motion was filed on behalf of General Motors and a reply
brief was filed on our behalf. The Motion for Summary Judgment
was heard before the court on April 29, 2003. On
July 1, 2003 the court denied Fireponds Motion for
Summary Judgment. 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 plaintiff, which
could harm our business. Should the parties reach a settlement
in this litigation, we could be required to pay significant
settlement amounts which could materially adversely affect our
financial condition and operating results.

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 a
class of persons who allegedly 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, FleetBoston
Robertson

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FIREPOND, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stephens, and other parties as underwriters of
our initial public offering (the Firepond
Defendants). 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
our 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. The action against us is being coordinated with over
three hundred other nearly identical actions filed against other
companies. In July 2003, we decided to join in a settlement
negotiated by representatives of a coalition of issuers named as
defendants in this action and their insurers. Although we
believe that the plaintiffs claims have no merit, we have
decided to accept the settlement proposal to avoid the cost and
distraction of continued litigation. Because the settlement will
be funded entirely by Fireponds insurers, we do not
believe that the settlement will have a material effect on our
financial condition, results of operation or cash flows. The
proposed settlement agreement is subject to final approval by
the court. Should the court fail to approve the settlement
agreement, we believe we have meritorious defenses to these
claims and would defend the action vigorously.

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. | 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 those
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 sales configuration
systems that help companies reduce the total cost of selling
complex products, regardless of the sales channel. Sold as a
complete system, or as incremental modules that address specific
business needs, our SalesPerformer sales configuration system
simplifies the sale of complex products, enabling companies to
convert more leads into accurate orders. We also offer an online
customer assistance solution, called Brightware
eServicePerformer, that leverages advanced intelligence engines
and natural language processing technology to manage a
companys online customer interaction channels, with an
emphasis on email response management.

During the quarter ended April 30, 2003, we
undertook plans to restructure our operations as a result of
lower than expected revenues due to a delayed recovery in global
information technology spending. As such, we announced the
consolidation of our corporate functions to our headquarters in
Minneapolis, Minnesota and a reorganization of our European
operations. These measures were taken to reduce global operating
expenses to better position us to reach profitability in the
future and to preserve cash. Overall, we terminated 7 general
and administrative, 8 sales and marketing, 5 professional
services and 1 development employees. The restructuring charge
for the quarter ended April 30, 2003 was $650,000, which
included approximately $241,000 reduction of prior restructuring
costs primarily due to the settlement of a lease at more
favorable terms than originally estimated. We completed the
restructuring activity during the quarter ended July 31,
2003. The restructuring charge for the quarter ended
July 31, 2003 was $391,000, principally for the closure of
excess facilities. This restructuring charge included an $80,000
reduction of prior restructuring costs primarily due to lower
than expected costs related to the closure of facilities.
Subsequently, in September 2003, management approved and began
to implement a restructuring plan aimed at further reducing
operating expenses. This plan is intended to reduce the
Companys headcount by approximately 25 employees by the
first quarter of fiscal year 2004. As a result of this plan, the
Company expects to incur approximately $400,000 to $600,000 of
additional restructuring charges, principally for severance, in
the fourth quarter of fiscal year 2003 and the first quarter of
fiscal year 2004.

During the quarter ended July 31, 2002, we
announced a strategic realignment to further enhance our focus
on the markets for sales configuration and email response
management, as well as measures to better align our costs with
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 charges for fiscal 2002 totaled
$3.4 million. These actions further contributed to the
significant decrease in our expenses in the three and nine
months ended July 31, 2003 compared to the same periods of
the prior year.

