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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 APRIL 30, 2000

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

COMMISSION FILE NUMBER 333-90911

FIREPOND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 41-1462409
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

890 WINTER STREET, WALTHAM, MASSACHUSETTS 02451
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(781) 487-8400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

(1) Yes [X] No [ ]

As of April 30, 2000 there were 35,491,095 shares of the Registrant's
Common Stock outstanding.

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2

FIREPOND, INC. AND SUBSIDIARIES

FORM 10-Q
QUARTER ENDED APRIL 30, 2000

TABLE OF CONTENTS

PAGE
NO.
----

PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets --
October 31, 1999 and April 30, 2000....................... 2
Condensed Consolidated Statements of Operations --
Three Months and Six Months Ended April 30, 1999 and
2000...................................................... 3
Condensed Consolidated Statements of Cash Flows --
Six Months Ended April 30, 1999 and 2000.................. 4
Notes to Condensed Consolidated Financial Statements........ 5

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 22

PART II OTHER INFORMATION

Item 1. Legal Proceedings........................................... 22
Item 2. Changes in Securities and Use of Proceeds................... 22
Item 3. Defaults Upon Senior Securities............................. 22
Item 4. Submission of Matters to a vote of Security Holders......... 22
Item 5. Other Information........................................... 22
Item 6. Exhibits and Reports on Form 8-K............................ 22
SIGNATURES.................................................. 23
EXHIBIT INDEX............................................... 24

1
3

FIREPOND, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)

OCTOBER 31, APRIL 30,
1999 2000
----------- ---------

ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,120 $ 91,984
Short-term investments.................................... -- 16,367
Accounts receivable, net.................................. 9,910 11,713
Unbilled services......................................... 1,191 1,006
Prepaid expenses and other current assets................. 1,265 1,532
-------- --------
Total current assets.............................. 14,486 122,602
Property and equipment, net................................. 6,048 5,984
Restricted cash............................................. 550 550
Long-term investments....................................... -- 2,545
Other assets................................................ 576 884
-------- --------
$ 21,660 $132,565
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit............................................ $ 6,740 $ --
Current portion of long-term debt......................... 1,313 1,479
Accounts payable.......................................... 3,833 2,253
Accrued liabilities....................................... 5,700 8,974
Deferred revenue.......................................... 8,280 9,068
-------- --------
Total current liabilities......................... 25,866 21,774
Long-term debt, less current portion........................ 702 339
Restructuring accrual, less current portion................. 446 14
Stockholders' equity (deficit):
Preferred stock, $0.01 par value --
Authorized -- 50,000,000 shares at October 31, 1999 and
5,000,000 at April 30, 2000;
Issued and outstanding -- 19,097,793 shares at October
31, 1999 and none at April 30, 2000................... 191 --
Common stock, $0.01 par value --
Authorized -- 100,000,000 shares;
Issued and outstanding -- 10,072,817 shares at October
31, 1999 and 35,491,095 shares at April 30, 2000...... 101 355
Additional paid-in capital.................................. 62,380 189,941
Accumulated deficit......................................... (61,793) (72,197)
Deferred compensation....................................... (5,893) (6,723)
Subscription receivables.................................... (13) --
Other comprehensive loss.................................... (327) (938)
-------- --------
Total stockholders' equity (deficit).............. (5,354) 110,438
-------- --------
$ 21,660 $132,565
======== ========

The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
4

FIREPOND, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

THREE MONTHS SIX MONTHS
ENDED APRIL 30, ENDED APRIL 30,
------------------- --------------------
1999 2000 1999 2000
------- -------- -------- --------

