##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

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

For the Quarter Ended January 31, 2003

OR

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

Commission File Number 0-29251

FIREPOND, INC.

(Exact Name of Registrant as Specified in its Charter)


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



(952) 229-2300
(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 [X] |  | No [  ]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

|         |  |       
|-------- |  | ------
|Yes [  ] |  | No [X]

As of March 13, 2003 there were 3,671,983 shares of the Registrants
Common Stock outstanding.





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TABLE OF CONTENTS



|                           |                                                                                               |                                                      |  |  |  |  |  | 
|-------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|                           |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                           |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                           |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                           |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                           | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                           | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                           | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION
|                           | ITEM 1. LEGAL PROCEEDINGS                                                                    
|SIGNATURES                
|CERTIFICATIONS            



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##### Table of Contents



FIREPOND, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED January 31, 2003

TABLE OF CONTENTS

|        |  |                                                                                                      |  |          | 
|------- |  | ---------------------------------------------------------------------------------------------------- |  | -------- | 
|        |  |                                                                                                      |  | Page No.
|        |  |                                                                                                      |  |         
|PART I  |  | FINANCIAL INFORMATION                                                                                |  |          | 
|Item 1. |  | Financial Statements (unaudited)                                                                     |  |          | 
|        |  | Condensed Consolidated Balance Sheets -
      January 31, 2003 and October 31, 2002.                 |  | 3        | 
|        |  | Condensed Consolidated Statements of Operations -
     Three Months Ended January 31, 2003 and 2002. |  | 4        | 
|        |  | Condensed Consolidated Statements of Cash Flows -
     Three Months Ended January 31, 2003 and 2002. |  | 5        | 
|        |  | Notes to Condensed Consolidated Financial Statements                                                 |  | 6        | 
|Item 2. |  | Managements Discussion and Analysis of Financial Condition
and
     Results of Operations           |  | 12       | 
|Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                           |  | 23       | 
|Item 4. |  | Controls and Procedures                                                                              |  | 23       | 
|PART II |  | OTHER INFORMATION                                                                                    |  |         
|Item 1. |  | Legal Proceedings                                                                                    |  | 23       | 
|        |  | SIGNATURES                                                                                           |  | 25       | 
|        |  | CERTIFICATIONS                                                                                       |  | 26       | 

2



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

|                                     |                                                                                                                                                  |                            |                           |          |        |             |        |             |        |        |  | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------------------------- | -------- | ------ | ----------- | ------ | ----------- | ------ | ------ |  | 
|                                     |                                                                                                                                                  |                            |                           |          |        | January 31, |        | October 31,
|                                     |                                                                                                                                                  |                            |                           |          |        | 2003        |        | 2002       
|                                     |                                                                                                                                                  |                            |                           |          |        |             |        |            
|ASSETS                               |                                                                                                                                                  |                            |                           |          |        |             |        |            
|Current assets:                      |                                                                                                                                                  |                            |                           |          |        |             |        |            
|                                     | Cash and cash equivalents                                                                                                                        |                            | $                         | 14,842   |        |             | $      | 13,479      |       
|                                     | Short-term investments                                                                                                                           |                            |                           | 10,546   |        |             |        | 15,690      |       
|                                     | Accounts receivable, net of allowance for doubtful accounts of $363 and $463                                                                     |                            |                           | 2,515    |        |             |        | 2,798       |       
|                                     | Unbilled revenue                                                                                                                                 |                            |                           | 358      |        |             |        | 268         |       
|                                     | Restricted cash                                                                                                                                  |                            |                           |         |        |             |        | 199         |       
|                                     | Prepaid expenses and other current assets                                                                                                        |                            |                           | 855      |        |             |        | 982         |       
|                                     |                                                                                                                                                  |                            |                           |          |        |             |        |            
|                                     |                                                                                                                                                  |                            | Total current assets      |          |        | 29,116      |        |             |        | 33,416 | 
|Property and equipment, net          |                                                                                                                                                  |                            | 1,718                     |          |        |             | 2,105  |            
|Other intangible assets, net         |                                                                                                                                                  |                            | 112                       |          |        |             | 137    |            
|Restricted cash                      |                                                                                                                                                  |                            | 190                       |          |        |             | 190    |            
|Other assets                         |                                                                                                                                                  |                            | 526                       |          |        |             | 511    |            
|                                     |                                                                                                                                                  |                            |                           |          |        |             |        |            
|                                     |                                                                                                                                                  | $                          | 31,662                    |          |        | $           | 36,359 |            
|                                     |                                                                                                                                                  |                            |                           |          |        |             |        |             |       
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                  |                            |                           |          |        |             |        |            
|Current liabilities:                 |                                                                                                                                                  |                            |                           |          |        |             |        |            
|                                     | Accounts payable                                                                                                                                 |                            | $                         | 751      |        |             | $      | 1,546       |       
|                                     | Accrued liabilities                                                                                                                              |                            |                           | 4,603    |        |             |        | 5,062       |       
|                                     | Accrued restructuring                                                                                                                            |                            |                           | 448      |        |             |        | 2,266       |       
|                                     | Deferred revenue                                                                                                                                 |                            |                           | 5,369    |        |             |        | 5,952       |       
|                                     |                                                                                                                                                  |                            |                           |          |        |             |        |            
|                                     |                                                                                                                                                  |                            | Total current liabilities |          |        | 11,171      |        |             |        | 14,826 | 
|Long-term accrued restructuring      |                                                                                                                                                  |                            | 127                       |          |        |             | 160    |            
|Stockholders equity:                |                                                                                                                                                  |                            |                           |          |        |             |        |            
|                                     | Preferred stock, $0.10 par value 
Authorized  5,000,000 shares;
Issued and outstanding  none at January 31, 2003 and October 31, 2002         |                            |                           |         |        |             |        |            |       
|                                     | Common stock, $0.10 par value 
Authorized  100,000,000
     Issued and outstanding  3,684,983 shares at January 31, 2003 and
October 31, 2002 |                            |                           | 369      |        |             |        | 369         |       
|                                     | Additional paid-in capital                                                                                                                       |                            |                           | 198,937  |        |             |        | 198,935     |       
|                                     | Accumulated deficit                                                                                                                              |                            |                           | (172,811 | )      |             |        | (172,094    | )     
|                                     | Loans receivable                                                                                                                                 |                            |                           | (4,057   | )      |             |        | (4,287      | )     
|                                     | Deferred compensation                                                                                                                            |                            |                           | (8       | )      |             |        | (10         | )     
|                                     | Accumulated other comprehensive loss                                                                                                             |                            |                           | (2,066   | )      |             |        | (1,540      | )     
|                                     |                                                                                                                                                  |                            |                           |          |        |             |        |             |       
|                                     |                                                                                                                                                  | Total stockholders equity |                           |          | 20,364 |             |        |             | 21,373 |       
|                                     |                                                                                                                                                  |                            |                           |          |        |             |        |             |       
|                                     |                                                                                                                                                  | $                          | 31,662                    |          |        | $           | 36,359 |            
|                                     |                                                                                                                                                  |                            |                           |          |        |             |        |             |       