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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,
|                                                                      |                                                          |                          |        |               
|                                                                      |                                                          | 2003                     |        | 2002           |       | 2003 |        | 2002 
|                                                                      |                                                          |                          |        |                |       |      |        |      
|Revenue:                                                              |                                                          |                          |        |                |       |      |        |       |       |  |       |      |       |  |        |     
|                                                                      | License                                                  |                          |        | 4.9            | %     |      |        | 14.8  | %     |  |       | 17.7 | %     |  |        | 28.2 | %    
|                                                                      | Services and maintenance                                 |                          |        | 95.1           |       |      |        | 85.2  |       |  |       | 82.3 |       |  |        | 71.8 |      
|                                                                      |                                                          |                          |        |                |       |      |        |       |       |  |       |      |       |  |        |     
|                                                                      |                                                          | Total revenue            |        |                | 100.0 |      |        |       | 100.0 |  |       |      | 100.0 |  |        |      | 100.0 | 
|                                                                      |                                                          |                          |        |                |       |      |        |       |       |  |       |      |       |  |        |     
|Cost of revenue:                                                      |                                                          |                          |        |                |       |      |        |       |       |  |       |      |       |  |        |     
|                                                                      | License                                                  |                          |        | 2.5            |       |      |        | 0.1   |       |  |       | 1.0  |       |  |        | 0.6  |      
|                                                                      | Services and maintenance                                 |                          |        | 43.2           |       |      |        | 53.4  |       |  |       | 41.0 |       |  |        | 47.7 |      
|                                                                      |                                                          |                          |        |                |       |      |        |       |       |  |       |      |       |  |        |     
|                                                                      |                                                          | Total cost of revenue    |        |                | 45.7  |      |        |       | 53.5  |  |       |      | 42.0  |  |        |      | 48.3  | 
|                                                                      |                                                          |                          |        |                |       |      |        |       |       |  |       |      |       |  |        |     
|Gross profit                                                          |                                                          |                          | 54.3   |                |       |      | 46.5   |       |       |  | 58.0  |      |       |  | 51.7   |     
|Operating expenses:                                                   |                                                          |                          |        |                |       |      |        |       |       |  |       |      |       |  |        |     
|                                                                      | Sales and marketing                                      |                          |        | 46.4           |       |      |        | 47.2  |       |  |       | 36.2 |       |  |        | 36.3 |      
|                                                                      | Research and development                                 |                          |        | 47.5           |       |      |        | 53.0  |       |  |       | 34.6 |       |  |        | 45.3 |      
|                                                                      | General and administrative                               |                          |        | 49.0           |       |      |        | 46.1  |       |  |       | 36.4 |       |  |        | 32.8 |      
|                                                                      | Stock-based compensation                                 |                          |        | 0.2            |       |      |        | (16.2 | )     |  |       | 2.6  |       |  |        | 4.3  |      
|                                                                      | Amortization of goodwill and other intangible
    assets |                          |        | 1.1            |       |      |        | 0.6   |       |  |       | 0.8  |       |  |        | 2.7  |      
|                                                                      | Restructuring charge                                     |                          |        | 17.2           |       |      |        | 136.5 |       |  |       | 11.1 |       |  |        | 34.2 |      
|                                                                      | Impairment of developed technology and know-how          |                          |        |               |       |      |        |      |       |  |       |     |       |  |        | 18.1 |      
|                                                                      |                                                          |                          |        |                |       |      |        |       |       |  |       |      |       |  |        |     
|                                                                      |                                                          | Total operating expenses |        |                | 161.4 |      |        |       | 267.2 |  |       |      | 121.7 |  |        |      | 173.7 | 
|                                                                      |                                                          |                          |        |                |       |      |        |       |       |  |       |      |       |  |        |     
|Loss from operations                                                  |                                                          |                          | (107.1 | )              |       |      | (220.7 | )     |       |  | (63.7 | )    |       |  | (122.0 | )   
|Interest income                                                       |                                                          |                          | 3.1    |                |       |      | 3.4    |       |       |  | 2.8   |      |       |  | 2.8    |     
|Other income (expense), net                                           |                                                          |                          | 12.0   |                |       |      | 7.1    |       |       |  | 10.6  |      |       |  | 1.4    |     
|                                                                      |                                                          |                          |        |                |       |      |        |       |       |  |       |      |       |  |        |     
|Loss before cumulative effect of a change in
    accounting principle |                                                          |                          | (92.0  | )              |       |      | (210.2 | )     |       |  | (50.3 | )    |       |  | (117.8 | )   
|Cumulative effect of a change in accounting
    principle             |                                                          |                          |       |                |       |      |       |       |       |  |      |      |       |  | (23.0  | )   
|                                                                      |                                                          |                          |        |                |       |      |        |       |       |  |       |      |       |  |        |     
|Net loss                                                              |                                                          |                          | (92.0  | )%             |       |      | (210.2 | )%    |       |  | (50.3 | )%   |       |  | (140.8 | )%  
|                                                                      |                                                          |                          |        |                |       |      |        |       |       |  |       |      |       |  |        |     