Revenues:
Product-related revenues:
License................................................ $ 2,410 $ 4,921 $ 4,017 $ 8,828
Services and maintenance............................... 1,950 5,058 3,246 9,516
------- -------- -------- --------
Total product-related revenues.................... 4,360 9,979 7,263 18,344
Custom development services.............................. 4,066 3,608 8,349 7,220
------- -------- -------- --------
Total revenues.................................... 8,426 13,587 15,612 25,564
------- -------- -------- --------
Cost of revenues:
License................................................ 47 138 93 267
Product-related services and maintenance(1)............ 1,405 2,828 2,403 5,111
Custom development services(1)......................... 2,733 1,407 5,734 3,006
------- -------- -------- --------
Total cost of revenues............................ 4,185 4,373 8,230 8,384
------- -------- -------- --------
Gross profit............................................... 4,241 9,214 7,382 17,180
Operating expenses:
Sales and marketing(1)................................... 6,541 6,671 11,299 13,089
Research and development(1).............................. 1,828 3,650 3,825 7,347
General and administrative(1)............................ 1,717 2,242 3,248 4,204
Stock-based compensation................................. 423 1,767 655 2,934
Reversal of restructuring charge......................... -- (500) -- (500)
------- -------- -------- --------
Total operating expenses.......................... 10,509 13,830 19,027 27,074
------- -------- -------- --------
Loss from operations....................................... (6,268) (4,616) (11,645) (9,894)
Interest income (expense).................................. (104) 1,201 (289) 398
Other income (expense), net................................ 26 271 (24) 529
------- -------- -------- --------
Net loss before extraordinary item......................... (6,346) (3,144) (11,958) (8,967)
Loss on extinguishment of debt............................. -- (1,437) -- (1,437)
------- -------- -------- --------
Net loss................................................... (6,346) (4,581) (11,958) (10,404)
Stock dividend paid to preferred stockholders.............. -- (65,542) -- (65,542)
------- -------- -------- --------
Loss applicable to common stockholders..................... $(6,346) $(70,123) $(11,958) $(75,946)
======= ======== ======== ========
Net loss per share (Note 6(a)):
Basic and diluted net loss per share before extraordinary
item................................................... $ (0.63) $ (0.09) $ (1.20) $ (0.41)
======= ======== ======== ========
Extraordinary item....................................... $ -- $ (0.04) $ -- $ (0.07)
======= ======== ======== ========
Basic and diluted net loss per share applicable to common
stockholders........................................... $ (0.63) $ (2.06) $ (1.20) $ (3.44)
======= ======== ======== ========
Basic and diluted weighted average common shares
outstanding............................................ 10,005 34,039 10,005 22,070
======= ======== ======== ========
Pro forma net loss per share (Note 6(b)):
Pro forma net loss per share............................. $ (0.24) $ (0.13) $ (0.50) $ (0.33)
======= ======== ======== ========
Pro forma basic and diluted weighted average common
shares outstanding..................................... 26,088 34,815 24,074 31,282
======= ======== ======== ========

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

THREE MONTHS SIX MONTHS
ENDED APRIL 30, ENDED APRIL 30,
---------------- ----------------
1999 2000 1999 2000
----- ------- ----- -------

Cost of revenues............................................ $ -- $ 9 $ -- $ 53
Operating expenses:
Sales and marketing....................................... -- 1,326 -- 1,966
Research and development.................................. 5 407 71 703
General and administrative................................ 418 25 584 212
---- ------ ---- ------
Total stock-based compensation.............................. $423 $1,767 $655 $2,934
==== ====== ==== ======

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 CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