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

3



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

|                                                                  |                                                                                               |                                                 |                          |       |                   |       |         |       |       |        | 
|----------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------ | ----- | ----------------- | ----- | ------- | ----- | ----- | ------ | 
|                                                                  |                                                                                               |                                                 |                          |       | Three Months     
|                                                                  |                                                                                               |                                                 |                          |       | Ended January 31,
|                                                                  |                                                                                               |                                                 |                          |       |                  
|                                                                  |                                                                                               |                                                 |                          |       | 2003              |       | 2002   
|                                                                  |                                                                                               |                                                 |                          |       |                   |       |        
|Revenue:                                                          |                                                                                               |                                                 |                          |       |                   |       |         |      
|                                                                  |                                                                                               | License                                         |                          | $     | 599               |       |         | $     | 3,236 |       
|                                                                  |                                                                                               | Services and maintenance                        |                          |       | 3,222             |       |         |       | 4,261 |       
|                                                                  |                                                                                               |                                                 |                          |       |                   |       |         |       |       |       
|                                                                  |                                                                                               |                                                 | Total revenue            |       |                   | 3,821 |         |       |       | 7,497  | 
|                                                                  |                                                                                               |                                                 |                          |       |                   |       |         |       |       |       
|Cost of revenue:                                                  |                                                                                               |                                                 |                          |       |                   |       |         |      
|                                                                  |                                                                                               | License                                         |                          |       |                  |       |         |       | 56    |       
|                                                                  |                                                                                               | Services and maintenance (1)                    |                          |       | 1,608             |       |         |       | 3,047 |       
|                                                                  |                                                                                               |                                                 |                          |       |                   |       |         |       |       |       
|                                                                  |                                                                                               |                                                 | Total cost of revenue    |       |                   | 1,608 |         |       |       | 3,103  | 
|                                                                  |                                                                                               |                                                 |                          |       |                   |       |         |       |       |       
|Gross profit                                                      |                                                                                               |                                                 | 2,213                    |       |                   |       | 4,394   |      
|Operating expenses:                                               |                                                                                               |                                                 |                          |       |                   |       |         |      
|                                                                  |                                                                                               | Sales and marketing (1)                         |                          |       | 1,187             |       |         |       | 2,066 |       
|                                                                  |                                                                                               | Research and development (1)                    |                          |       | 1,073             |       |         |       | 2,863 |       
|                                                                  |                                                                                               | General and administrative (1)                  |                          |       | 1,179             |       |         |       | 1,492 |       
|                                                                  |                                                                                               | Stock-based compensation                        |                          |       | 234               |       |         |       | 1,485 |       
|                                                                  |                                                                                               | Amortization of intangible assets               |                          |       | 26                |       |         |       | 408   |       
|                                                                  |                                                                                               | Impairment of developed technology and know-how |                          |       |                  |       |         |       | 3,120 |       
|                                                                  |                                                                                               |                                                 |                          |       |                   |       |         |       |       |       
|                                                                  |                                                                                               |                                                 | Total operating expenses |       |                   | 3,699 |         |       |       | 11,434 | 
|                                                                  |                                                                                               |                                                 |                          |       |                   |       |         |       |       |       
|Loss from operations                                              |                                                                                               |                                                 | (1,486                   | )     |                   |       | (7,040  | )    
|Interest income                                                   |                                                                                               |                                                 | 102                      |       |                   |       | 181     |      
|Other income (expense), net                                       |                                                                                               |                                                 | 667                      |       |                   |       | (196    | )    
|                                                                  |                                                                                               |                                                 |                          |       |                   |       |         |       |       |       
|Loss before cumulative effect of a change in accounting principle |                                                                                               |                                                 | (717                     | )     |                   |       | (7,055  | )    
|Cumulative effect of a change in accounting principle             |                                                                                               |                                                 |                         |       |                   |       | (3,973  | )    
|                                                                  |                                                                                               |                                                 |                          |       |                   |       |         |       |       |       
|Net loss                                                          |                                                                                               | $                                               | (717                     | )     |                   | $     | (11,028 | )    
|                                                                  |                                                                                               |                                                 |                          |       |                   |       |         |       |       |       
|Net loss per share:                                               |                                                                                               |                                                 |                          |       |                   |       |         |      
|                                                                  | Basic and diluted loss per share before cumulative effect of a change in
accounting principle |                                                 | $                        | (0.19 | )                 |       | $       | (1.94 | )    
|                                                                  | Cumulative effect of a change in accounting principle                                         |                                                 |                          |      |                   |       |         | (1.09 | )    
|                                                                  |                                                                                               |                                                 |                          |       |                   |       |         |       |       |       
|                                                                  | Basic and diluted net loss per share applicable to common stockholders                        |                                                 | $                        | (0.19 | )                 |       | $       | (3.03 | )    
|                                                                  |                                                                                               |                                                 |                          |       |                   |       |         |       |       |       
|                                                                  | Basic and diluted weighted average common shares outstanding                                  |                                                 |                          | 3,685 |                   |       |         | 3,639 |      
|                                                                  |                                                                                               |                                                 |                          |       |                   |       |         |       |       |       