Comparison of Three Months Ended July 31,
2003 and 2002

Revenue.Total revenue decreased
$2.1 million, or 47.5%, to $2.3 million in the three
months ended July 31, 2003 from $4.3 million in the
three months ended July 31, 2002. This decrease is
attributable to a 82.6% decrease in license revenue and a 41.4%
decrease in services and maintenance revenue.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | License.License
    revenue decreased $527,000, or 82.6%, to $111,000 in the three
    months ended July 31, 2003 from $638,000 in the three
    months ended July 31, 2002. License revenue as a percentage
    of total revenue decreased to 4.9% in the three months ended
    July 31, 2003 from 14.8% in the three months ended
    July 31, 2002. The decrease is primarily attributable to a
    decline in our software license sales which we believe is due in
    part to a continued slowdown in information technology spending
    by companies in our target markets. The decline in revenue is
    also due to a fewer number of implementation engagements
    contributing to license revenue as compared to the prior year
    period.
|
| | Services and maintenance.Services and maintenance revenue
    decreased $1.5 million, or 41.4%, to $2.2 million in
    the three months ended July 31, 2003 from $3.7 million
    in the three months ended July 31, 2002. Services and
    maintenance revenue as a percentage of total revenue increased
    to 95.1% in                                                                                                                                                                                                                                                                                                                                                                                                                               

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| |                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the three months ended July 31, 2003 from
    85.2% in the three months ended July 31, 2002. The decrease
    in absolute dollars is attributable to the decrease in
    consulting engagements related to the decreased license revenue
    and a decrease in maintenance agreements in this period as
    compared to the prior year period.

Cost of revenue.Total cost of revenue decreased
$1.3 million, or 55.2%, to $1.0 million in the three
months ended July 31, 2003 from $2.3 million in the
three months ended July 31, 2002. Total cost of revenue as
a percentage of total revenue decreased to 45.7% in the three
months ended July 31, 2003 from 53.5% in the three months
ended July 31, 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 was $57,000 in
    the three months ended July 31, 2003 and $4,000 in the
    three months ended July 31, 2002. Cost of license revenue
    as a percentage of license revenue increased to 51.4% in the
    three months ended July 31, 2003 from 0.6% in the three
    months ended July 31, 2002. The increase in the cost of
    license revenue as a percentage of license revenue is primarily
    due to a change in the mix of license revenue toward more
    royalty-related products.                                                                                                                                                                                                                                                                 
|
| | Cost of services and maintenance revenue.Cost of 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 services and maintenance revenue decreased
    $1.3 million, or 57.5%, to $1.0 million in the three
    months ended July 31, 2003 from $2.3 million in the
    three months ended July 31, 2002. Cost of services and
    maintenance revenue as a percentage of services and maintenance
    revenue decreased to 45.4% in the three months ended
    July 31, 2003 from 62.7% in the three months ended
    July 31, 2002. The decrease in absolute dollars and as a
    percentage of services and maintenance revenue is primarily due
    to decreased staff and consulting resources, and our efforts to
    reduce our operating costs.

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 $984,000, or 48.3%, to
$1.1 million in the three months ended July 31, 2003
from $2.0 million in the three months ended July 31,
2002. Sales and marketing expenses as a percentage of total
revenue decreased to 46.4% in the three months ended
July 31, 2003 from 47.2% in the three months ended
July 31, 2002. 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.

Research and development expenses.Research and development expenses
consist primarily of salaries and personnel-related costs and
the costs of contractors associated with the development of new
products, the enhancement of existing products, and the
performance of quality assurance and documentation activities.
Research and development expenses decreased $1.2 million,
or 53.0%, to $1.1 million in the three months ended
July 31, 2003 from $2.3 million in the three months
ended July 31, 2002. Research and development expenses as a
percentage of total revenue decreased to 47.5% in the three
months ended July 31, 2003 from 53.0% in the three months ended
July 31, 2002. These expenses decreased in absolute dollars
and as a percentage of total revenue due to a decrease in
headcount and decreased utilization of product development
contractors as well as lower operating costs due to a
consolidation of our research and development operations to
Minnesota.

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 $882,000, or 44.3%, to
$1.1 million in the three months ended July 31, 2003
from $2.0 million in the three months ended July 31,
2002. General and administrative expenses as a percentage of
total revenue increased to 49.0% in the three months ended
July 31, 2003 from 46.1% in the three months ended
July 31, 2002. These expenses decreased in absolute dollars
primarily as a result of decreased headcount, which resulted in
reduced

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payroll and other related expenses, and lower
overall operating costs resulting from the consolidation of the
company.


Stock-based compensation expense.Stock-based compensation expense
increased to $4,000 in the three months ended July 31, 2003
from a $701,000 credit in the three months ended July 31,
2002. Stock-based compensation expense as a percentage of total
revenue increased to 0.2% in the three months ended
July 31, 2003 from (16.2)% in the three months ended
July 31, 2002. Stock-based compensation expense at
July 31, 2003 includes charges related to non-employee
stock option grants and warrants.