SIX MONTHS
ENDED APRIL 30,
--------------------
1999 2000
-------- --------

Cash flows from operating activities:
Net loss.................................................. $(11,958) $(10,404)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock-based compensation expense....................... 655 2,934
Loss on disposal of property and equipment............. 48 --
Depreciation and amortization.......................... 1,262 1,541
Non-cash interest expense.............................. -- 467
Loss on early extinguishment of debt................... -- 1,437
Changes in assets and liabilities:
Accounts receivable.................................. (457) (2,061)
Unbilled services.................................... (842) 185
Prepaid expenses and other current assets............ (304) (267)
Accounts payable..................................... (670) (1,723)
Accrued liabilities.................................. (1,050) 3,078
Deferred revenue..................................... 2,276 788
Restructuring accrual................................ -- (378)
-------- --------
Net cash used in operating activities............. (11,040) (4,403)
-------- --------
Cash flows from investing activities:
Purchases of short term investments....................... -- (16,395)
Purchases of long term investments........................ -- (2,558)
Purchases of property and equipment....................... (778) (1,397)
Proceeds from sale of property and equipment.............. 2,557 --
Increase in other assets.................................. (310) (320)
-------- --------
Net cash provided by (used in) investing
activities...................................... 1,469 (20,670)
-------- --------
Cash flows from financing activities:
Net proceeds (payments) on line of credit................. 4,385 (6,740)
Payments on long-term debt................................ (4,260) (197)
Proceeds from preferred stock issuance.................... 19,840 --
Proceeds from common stock issuance, net of offering
costs.................................................. -- 113,800
Proceeds from stock options and warrants exercised........ 10 8,088
Decrease in subscription receivables...................... -- 13
-------- --------
Net cash provided by financing activities......... 19,975 114,964
-------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... (16) (27)
-------- --------
Net increase in cash and cash equivalents................... 10,388 89,864
Cash and cash equivalents, beginning of period.............. 2,324 2,210
-------- --------
Cash and cash equivalents, end of period.................... $ 12,712 $ 91,984
======== ========
Supplemental cash flow information:
Interest paid............................................. $ 370 $ 601
======== ========
Noncash investing and financing activities:
Equipment acquired under capital lease obligations........ $ 273 $ --
======== ========
Warrants issued in conjunction with subordinated notes
payable................................................ $ -- $ 1,904
======== ========
Conversion of preferred stock into common stock........... $ -- $ 191
======== ========

The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
6

FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

FirePond, Inc. together with its wholly owned subsidiaries (the "Company"),
is a leading global provider of integrated e-business sales and marketing
solutions that enable companies to optimize their customer relationships and
maximize the effectiveness of their Internet-based and traditional sales
channels. The Company provides software and services that allow its customers to
merge their e-commerce selling, customer relationship management, and channel
management strategies on a single, Internet-based platform.

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

The accompanying condensed consolidated financial statements for the three
and six months ended April 30, 2000 and 1999 are unaudited and have been
prepared on a basis consistent with the October 31, 1999 audited financial
statements and include normal recurring adjustments which are, in the opinion of
management, necessary for the fair presentation of the results of these periods.
These condensed consolidated financial statements should be read in conjunction
with our consolidated financial statements and notes thereto for the fiscal year
ended October 31, 1999 included in our Registration Statement on Form S-1. The
results of operations for the three and six months ended April 30, 2000 are not
necessarily indicative of results to be expected for the entire year or any
other period.

2. INITIAL PUBLIC OFFERING

On February 4, 2000, the Company completed its initial public offering of
5,000,000 shares of common stock. Additionally, on February 25, 2000, the
underwriters of the initial public offering exercised their over-allotment
option to purchase an additional 666,666 shares. At the offering price of $22.00
per share, the Company received $113.8 million from these transactions, net of
underwriting discounts and commissions and offering expenses.

The Company's previously outstanding series A, series C and series G
preferred stock, as well as shares of the Company's common stock held by some
common stockholders, had rights that allowed holders to receive a priority
payment upon the completion of the Company's initial public offering. These
priority payments totaled $35,750,000 for the series A, series C and series G
preferred stockholders, and $10,000,000 to some of the holders of the Company's
common stock. These amounts were payable in cash, or, at the Company's option, a
number of shares of common stock determined by dividing the amount payable by
$12.00. The Company's board of directors elected to make these payments as a
stock dividend of 3,812,532 shares of common stock upon consummation of the
Company's initial public offering. At the initial public offering price of
$22.00 per share, the value of the stock dividend to preferred shareholders
totaled $65,542,000 and the value of the stock dividend to some of the holders
of the Company's common stock totaled $18,334,000. The stock dividend on the
preferred stock increased the loss attributable to common stockholders by
$65,542,000 for the three and six months ended April 30, 2000.