---

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

|                               |                            |   |                   |     |      |   |       |       | 
|------------------------------ | -------------------------- | - | ----------------- | --- | ---- | - | ----- | ----- | 
|                               |                            |   | Three Months     
|                               |                            |   | Ended January 31,
|                               |                            |   |                  
|                               |                            |   | 2003              |     | 2002
|                               |                            |   |                   |     |     
|Cost of revenue                |                            | $ | 83                |     |      | $ | 92    |      
|Operating expenses:            |                            |   |                   |     |      |   |       |      
|                               | Sales and marketing        |   |                   |    |      |   |       | 35    | 
|                               | Research and development   |   |                   | 2   |      |   |       | 205   | 
|                               | General and administrative |   |                   | 149 |      |   |       | 1,153 | 
|                               |                            |   |                   |     |      |   |       |      
|Total stock-based compensation |                            | $ | 234               |     |      | $ | 1,485 |      
|                               |                            |   |                   |     |      |   |       |      

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

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

|                                                             |                                                                             |                                                       |                                           |                                           |     |                   |        |         |       |        |        |  
|------------------------------------------------------------ | --------------------------------------------------------------------------- | ----------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | --- | ----------------- | ------ | ------- | ----- | ------ | ------ | -
|                                                             |                                                                             |                                                       |                                           |                                           |     | Three Months     
|                                                             |                                                                             |                                                       |                                           |                                           |     | Ended January 31,
|                                                             |                                                                             |                                                       |                                           |                                           |     |                  
|                                                             |                                                                             |                                                       |                                           |                                           |     | 2003              |        | 2002   
|                                                             |                                                                             |                                                       |                                           |                                           |     |                   |        |        
|Cash flows from operating activities:                        |                                                                             |                                                       |                                           |                                           |     |                   |        |        
|                                                             | Net loss                                                                    |                                                       | $                                         | (717                                      | )   |                   | $      | (11,028 | )    
|                                                             | Adjustments to reconcile net loss to net cash used in operating
activities: |                                                       |                                           |                                           |     |                   |        |         |      
|                                                             |                                                                             | Stock-based compensation expense                      |                                           |                                           | 234 |                   |        |         | 1,485 |       
|                                                             |                                                                             | Depreciation and amortization                         |                                           |                                           | 441 |                   |        |         | 1,085 |       
|                                                             |                                                                             | 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                       |                                           |     | 151               |        |         |       | 5,787  |       
|                                                             |                                                                             |                                                       | Unbilled revenue                          |                                           |     | (139              | )      |         |       | 233    |       
|                                                             |                                                                             |                                                       | Prepaid expenses and other current assets |                                           |     | 44                |        |         |       | 379    |       
|                                                             |                                                                             |                                                       | Accounts payable                          |                                           |     | (832              | )      |         |       | (556   | )     
|                                                             |                                                                             |                                                       | Accrued liabilities                       |                                           |     | (616              | )      |         |       | (509   | )     
|                                                             |                                                                             |                                                       | Accrued restructuring                     |                                           |     | (1,851            | )      |         |       | (2,766 | )     
|                                                             |                                                                             |                                                       | Deferred revenue                          |                                           |     | (764              | )      |         |       | (4,348 | )     
|                                                             |                                                                             |                                                       |                                           |                                           |     |                   |        |         |      
|                                                             |                                                                             |                                                       |                                           | Net cash used in operating activities     |     |                   | (4,049 | )       |       |        | (3,145 | )
|                                                             |                                                                             |                                                       |                                           |                                           |     |                   |        |         |      
|Cash flows from investing activities:                        |                                                                             |                                                       |                                           |                                           |     |                   |        |        
|                                                             | Purchases of short-term investments                                         |                                                       |                                           |                                          |     |                   |        | (7,291  | )    
|                                                             | Proceeds from the sale and maturities of short-term investments             |                                                       |                                           | 5,197                                     |     |                   |        | 9,600   |      
|                                                             | Purchases of property and equipment                                         |                                                       |                                           | (29                                       | )   |                   |        | (72     | )    
|                                                             | Return of cash from the Brightware acquisition escrow                       |                                                       |                                           |                                          |     |                   |        | 520     |      
|                                                             | Decrease in restricted cash                                                 |                                                       |                                           | 199                                       |     |                   |        | 188     |      
|                                                             | Increase in other assets                                                    |                                                       |                                           |                                          |     |                   |        | 10      |      
|                                                             |                                                                             |                                                       |                                           |                                           |     |                   |        |         |      
|                                                             |                                                                             |                                                       |                                           | Net cash provided by investing activities |     |                   | 5,367  |         |       |        | 2,955  |  
|                                                             |                                                                             |                                                       |                                           |                                           |     |                   |        |         |      
|Cash flows from financing activities:                        |                                                                             |                                                       |                                           |                                           |     |                   |        |        
|                                                             | Payments on long-term debt                                                  |                                                       |                                           |                                          |     |                   |        | (4      | )    
|                                                             | Proceeds from stock options and warrants exercised                          |                                                       |                                           |                                          |     |                   |        | 39      |      
|                                                             |                                                                             |                                                       |                                           |                                           |     |                   |        |         |      
|                                                             |                                                                             |                                                       |                                           | Net cash provided by financing activities |     |                   |       |         |       |        | 35     |  
|                                                             |                                                                             |                                                       |                                           |                                           |     |                   |        |         |      
|Effect of exchange rate changes on cash and cash equivalents |                                                                             |                                                       | 45                                        |                                           |     |                   | (9     | )      
|                                                             |                                                                             |                                                       |                                           |                                           |     |                   |        |         |      
|Net increase (decrease) in cash and cash equivalents         |                                                                             |                                                       | 1,363                                     |                                           |     |                   | (164   | )      
|Cash and cash equivalents, beginning of period               |                                                                             |                                                       | 13,479                                    |                                           |     |                   | 34,660 |        
|                                                             |                                                                             |                                                       |                                           |                                           |     |                   |        |         |      
|Cash and cash equivalents, end of period                     |                                                                             | $                                                     | 14,842                                    |                                           |     | $                 | 34,496 |        
|                                                             |                                                                             |                                                       |                                           |                                           |     |                   |        |         |      
|Supplemental cash flow information:                          |                                                                             |                                                       |                                           |                                           |     |                   |        |        
|                                                             | Interest paid                                                               |                                                       | $                                         |                                          |     |                   | $      | 37      |      
|                                                             |                                                                             |                                                       |                                           |                                           |     |                   |        |         |      
|Non-cash investing and financing activities:                 |                                                                             |                                                       |                                           |                                           |     |                   |        |        
|                                                             | Return of shares issued to Brightware                                       |                                                       | $                                         |                                          |     |                   | $      | 2,448   |      
|                                                             |                                                                             |                                                       |                                           |                                           |     |                   |        |         |      
|                                                             | Increase in other assets for value of shares returned from Brightware       |                                                       | $                                         |                                          |     |                   | $      | 430     |      
|                                                             |                                                                             |                                                       |                                           |                                           |     |                   |        |         |      