Amortization of other intangible assets.Amortization of other intangible
assets was $26,000 in the three months ended July 31, 2003
and the three months ended July 31, 2002. Amortization of
other intangible assets as a percentage of total revenue
increased to 1.1% in the three months ended July 31, 2003
from 0.6% in the three months ended July 31, 2002.

Restructuring charge.During the quarter ended
April 30, 2003, the Company announced a restructuring of
its operations due to a delayed recovery in global technology
spending. In connection with this plan, we terminated 21
employees and incurred an $891,000 restructuring charge in the
three months ended April 30, 2003, which included $832,000
of employee severance costs, and $59,000 of other costs. This
restructuring charge was offset by a reduction of approximately
$241,000 of prior restructuring costs principally due to a lease
settlement at more favorable terms than originally estimated.
The restructuring activity was completed during the
Companys quarter ended July 31, 2003. The Company
incurred an additional restructuring charge of $391,000 in the
quarter ended July 31, 2003, of which $416,000 was for
excess facilities and $55,000 for contractual commitments. This
restructuring charge included an $80,000 reduction of prior
restructuring costs primarily due to lower than expected costs
related to the closure of facilities.

Subsequently, in September 2003, management
approved and began to implement a restructuring plan aimed at
further reducing operating expenses. This plan is intended to
reduce the Companys headcount by approximately 25
employees by the first quarter of fiscal year 2004. As a result
of this plan, the Company expects to incur approximately
$400,000 to $600,000 of additional restructuring charges,
principally for severance, in the fourth quarter of fiscal year
2003 and the first quarter of fiscal year 2004.

During the quarter ended July 31, 2002, the
Company announced a restructuring of its 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 the Company 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.

Interest income.Interest income decreased $73,000, or
50.7%, to $71,000 in the three months ended July 31, 2003
from $144,000 in the three months ended July 31, 2002. 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 decreased $35,000,
or 11.4%, to $273,000 in income in the three months ended
July 31, 2003 from $308,000 in income in the three months
ended July 31, 2002.

Comparison of Nine Months Ended July 31,
2003 and 2002

Revenue.Total revenue decreased
$7.8 million, or 45.4%, to $9.4 million in the nine
months ended July 31, 2003 from $17.2 million in the
nine months ended July 31, 2002. This decrease is
attributable to a 65.7% decrease in license revenue and 37.5%
decrease in service and maintenance revenue.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | License.License
    revenue decreased $3.2 million, or 65.7%, to
    $1.7 million in the nine months ended July 31, 2003
    from $4.9 million in the nine months ended July 30,
    2002. License revenue as a percentage of total revenue decreased
    to 17.7% in the nine months ended July 31, 2003 from 28.2%
    in the nine months ended July 31, 2002. We believe the
    overall decline is attributable to a global slowdown in

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | information technology spending experienced by
    software companies in our industry. The decline in revenue is
    also due to a fewer number of implementation engagements
    contributing to license revenue as compared to the prior year
    period. Also, the results for the first quarter of fiscal 2002
    included the completion of a large customer implementation
    resulting in a modification of the estimate to complete and the
    acceleration of license revenue of $1.2 million as well as
    the resolution of certain contingencies from two other customers
    resulting in an additional $1.2 million of license revenue.                                                                                                                                                                            
|
| | Services and maintenance.Services and maintenance revenue
    decreased $4.6 million, or 37.5%, to $7.7 million in
    the nine months ended July 31, 2003 from $12.4 million
    in the nine months ended July 31, 2002. Services and
    maintenance revenue as a percentage of total revenue increased
    to 82.3% in the nine months ended July 31, 2003 from 71.8%
    in the nine months ended July 31, 2002. The decrease in absolute
    dollars is attributable to the decrease in consulting
    engagements related to the decreased license revenue and a
    decrease in maintenance agreements in this period as compared to
    the prior year period. The increase as a percentage of total
    revenue is due to maintenance revenue declining at a
    substantially lower rate than license and services revenue.