3. SIGNIFICANT ACCOUNTING POLICIES

(a) Revenue Recognition

The Company recognizes revenue based on the provisions of Statement of
Position, or SOP, No. 97-2, Software Revenue Recognition, as amended by SOP No.
98-4, and SOP No. 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. The American Institute of Certified Public
Accountants recently issued SOP No. 98-9, which provides amendments to SOP No.
97-2, and was effective for transactions entered into beginning January 1, 2000.
This pronouncement has not materially impacted the Company's revenue recognition
practices.

5
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FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

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

Product-Related Revenues

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

The Company has concluded that the implementation services are essential to
the customer's use of the packaged software products in arrangements where the
Company is responsible for implementation services. As such, the Company
recognizes revenue for these arrangements following the percentage-of-completion
method over the implementation period. Percentage of completion is measured by
the percentage of implementation hours incurred to date to estimated total
implementation hours. This method is used because management has determined that
past experience has shown expended hours to be the best measure of progress on
these engagements.

In situations where the Company is not responsible for implementation
services, the Company recognizes revenue on delivery of the packaged software if
there is persuasive evidence of an arrangement, collection is probable, the fee
is fixed or determinable and vendor-specific objective evidence exists to
allocate the total fees to all elements of the arrangement.

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

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

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

Custom Development Services Revenues

The Company performs custom development services under fixed-price
contracts, for which revenue is recognized using the percentage-of-completion
method. These services consist of the development of highly customized
applications utilizing core software technology. These contracts typically range
in terms of one to five years. Percentage of completion is measured by the
percentage of implementation hours incurred to date to estimated total
implementation hours. This method is used because management considers expended
hours to be the best measure of progress on these engagements. When the current
estimates of total contract revenue and contract cost indicate a loss, a
provision for the entire loss on the contract is recorded.

The Company also provides ongoing services related to custom development
projects including software and data maintenance. Revenues from these
arrangements are recognized as the services are performed.

Unbilled services represent amounts due to the Company under custom
development service agreements for work performed that had not been billed as of
the period end. The Company bills customers under custom development contracts
upon achieving performance milestones or by billing dates, as specified in the
contracts.
6
8
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

(b) Cash and Cash Equivalents

The Company accounts for cash equivalents based on the guidance in
Statement of Financial Accounting Standards, or SFAS, No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Cash equivalents are
short-term, highly liquid investments with original maturity dates of three
months or less. Cash equivalents are carried at cost, which approximates fair
market value. Cash equivalents at October 31, 1999 and April 30, 2000 consisted
of interest-bearing bank deposits, money market accounts and commercial paper.

In accordance with SFAS No. 115 and based on the Company's intentions
regarding these instruments, the Company has classified all short-term and
long-term investments as available-for-sale. These investments consist primarily
of commercial paper with an original maturity of less than a year for short-term
investments and less than two years for long-term investments. An unrealized
holding loss of $41,000 for the quarter ended April 30, 2000 was recorded as
other comprehensive loss in stockholder's equity.

OCTOBER 31, APRIL 30,
1999 2000
----------- ---------

Cash and cash equivalents
Cash................................................. $2,120 $ 4,675
Money market accounts................................ -- 22,578
Commercial paper..................................... -- 64,731
------ -------
Total cash and cash equivalents.............. $2,120 $91,984
====== =======
Short-term investments
Commercial paper..................................... $ -- $16,367
------ -------
Total short-term investments................. $ -- $16,367
====== =======
Long-term investments
Commercial paper..................................... $ -- $ 2,545
------ -------
Total long-term investments.................. $ -- $ 2,545
====== =======

(d) Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No.
133 is not expected to have a material impact on the Company's consolidated
financial statements.