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

5



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

1.     Nature of Business and Basis of Presentation

Firepond, Inc., together with its wholly owned subsidiaries (the
Company), considers itself to be a pioneer 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 Fireponds eServicePerformer, 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
months ended January 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 segments into one. 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 reclassed 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 months ended January 31,
2003 are not necessarily indicative of results to be expected for the entire
year or any other period.

2.     Recent Accounting Pronouncements

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 has adopted the disclosure 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 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

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

disclosure requirements are effective for interim periods beginning after
December 15, 2002. The Company will adopt the disclosure requirement in its
quarter ending April 30, 2003. The adoption of this standard is not expected to
have a material effect on the Companys consolidated financial statements.

3.     Comprehensive Income (Loss)

The components of comprehensive loss for the three months ended January
31, 2003 and 2002 are as follows:

|                    |                           |                                                                |   |                   |      |      |   |         |     |  
|------------------- | ------------------------- | -------------------------------------------------------------- | - | ----------------- | ---- | ---- | - | ------- | --- | -
|                    |                           |                                                                |   | Three Months     
|                    |                           |                                                                |   | Ended January 31,
|                    |                           |                                                                |   |                  
|                    |                           |                                                                |   | 2003              |      | 2002
|                    |                           |                                                                |   |                   |      |     
|                    |                           |                                                                |   | (In thousands)   
|Comprehensive loss: |                           |                                                                |   |                   |      |      |   |        
|                    | Net loss                  |                                                                | $ | (717              | )    |      | $ | (11,028 | )  
|                    | Other comprehensive loss: |                                                                |   |                   |      |      |   |         |    
|                    |                           | Unrealized gain (loss) on short-term and long-term investments |   |                   | 53   |      |   |         | (10 | )
|                    |                           | Foreign currency translation                                   |   |                   | (579 | )    |   |         | 38  |  
|                    |                           |                                                                |   |                   |      |      |   |        
|                    | Comprehensive loss        |                                                                | $ | (1,243            | )    |      | $ | (11,000 | )  
|                    |                           |                                                                |   |                   |      |      |   |        

4.     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 requires the
recognition of stock-based compensation expense. As of January 31, 2003, a
total of approximately 327,600 options to purchase shares of the Companys
common stock are subject to variable accounting as a result of the stock option
exchange program. As of January 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 granted options to employees to purchase approximately 112,100
shares of common stock at a weighted-average exercise price of $2.83 per share
during the three months ended January 31, 2003. At January 31, 2003,
approximately 721,500 options were outstanding.

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 January 31, 2003, the deferred
compensation balance associated with these grants was $8,500.

(b)  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 January 31, 2003, and is generally not a recourse
obligation of the borrower, with specified exceptions. As of January 31, 2003,
the amount outstanding was approximately $4,000,000.

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

In addition, the Company issued notes to two former officers of the
Company totaling $270,000 and to a former employee of the Company in the amount
of $125,000. During the quarter ended January 31, 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. As of January 31, 2003, the loan
receivable balance for these two notes has been written down to the value of
the underlying shares. During the quarter ended January 31, 2002, in connection
with the termination of the other former officers 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.