Cost of revenue.Total cost of revenue decreased
$4.4 million, or 52.6%, to $3.9 million in the nine
months ended July 31, 2003 from $8.3 million in the
nine months ended July 30, 2002. Total cost of revenue as a
percentage of total revenue decreased to 42.0% in the nine
months ended July 31, 2003 from 48.3% in the nine months
ended July 31, 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of license revenue.Cost of license revenue decreased
    $4,000, or 4.0%, to $97,000 in the nine months ended
    July 31, 2003 from $101,000 in the nine months ended
    July 31, 2002. Cost of license revenue as a percentage of
    license revenue increased to 5.8% in the nine months ended
    July 31, 2003 from 2.1% in the nine months ended
    July 31, 2002.. The increase in the cost of license revenue
    as a percentage of license revenue is due primarily to a change
    in the mix of license revenue toward more royalty related
    products.                                                                                                                                                                    
|
| | Cost of services and maintenance revenue.Cost of services and maintenance
    revenue decreased $4.4 million, or 53.2%, to
    $3.8 million in the nine months ended July 31, 2003
    from $8.2 million in the nine months ended July 31,
    2002. Cost of services and maintenance revenue as a percentage
    of services and maintenance revenue decreased to 49.8% in the
    nine months ended July 31, 2003 from 66.4% in the nine
    months ended July 31, 2002. The decrease in absolute
    dollars of total services and maintenance revenue was primarily
    due to decreased staff and consulting resources which resulted
    in reduced payroll and other expenses and our continued efforts
    to reduce our operating costs.

Sales and marketing expenses.Sales and marketing expenses
decreased $2.9 million, or 45.6%, to $3.4 million in
the nine months ended July 31, 2003 from
$6.2 million in the nine months ended July 31,
2002. Sales and marketing expenses as a percentage of total
revenue decreased to 36.2% in the nine months ended
July 31, 2003 from 36.3% in the nine months ended
July 31, 2002. Sales and marketing expenses decreased in
absolute dollars 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 and lower commissions on
fewer license transactions.

Research and development expenses.Research and development expenses
decreased $4.5 million, or 58.3%, to $3.3 million in
the nine months ended July 31, 2003 from
$7.8 million in the nine months ended July 30,
2002. Research and development expenses as a percentage of total
revenue decreased to 34.6% in the nine months ended
July 31, 2003 from 45.3% in the nine months ended
July 31, 2002. These expenses decreased in absolute dollars
and as a percentage of revenue primarily due to a decrease in
headcount and decreased utilization of product development
contractors as well as lower operating costs due to a
consolidation of our research and development operations to
Minnesota.

General and administrative expenses.General and administrative
expenses decreased $2.2 million, or 39.4%, to
$3.4 million in the nine months ended July 31,
2003 from $5.6 million in the nine months ended
July 31, 2002. General and administrative expenses as a
percentage of total revenue increased to 36.4% in the
nine months ended July 31, 2003 from 32.8% in the
nine months ended July 31 30, 2002. These expenses
decreased in absolute dollars primarily as a result of decreased
headcount, which resulted in reduced payroll

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and other related expenses. These expenses as a
percentage of total revenue increased primarily due to the lower
revenue in the fiscal 2003 period.


Stock-based compensation expense.Stock-based compensation expense
decreased $494,000, or 67.3%, to $240,000 in the
nine months ended July 31, 2003 from $734,000 in the
nine months ended July 31, 2002. Stock-based
compensation expense as a percentage of total revenue decreased
to 2.6% in the nine months ended July 31, 2003 from
4.3% in the nine months ended July 31, 2002.
Stock-based compensation expense for the fiscal 2003 period
includes $10,000 for charges related to non-employee stock
option grants and warrants and $230,000 for charges related to
shares we acquired in satisfaction of two loan agreements.

Amortization of goodwill and other
intangible assets.Amortization of
goodwill and other intangible assets decreased $382,000, or
83.0%, to $78,000 in the nine months ended July 31,
2003 from $460,000 in the nine months ended July 30,
2002. Amortization of goodwill and other intangible assets as a
percentage of total revenue decreased to 0.8% in the
nine months ended July 31, 2003 from 2.7% in the
nine months ended July 31, 2002.

Restructuring charge.During the quarter ended
April 30, 2003, the Company announced a restructuring of
its operations due to a delayed recovery in global technology
spending. In connection with this plan, we terminated
21 employees and incurred an $891,000 restructuring charge
in the three months ended April 30, 2003, which
included $832,000 of employee severance costs and $59,000 of
other costs. This restructuring charge was offset by a reduction
of approximately $241,000 of prior restructuring costs
principally due to a lease settlement at more favorable terms
than originally estimated. The restructuring activity was
completed during the Companys quarter ended July 31,
2003. The Company incurred an additional restructuring charge of
$391,000 in the quarter ended July 31, 2003, of which
$416,000 was for excess facilities and $55,000 for contractual
commitments. This restructuring charge included approximately
$80,000 reduction of prior restructuring costs primarily due to
lower than expected costs related to the closure of facilities.

Subsequently, in September 2003, management
approved and began to implement a restructuring plan aimed at
further reducing operating expenses. This plan is intended to
reduce the Companys headcount by approximately
25 employees by the first quarter of fiscal year 2004. As a
result of this plan, the Company expects to incur approximately
$400,000 to 600,000 of additional restructuring charges,
principally for severance, as a result of this plan in the
fourth quarter of fiscal year 2003 and the first quarter of
fiscal year 2004.

During the quarter ended July 31, 2002, the
Company announced a restructuring of its 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 the Company 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.

Impairment of developed technology and
know-how.During the
nine months ended July 31, 2002, we recorded a
$3.1 million impairment charge related to the impairment of
the developed technology and know-how intangible assets related
to the Brightware products eCustomer assistance software.

Interest
income.Interest income decreased
$224,000, or 46.3%, to $260,000 in the nine months ended
July 31, 2003 from $484,000 in the nine months ended
July 31, 2002. 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
increased $753,000, to $993,000 in income in the
nine months ended July 31, 2003 from $240,000 in
income in the nine months ended July 31, 2002. The
increase is primarily due to the increase in foreign currency
transaction gains in the nine months ended July 31,
2003.

Cumulative effect of a change in accounting
principle.With the acquisition of
Brightware in 2001, we allocated approximately $4.0 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,

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respectively. Effective November 1, 2001, we
adopted SFAS No. 142, Goodwill and Other Intangible
Assetsand reclassified the net book value of assembled
workforce to goodwill. As a result of the valuation under the
new FASB standard of the remaining goodwill, we determined that
the goodwill was fully impaired and, accordingly, recorded a
cumulative change in accounting principle charge of
$4.0 million in the quarter ended January 31, 2002.


Liquidity and Capital Resources

As of July 31, 2003, cash and cash
equivalents were $13.5 million and short-term investments
were $6.1 million as compared with cash and cash
equivalents of $13.5 million and short-term investments of
$15.7 million as of October 31, 2002. Our working
capital at July 31, 2003 was $14.5 million compared to
working capital of $18.6 million at October 31, 2002.

Net cash used in operating activities was
$9.7 million in the nine months ended July 31,
2003 compared with net cash used in operating activities of
$13.7 million in the nine months ended July 31,
2002. Cash used in operating activities in the nine months
ended July 31, 2003 was primarily attributable to our net
loss, and our reduction in our accrued liabilities, accrued
restructuring charges and deferred revenue.

Net cash provided by investing activities was
$9.7 million in the nine months ended July 31,
2003 compared with net cash provided by investing activities of
$654,000 in the nine months ended July 31, 2002. Net
cash provided by investing activities in the nine months
ended July 31, 2003 was primarily attributable to proceeds
from the sale and maturities of short-term investments and a
decrease in restricted cash.

We lease facilities under non-cancelable
operating leases which have various expiration dates ranging
from 2003 through 2005. At July 31, 2003, future minimum
annual lease payments amounted to $583,000 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 and short-term investments will be
sufficient to meet our anticipated cash needs 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 January 2003, the Financial Accounting
Standards Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities. This
interpretation addresses the consolidation of certain variable
interest entities for which a controlling financial interest
exists. The interpretation applies immediately to variable
interest entities created after January 31, 2003. It
applies in the first interim period beginning after
June 15, 2003 to pre-existing entities. The adoption of
this interpretation did not affect the Companys financial
statements.

In December 2002, the Financial Accounting
Standards Board issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. This interpretation expands the disclosures to be
made by a guarantor in its annual and interim financial
statements about its obligations under certain guarantees. It
also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. As required by
the interpretation, we have adopted the disclosure and
recognition requirements for the quarter ended January 31,
2003.

In December 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of SFAS No. 123(SFAS No. 148) which
provides alternative methods of transition for a voluntary

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change to the fair value based method of
accounting for stock-based employee compensation. In addition,
this statement amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and
interim financial statements about our method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. The transition and annual disclosure
requirements of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure
requirements are effective for interim periods beginning after
December 15, 2002. We adopted the disclosure requirements
effective in the quarter ended April 30, 2003.


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
requires that liabilities associated with exit or disposal
activities be recognized and measured at fair value when
incurred, as opposed to at the date an entity commits to the
exit or disposal plans. The Company has adopted this standard
for its fiscal 2003 restructuring activities.

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
product typically range from approximately a few 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 continued slowdown
in information technology spending. Consequently, if the
continued slowdown in information technology spending should
persist, due to 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, we depend on our customers
to 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 continued slowdown in information
technology spending should persist, due to 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 the markets for sales configuration and
customer service solutions do not expand, we may not be
successful

Our products address a new and emerging market
for solutions that optimize the lead-to-order
process and solutions which address guided customer service. The
failure of these markets to expand, or a delay in the expansion
of these markets, 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 our products. Our
business would be harmed if our target customers do not adopt
and expand their use of our products.