(c)  Net Loss Per Share

Net loss per share is computed based on the guidance of SFAS No. 128,
Earnings per Share. SFAS No. 128 requires companies to report both basic loss
per share, which is computed by dividing the net loss by the weighted average
number of common shares outstanding, and diluted loss per share, which is
computed by dividing the net loss by the weighted average number of common
shares outstanding plus the weighted average dilutive potential common shares
outstanding using the treasury stock method. As a result of the losses incurred
by the Company for the three months ended January 31, 2003 and 2002, all
potential common shares were antidilutive and were excluded from the diluted
net loss per share calculations.

As of January 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 770,200 and 852,900,
respectively.

5.     Segment Reporting

Beginning with fiscal year 2003, the Company has combined product-related
revenue 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%, 15% and 12% of revenue, respectively for the three months
ended January 31, 2003. Revenue from the United States, the United Kingdom,
Switzerland and Sweden contributed approximately 41%, 17%, 17% and 11% of
revenue, respectively for the three months ended January 31, 2002.

6.     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 represents patented and
unpatented technology and know-how related to Brightwares eService product
line founded on a combination of artificial intelligence, knowledge
manager-technology and internet enterprise applications. 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 eService 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 eService revenue forecasts, operating profits and cash flows,
resulting in the impairment charge of the developed technology and know-how. As
of January 31, 2003, accumulated amortization of developed technology and

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

know-how was $103,000. The amortization expense for the quarter ended January
31, 2003 and 2002 was $26,000.

7.     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, 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 eService 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.

8.     Restructuring and Other Special Charges

(a)  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.

9



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

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

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

The facilities related cost component 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.

(b)  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.

(c)  Accrued Restructuring

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

|                       |                              |                             |   |                |        |  
|---------------------- | ---------------------------- | --------------------------- | - | -------------- | ------ | -
|                       |                              |                             |   | (In thousands)
|Accrued restructuring: |                              |                             |   |               
|                       | Balance, at October 31, 2002 |                             | $ | 2,426          |       
|                       |                              | Severance payments          |   |                | (242   | )
|                       |                              | Facilities related payments |   |                | (1,616 | )
|                       |                              | Other                       |   |                | 7      |  
|                       |                              |                             |   |                |       
|                       | Balance, at January 31, 2003 |                             | $ | 575            |       
|                       |                              |                             |   |                |       

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

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

9.     Commitments and Contingencies

On October 19, 2001, General Motors Corporation filed a complaint against
the Company in the Superior Court of Massachusetts, Middlesex County. The
complaint alleges, among other things, a breach of contract under agreements
entered into in 1994, as amended; anticipatory repudiation in the spring of
2000 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

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

as, extortion and coercion relating to agreements entered into in 1994, as
amended; breach of the covenant of good faith and fair dealing; fraud; as well
as, violation of Chapter 93A of the General Laws of the Commonwealth of
Massachusetts relating to unfair and deceptive trade practices. General Motors
claims further relate to license agreements, services agreements and a general
release entered into with the Company in May 2000. The claims generally allege,
among other things, that the Company coerced, extorted or otherwise caused
General Motors to enter into the May 2000 agreements under duress. On the Civil
Cover Sheet for the Superior Court of Massachusetts, Middlesex County, General
Motors claims damages in the amount of $9,000,000, exclusive of fees, costs and
multiple damages. The complaint does not demand damages in specific dollar
amounts. A Motion for Summary Judgment was filed on behalf of the Company in
December 2002. An opposition to the motion was filed on behalf of General
Motors and a reply brief was filed on behalf of the Company. The Motion for
Summary Judgment is now pending before the court. While the Company believes
the claims against it are without merit and intends to defend the action
vigorously, the litigation is in the preliminary stage and the Company cannot
predict the outcome with certainty. The Company may incur substantial legal
fees and expenses, and the litigation may divert the attention of some of the
Companys key management. The Companys defense of this litigation, regardless
of its outcome, may be costly and time-consuming. Should the outcome of the
litigation be adverse to the Company, it could be required to pay significant
monetary damages to the plaintiff, which could harm the business.

Beginning in August 2001, a number of securities class action complaints
were filed in the Southern District of New York seeking an unspecified amount
of damages on behalf of an alleged class of persons who purchased shares of the
Companys common stock between the date of its initial public offering and
December 6, 2000. The complaints name as defendants the Company and certain of
its directors and officers, FleetBoston Robertson Stephens, and other parties
as underwriters of the Companys initial public offering (the Firepond
Defendants). The plaintiffs allege, among other things, that the Companys
prospectus, incorporated in the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission, was materially false and misleading
because it failed to disclose that the investment banks which underwrote the
Companys initial public offering of securities received undisclosed and
excessive brokerage commissions, and required investors to agree to buy shares
of the Companys securities after the initial public offering was completed, at
predetermined prices, as a precondition to obtaining initial public offering
allocations. The plaintiffs further allege that these actions artificially
inflated the price of the Companys common stock after the initial public
offering. The action against the Company is being coordinated with over three
hundred other nearly identical actions filed against other companies. A motion
to dismiss addressing issues common to the companies and individuals who have
been sued in these actions was filed in July 2002. In October 2002, the court
dismissed the individual defendants from the case without prejudice based upon
stipulations of dismissal filed by the plaintiffs and the individual
defendants. After a hearing on the motion to dismiss, the Court, on February
19, 2003, denied dismissal of the claims against the companies and individuals,
including the Firepond Defendants. While the Company believes the claims
against it are without merit and intends to defend the actions vigorously, the
litigation is in the preliminary stage and the Company cannot predict the
outcome with certainty. The Company may incur substantial legal fees and
expenses, and the litigation may divert the attention of some of the Companys
key management. The Companys defense of this litigation, regardless of its
outcome, may be costly and time-consuming. Should the outcome of the litigation
be adverse to the Company, it could be required to pay significant monetary
damages to the plaintiff, which could harm the business.