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

Our success depends upon the continued
contributions of our senior management, sales, engineers, and
professional services personnel, who perform important functions
and would be difficult to replace. Also, we believe that our
future success is highly dependent on Klaus P. Besier, our
Chairman, Chief Executive Officer

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and President. The loss of the services of any
key personnel, particularly senior management, sales, engineers,
or professional services personnel could seriously harm our
business.


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

In addition, 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. In fiscal year 2002,
we terminated 93 employees and incurred aggregate costs of
$1.9 million associated with this workforce reduction
related to severance and other employee-related costs. In the
first two quarters of fiscal year 2003, we terminated
21 employees and incurred aggregate costs of $832,000
associated with this workforce reduction. We completed this
restructuring activity during the quarter ended July 31,
2003 and recognized an additional net restructuring charge of
$391,000, principally for the closure of excess facilities.
Subsequently, in September 2003, management approved and began
to implement a restructuring plan aimed at further reducing
operating expenses. This plan is intended to reduce the
Companys headcount by approximately 25 employees by
the first quarter of fiscal year 2004. As a result of this plan,
the company expects to incur approximately $400,000 to $600,000
of additional restructuring charges, principally for severance,
in the fourth quarter of fiscal year 2003 and the first quarter
of fiscal year 2004. 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.

Material litigation has caused, and may
continue to cause, us to incur substantial costs as well as to
divert managements 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, has been and may continue to 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. Should the parties reach a settlement in this
litigation, we could be required to pay significant settlement
amounts which could materially adversely affect our financial
condition and operating results.

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 Securities and Exchange Commission
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

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issued in connection with our initial public
offering. The complaints further allege that FleetBoston
Robertson Stephens and the other underwriters entered into
agreements with their 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. In July 2003, we decided
to join in a settlement negotiated by representatives of a
coalition of issuers named as defendants in this action and
their insurers. Although we believe that the plaintiffs
claims have no merit, we have decided to accept the settlement
proposal to avoid the cost and distraction of continued
litigation. Because the settlement will be funded entirely by
Fireponds insurers, we do not believe that the settlement
will have a material effect on our financial condition, results
of operation or cash flow. The proposed settlement agreement is
subject to final approval by the court. Should the court fail to
approve the settlement agreement, we believe we have meritorious
defenses to these claims and would defend the action vigorously.
Securities class action litigation can result in substantial
costs and divert our managements attention and resources,
which could seriously harm our business.


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

In fiscal 2002, 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, we lowered our
previously reported results and reduced our forecasted revenues.
The Securities and Exchange Commissions investigation into
this matter as well as any further action brought by government
agencies or any shareholder litigation has and may continue to
result in substantial legal fees and expenses and divert
managements attention and resources.

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 product licenses over the related
implementation period. If we are unable to recognize revenue
from one or more substantial license sales planned for a
particular fiscal quarter, our operating results for that
quarter would be seriously harmed. In addition, the license of
our SalesPerformer product 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 $4.7 million for the
nine months ended July 31, 2003, $23.7 million in
fiscal 2002, $70.3 million for fiscal 2001, and
$16.3 million for fiscal 2000. We may continue to incur
losses on a quarterly and annual basis and not become
profitable. Additionally, we may not grow or generate sufficient
revenue to attain profitability.

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

In the recent past, we have traded at levels that
would have resulted in our failure to maintain the Nasdaq
National Market minimum $5 million market value of publicly
held share requirement. 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 securities
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 our 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 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 to 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.

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Difficulties associated with the protection of
our intellectual property and potential claims alleging
infringement of third parties intellectual property could
harm our ability to compete and result in significant expense to
us and loss of significant rights

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.

Further, the software 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 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.

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

The market for sales configuration 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.

Our failure to successfully implement our
products in a timely manner could result in negative publicity
and reduced sales, both of which could 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.

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

We license technology from a small number of
software providers for use with our products 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 results of operations may 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 approximately 717,900 options
for exchange and, on July 31, 2001 issued approximately
538,400 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 are treated as variable awards.
Accordingly, we are required to record as 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
or otherwise terminated 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 will be.

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

The trading price of our common stock has been
and may continue to be highly volatile and could be subject to
wide fluctuations in price in response to various factors, many
of which are beyond our control, including quarterly variations
in our results of operations; changes in recommendations by the
investment community or in their estimates of our revenue or
operating results; speculation in the press or investment
community; strategic actions by our competitors, such as product
announcements or acquisitions; and general market conditions. In
addition, the stock market in general and the Nasdaq National
Market and securities of Internet and software companies in
particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate
to their operating performance. These broad market and industry
factors may materially adversely affect the market price of our
common stock, regardless of our actual operating performance.
Litigation, if instituted, could result in substantial costs and
a diversion of managements attention and resources, which
would materially adversely affect our business, financial
condition and results of operations.