The Company is also subject to various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material effect on the Companys 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 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 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 the current economic conditions. In addition, as a result of a prolonged
slowdown of global information technology spending, specifically within the
enterprise software marketplace, we undertook a plan to restructure our
operations. These actions sought to better align our cost structure with
projected revenue in the future and preserve cash. We reduced headcount and
facilities as well as wrote off excess equipment and terminated and
restructured certain contractual relationships. Overall, we terminated 19
general and administrative, 19 sales and marketing, 25 professional services
and 30 development employees. The restructuring and other special charges for
fiscal 2002 totaled $3.4 million. These actions further contributed to the
significant decrease in our expenses in the three months ended January 31, 2003
compared to the same period 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     
|                                                                  |                                                      |                          |                          |      | Ended January 31,
|                                                                  |                                                      |                          |                          |      |                  
|                                                                  |                                                      |                          |                          |      | 2003              |       | 2002  
|                                                                  |                                                      |                          |                          |      |                   |       |       
|Revenue:                                                          |                                                      |                          |                          |      |                   |       |        |     
|                                                                  |                                                      | License                  |                          |      | 15.7              | %     |        |      | 43.2 | %    
|                                                                  |                                                      | Services and maintenance |                          |      | 84.3              |       |        |      | 56.8 |      
|                                                                  |                                                      |                          |                          |      |                   |       |        |      |      |      
|                                                                  |                                                      |                          | Total revenue            |      |                   | 100.0 |        |      |      | 100.0 | 
|                                                                  |                                                      |                          |                          |      |                   |       |        |      |      |      
|Cost of revenue:                                                  |                                                      |                          |                          |      |                   |       |        |     
|                                                                  | License                                              |                          |                          |     |                   |       |        | 0.8  |     
|                                                                  | Product-related services and maintenance             |                          |                          | 42.1 |                   |       |        | 40.6 |     
|                                                                  |                                                      |                          |                          |      |                   |       |        |      |      |      
|                                                                  |                                                      |                          | Total cost of revenue    |      |                   | 42.1  |        |      |      | 41.4  | 
|                                                                  |                                                      |                          |                          |      |                   |       |        |      |      |      
|Gross profit                                                      |                                                      |                          | 57.9                     |      |                   |       | 58.6   |     
|Operating expenses:                                               |                                                      |                          |                          |      |                   |       |        |     
|                                                                  | Sales and marketing                                  |                          |                          | 31.0 |                   |       |        | 27.6 |     
|                                                                  | Research and development                             |                          |                          | 28.1 |                   |       |        | 38.2 |     
|                                                                  | General and administrative                           |                          |                          | 30.9 |                   |       |        | 19.9 |     
|                                                                  | Stock-based compensation                             |                          |                          | 6.1  |                   |       |        | 19.8 |     
|                                                                  | Amortization of goodwill and other intangible assets |                          |                          | 0.7  |                   |       |        | 5.4  |     
|                                                                  | Impairment of developed technology and know-how      |                          |                          |     |                   |       |        | 41.6 |     
|                                                                  |                                                      |                          |                          |      |                   |       |        |      |      |      
|                                                                  |                                                      |                          | Total operating expenses |      |                   | 96.8  |        |      |      | 152.5 | 
|                                                                  |                                                      |                          |                          |      |                   |       |        |      |      |      
|Loss from operations                                              |                                                      |                          | (38.9                    | )    |                   |       | (93.9  | )   
|Interest income                                                   |                                                      |                          | 2.7                      |      |                   |       | 2.4    |     
|Other income (expense), net                                       |                                                      |                          | 17.4                     |      |                   |       | (2.6   | )   
|                                                                  |                                                      |                          |                          |      |                   |       |        |      |      |      
|Loss before cumulative effect of a change in accounting principle |                                                      |                          | (18.8                    | )    |                   |       | (94.1  | )   
|Cumulative effect of a change in accounting principle             |                                                      |                          |                         |      |                   |       | (53.0  | )   
|                                                                  |                                                      |                          |                          |      |                   |       |        |      |      |      
|Net loss                                                          |                                                      |                          | (18.8                    | )%   |                   |       | (147.1 | )%  
|                                                                  |                                                      |                          |                          |      |                   |       |        |      |      |      

Comparison of Three Months Ended January 31, 2003 and 2002

Revenue.Total revenue decreased $3.7 million, or 49.0%, to $3.8 million
in the three months ended January 31, 2003 from $7.5 million in the three
months ended January 31, 2002. This decrease is attributable to an 81.5%
decrease in license revenue and a 24.4% decrease in services and maintenance
revenue.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | License.License revenue decreased $2.6 million, or 81.5%, to $599,000
in the three months ended January 31, 2003 from $3.2 million in the three
months ended July 31, 2002. License revenue as a percentage of total revenue
decreased to 15.7% in the three months ended January 31, 2003 from 43.2% in
the three months ended January 31, 2002. The decrease in absolute dollars and
as a percentage of total revenue are 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 quarter. 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
$1.0 million, or 24.4%, to $3.2 million in the three months ended January 31,
2003 from $4.3 million in the three months ended January 31, 2002. Services
and maintenance revenue as a percentage of total revenue increased to 84.3%
in the three months ended January 31, 2003 from 56.8% in the three months
ended January 31, 2002. The decrease in absolute dollars is attributable
primarily to the decrease in consulting engagements due to fewer new license
implementation engagements as well as a reduced level of implementation
services provided with new and post-implementation engagements. The increase
as a percentage of total revenue is due to maintenance revenue declining at a
substantially lower rate than license and services revenue.