Failure to realize planned 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. However, foreign
markets for our products may develop more slowly than currently
anticipated. International revenue as a percentage of total
revenue was 30% in the nine months ended July 31, 2003, 51%
in fiscal 2002, 36% in fiscal 2001, and 28% in fiscal 2000. Our
failure to realize our planned international sales levels 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
the United States, 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.

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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, Euro and
Japanese Yen.


Fluctuations against the U.S. dollar can
produce significant differences in the reported value of sales
and expenses. For sales in the United States which are produced
outside of the United States, any weakening of the
U.S. dollar against a particular countrys currency
reduces the amount of net income reported in U.S. dollars.
Conversely, the same weakening of the U.S. dollar generates
an offsetting increase in the dollar value of profits arising
from sales within that country. Any weakening of the
U.S. dollar that negatively impacts a foreign
operations operating income 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 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.

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

As of July 31, 2003, our executive officers,
directors and entities associated with them own approximately
46.9% 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.

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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.

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

In the future, we may acquire additional
businesses or product lines or be the target of a potential
merger or acquisition. Any future merger or acquisition of or by
us may not produce the revenue, earnings or business synergies
anticipated, and an acquired product, service or technology
might not perform as expected. Prior to completing a merger or
acquisition, however, it is difficult to determine if such
benefits can actually be realized. The process of integrating
companies into our business or integrating our company into
another 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 merger or
acquisition, our management could spend a significant amount of
time and effort identifying and completing the merger or
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.






|        |                                                               
|------- | --------------------------------------------------------------
|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.






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

Our chief executive officer and our chief
financial officer have concluded, based on their evaluation as
of July 31, 2003, that the Companys disclosure
controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are
effective to ensure that information required to be disclosed in
the reports that the Company files or submits under the
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms.

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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. A Motion for Summary
Judgment was filed on our behalf in December 2002. An opposition
to the motion was filed on behalf of General Motors and a reply
brief was filed on our behalf. The Motion for Summary Judgment
was heard before the court on April 29, 2003. On
July 1, 2003 the court denied Fireponds Motion for
Summary Judgment. 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 plaintiff, which
could harm our business. Should the parties reach a settlement
in this litigation, we could be required to pay significant
settlement amounts which could materially adversely affect our
financial condition and operating results.

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 a
class of persons who allegedly 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, FleetBoston Robertson
Stephens, and other parties as underwriters of our initial
public offering (the Firepond Defendants). 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 our 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. The
action against us is being coordinated with over three hundred
other nearly identical actions filed against other companies. In
July 2003, we decided to join in a settlement negotiated by
representatives of a coalition of issuers named as defendants in
this action and their insurers. Although we believe that the
plaintiffs claims have no merit, we have decided to accept
the settlement proposal to avoid the cost and distraction of
continued litigation. Because the settlement will be funded
entirely by Fireponds insurers, we do not believe that the
settlement will have a material effect on our financial
condition, results of operation or cash flows. The proposed
settlement agreement is subject to final approval by the court.
Should the court fail to approve the settlement agreement, we
believe we have meritorious defenses to these claims and would
defend the action vigorously.

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 6. | Exhibits and Reports on Form
    8-K



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

|     |  |                                                                                                              
|---- |  | -------------------------------------------------------------------------------------------------------------
|31.1 |  | Principal Executive Officer 
    Certification pursuant to section 302 of the Sarbanes-Oxley Act
    of 2002
|31.2 |  | Principal Financial Officer 
    Certification pursuant to section 302 of the Sarbanes-Oxley Act
    of 2002
|32.1 |  | Principal Executive Officer 
    Certification pursuant to section 906 of the Sarbanes-Oxley Act
    of 2002
|32.2 |  | Principal Financial Officer 
    Certification pursuant to section 906 of the Sarbanes-Oxley Act
    of 2002

(b) Reports on Form 8-K

None

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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.



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



| |     |                    
| | --- | -------------------
| | By: | /s/ KLAUS P. BESIER

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



| |     |                    
| | --- | -------------------
| | By: | /s/ KRISTI L. SMITH

| |                                 
| | --------------------------------
| |                                 
| | Kristi L. Smith                 
| | Chief Financial Officer         
| | (Principal Financial Officer and
| | Principal Accounting Officer)   

Dated: September 12, 2003

31