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Cost of revenue.Total cost of revenue decreased $1.5 million, or 48.2%,
to $1.6 million in the three months ended January 31, 2003 from $3.1 million in
the three months ended January 31, 2002. Total cost of revenue as a percentage
of total revenue increased to 42.1% in the three months ended January 31, 2003
from 41.4% in the three months ended January 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 decreased $56,000, or 100.0%, to $0 in the three
months ended January 31, 2003 from $56,000 in the three months ended January
31, 2002. Cost of license revenue as a percentage of license revenue
decreased to 0% in the three months ended January 31, 2003 from 1.7% in the
three months ended January 31, 2002. The decrease in absolute dollars and as
a percentage of license revenue is primarily due to a decrease in royalties
due for license transactions during the quarter.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 $1.4 million, or 47.2%, to $1.6 million in
the three months ended January 31, 2003 from $3.0 million in the three months
ended January 31, 2002. Cost of services and maintenance revenue as a
percentage of services and maintenance revenue decreased to 49.9% in the
three months ended January 31, 2003 from 71.5% in the three months ended
January 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, increased utilization rate of staff, and our effort to
cut 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
$879,000, or 42.5%, to $1.2 million in the three months ended January 31, 2003
from $2.1 million in the three months ended January 31, 2002. Sales and
marketing expenses as a percentage of total revenue increased to 31.0% in the
three months ended January 31, 2003 from 27.6% in the three months ended
January 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, as well as a decrease in
marketing program spending. We plan to invest in marketing programs as
necessary.

Research and development expenses.Research and development expenses
consist primarily of salaries and personnel-related costs and the costs of
contractors associated with the development of new products, the enhancement of
existing products, and the performance of quality assurance and documentation
activities. Research and development expenses decreased $1.8 million, or 62.5%,
to $1.1 million in the three months ended January 31, 2003 from $2.9 million in
the three months ended January 31, 2002. Research and development expenses as a
percentage of total revenue decreased to 28.1% in the three months ended
January 31, 2003 from 38.2% in the three months ended January 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. We will continue to make
necessary investments to enhance our existing products and develop new
products.

General and administrative expenses.General and administrative expenses
consist primarily of salaries, and other personnel-related costs for executive,
financial, human resource, information services, and other administrative
functions, as well as legal and accounting costs. General and administrative
expenses decreased $313,000, or 21.0%, to $1.2 million in the three months
ended January 31, 2003 from $1.5 million in the three months ended January 31,
2002. General and administrative expenses as a percentage of total revenue
increased to 30.9% in the three months ended January 31, 2003 from 19.9% in the
three months ended January 31, 2002. These expenses decreased in absolute
dollars primarily as a result of decreased headcount, which resulted in reduced
payroll and other related expenses. These expenses as a percentage of total
revenue increased primarily due to the lower revenue for the first quarter of
fiscal 2003.

Stock-based compensation expense.Stock-based compensation expense
decreased $1.3 million, or 84.2%, to $234,000 in the three months ended January
31, 2003 from $1.5 million in the three months ended January 31, 2002.
Stock-based compensation expense as a percentage of total revenue decreased to
6.1% in the three months ended January 31, 2003 from 19.8% in the three months
ended January 31, 2002. Stock-based compensation expense at January 31, 2003
includes $3,500 for charges related to employee and non-employee stock option
grants and warrants and $230,000 for charges related to shares we acquired in
satisfaction of two loan agreements.

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Amortization of other intangible assets.Amortization of other intangible
assets decreased $382,000, or 93.6%, to $26,000 in the three months ended
January 31, 2003 from $408,000 in the three months ended January 31, 2002.
Amortization of other intangible assets as a percentage of total revenue
decreased to 0.7% in the three months ended January 31, 2003 from 5.4% in the
three months ended January 31, 2002. The decrease is primarily due to the
impairment of related developed technology and know-how under SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets.

Impairment of developed technology and know-how.During the three months
ended January 31, 2002, we lowered our estimates of the expected revenue from
the Brightware product, eCustomer assistance software, and determined that the
developed technology and know-how intangible asset was significantly impaired
and, accordingly, recorded a $3.1 million impairment charge.

Interest income.Interest income decreased $79,000, or 43.6%, to $102,000
in the three months ended January 31, 2003 from $181,000 in the three months
ended January 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 improved $863,000, or 440.3%, to $667,000 in income in
the three months ended January 31, 2003 from $196,000 in expense in the three
months ended January 31, 2002. The change is primarily due to foreign currency
transaction gains in the three months ended January 31, 2003.

Cumulative effect of a change in accounting principle.With the
acquisition of Brightware, Inc. 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, 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 January 31, 2003, cash and cash equivalents were $14.8 million and
short-term investments were $10.5 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 January 31, 2003 was $17.9 million
compared to working capital of $18.6 million at October 31, 2002.

Net cash used in operating activities was $4.0 million in the three months
ended January 31, 2003 compared with net cash used in operating activities of
$3.1 million in the three months ended January 31, 2002. Cash used in operating
activities in the three months ended January 31, 2003 was attributable to our
net loss, as well as changes in various working capital accounts including
accrued restructuring of which $1.6 million was due to facilities-related
payments, offset by stock-based compensation and depreciation and amortization.

Net cash provided by investing activities was $5.4 million in the three
months ended January 31, 2003 compared with net cash provided by investing
activities of $3.0 million in the three months ended January 31, 2002. Net cash
provided by investing activities in the three months ended January 31, 2003 was
primarily attributable to proceeds from the sale and maturities of short-term
investments and a decrease in restricted cash, offset by the purchase of
property and equipment.

We lease facilities under non-cancelable operating leases which have
various expiration dates ranging from 2003 through 2005. At January 31, 2003,
future minimum annual lease payments amounted to $1.6 million under these
leases.

We anticipate continued spending on capital expenditures consistent with
anticipated requirements for operations, infrastructure and personnel. We
believe that our existing cash balances will be sufficient to meet our
anticipated cash 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
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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 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 requirements for the quarter ended January 31, 2003. The
adoption of this standard is not expected to have a material effect on our
consolidated financial statements.

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 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 will adopt the disclosure requirement in its quarter ending April 30,
2003. The adoption of this standard is not expected to have a material effect
on our consolidated financial statements.

Risk Factors

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

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

Average license fees for our SalesPerformer 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.

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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 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, and may incur further costs. Our restructuring
may also yield unanticipated consequences, such as attrition beyond our planned
reduction in workforce and loss of employee morale and decreased performance.
Continuity of personnel is an important factor in the successful completion of
our business plan and ongoing turnover in our personnel could materially and
adversely impact our sales and marketing efforts, current customer
implementations, and our development projects. We believe that hiring and
retaining qualified individuals at all levels is essential to our success, and
there can be no assurance that we will be successful in attracting and
retaining the necessary personnel.

Recent material litigation 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.

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
issued in connection with our initial public offering. The complaints further
allege that FleetBoston Robertson Stephens and the other underwriters entered
into agreements with its customers in which FleetBoston Robertson Stephens and
the other underwriters agreed to allocate the common stock sold in our initial
public offering to certain customers in exchange for which such customers
agreed to purchase additional shares of our common stock in the after-market at
pre-determined prices. Securities class action litigation can result in
substantial costs and divert our managements attention and resources, which
could seriously harm our business.

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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
$717,000 for the three months ended January 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.

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

We are currently trading at levels that may result 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.

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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.

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.

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.

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
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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.

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
20Table of Contents

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 is 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 27% in the three
months ended January 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. 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
21Table of Contents

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 January 31, 2003, our executive officers, directors and entities
associated with them own approximately 48% of the outstanding shares of our
common stock. These stockholders have significant influence over matters
requiring approval by our stockholders, including the election of directors and
the approval of mergers or other business combination transactions. This
concentration of ownership could have the effect of delaying or preventing a
change in our control or discouraging a potential acquirer from attempting to
obtain control of us, which in turn could have a material adverse effect on the
market price of the common stock or prevent our stockholders from realizing a
premium over the market price for their shares of common stock.

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

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

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

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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




ITEM 4. CONTROLS AND PROCEDURES

Our principal executive officer and principal financial officer have
concluded, based on their evaluation within 90 days of the filing date of this
report, that our disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information we are required to disclose
in our reports filed under the Securities Exchange Act of 1934. There have been
no significant changes in our internal controls or in other factors that could
significantly affect the internal controls subsequent to the date of their
evaluation.




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 Judgement is now pending
before the court. 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.

Beginning in August 2001, a number of securities class action complaints
were filed in the Southern District of New York seeking an unspecified amount
of damages on behalf of an alleged class of persons who purchased shares of our
common stock between the date of our initial public offering and December 6,
2000. The complaints name as defendants Firepond and certain of its directors
and officers, 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. A motion to dismiss addressing issues common to the companies and
individuals who have been sued in these actions was filed in July 2002. In
October 2002, the court dismissed the individual defendants from the case
without prejudice based upon stipulations of dismissal filed by the plaintiffs
and the individual defendants. After a hearing on the motion to dismiss, the
Court, on February 19, 2003, denied dismissal of the claims against the
companies and the individuals,
23Table of Contents

including the Firepond Defendants. While we believe the claims against us
are without merit and intend to defend the actions vigorously, the litigation
is in the preliminary stage and we cannot predict the outcome with certainty.
We may incur substantial legal fees and expenses, and the litigation may divert
the attention of some of our key management. Our defense of this litigation,
regardless of its outcome, may be costly and time-consuming. Should the outcome
of the litigation be adverse to us, we could be required to pay significant
monetary damages to the plaintiff, which could harm our business.

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

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##### Table of Contents






SIGNATURES

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

Dated: March 17, 2003



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



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



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

25



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##### Table of Contents






CERTIFICATIONS

I, Klaus P. Besier, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Firepond, Inc.;                                                                                                                                                                                                                                                             
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report; and
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.                       
|
| | 4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:                                                                                                         
|

| | a) |  | Designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
Evaluation Date);                                                                                                      
|
| | c) |  | Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of the registrants Board of
Directors (or persons performing the equivalent function):
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | All significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrants internal controls; and                                                                                                                                        



| | 6. |  | The registrants other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 17, 2003

/s/ KLAUS P. BESIER
Klaus P. Besier
Chairman, Chief Executive Officer and President
(Principal Executive Officer)

26



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##### Table of Contents



I, Susan W. Ledoux, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Firepond, Inc.;                                                                                                                                                                                                                                                             
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report; and
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.                       
|
| | 4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:                                                                                                         



| | a) |  | Designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
Evaluation Date);                                                                                                      
|
| | c) |  | Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of the registrants Board of
Directors (or persons performing the equivalent function):
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | All significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrants internal controls; and                                                                                                                                        



| | 6. |  | The registrants other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 17, 2003

/s/ SUSAN W. LEDOUX
Susan W. Ledoux
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

27