In March 2000, the FASB issued Interpretation Number 44, Accounting for
Certain Transactions Involving Stock Compensation -- An Interpretation of APB
No. 25. The Interpretation clarifies the application of Opinion 25 in certain
situations, as defined. The Interpretation is effective July 1, 2000 but covers
certain events having occurred after December 15, 1998. To the extent that
events covered by the Interpretation occur during the period after December 15,
1998, but before the issuance of the Interpretation, the effects of applying
this Interpretation would be recognized on a prospective basis from the
effective date. Accordingly, upon initial application of the Interpretation, (a)
no adjustment would be made to financial statements for the periods before the
effective date and (b) no expense would be recognized for any additional
compensation cost

7
9
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

measured that is attributed to periods before the effective date. The Company
expects that the adoption of this Interpretation would not have a material
impact on the accompanying financial statements.

(e) Comprehensive Income (Loss)

The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which
requires that items defined as other comprehensive income (loss), such as
unrealized gains and losses on investments and foreign currency translation
adjustments, be separately classified in the financial statements and that the
accumulated balance of other comprehensive income (loss) be reported separately
from retained earnings and additional paid-in capital in the stockholders'
equity section of the balance sheet. The components of comprehensive loss for
the three and six months ended April 30, 1999 and 2000 are as follows:

THREE MONTHS SIX MONTHS
ENDED APRIL 30, ENDED APRIL 30,
------------------ --------------------
1999 2000 1999 2000
------- ------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)

Comprehensive loss:
Net loss................................ $(6,346) $(4,581) $(11,958) $(10,404)
Other comprehensive loss
Unrealized loss on short-term and
long-term investments.............. -- (41) -- (41)
Foreign currency translation......... (44) (382) (83) (570)
------- ------- -------- --------
Comprehensive loss........................ $(6,390) $(5,004) $(12,041) $(11,015)
======= ======= ======== ========

4. SUBORDINATED NOTES PAYABLE

On November 12, 1999, the Company issued subordinated notes payable
totaling $6,000,000 to an outside investor and two existing stockholders of the
Company. The subordinated notes bore interest at 12.0% per year and were due
upon the earlier of the closing of the Company's initial public offering or
November 11, 2000. If an initial public offering was not completed by May 11,
2000 or in the event of a sale transaction, as defined, before May 11, 2000, the
subordinated notes, including accrued interest, were convertible into shares of
the Company's preferred stock having rights equivalent to the Company's existing
series F preferred stock at a rate of $4.46 per share. The Company also issued
to the holders of the subordinated notes payable warrants to purchase an
aggregate of 360,000 shares of common stock at an exercise price of $5.25 per
share. The estimated fair value of these warrants totaling $2,789,000 was
determined using the Black-Scholes valuation model with the following variables:
risk-free interest rate of 6.0%, dividend yield rate of 0%, term of five years,
and volatility of 80%. The Company allocated the proceeds from the subordinated
notes payable of $6,000,000 in proportion to the relative fair values of both
the warrants and the subordinated notes payable. As a result, the Company
recorded the warrants as a discount totaling $1,904,000 against the carrying
value of the subordinated notes payable, with the discount amortized to interest
expense over the term of the subordinated notes payable.

In conjunction with the Company's initial public offering in February 2000,
the Company repaid the $6,000,000 of subordinated notes plus accrued interest of
$180,000. As a result, in the quarter ended April 30, 2000, the Company recorded
a $1,437,000 loss on extinguishment of debt as an extraordinary item for the
amount of unamortized discount at the time of repayment.

8
10
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

5. REVERSAL OF RESTRUCTURING CHARGE

During its fiscal year ended October 31, 1999, the Company recorded a
restructuring charge in connection with the relocation of its corporate office
from Mankato, Minnesota to Waltham, Massachusetts and in doing so accrued the
present value of the future lease payments relating to idle space in the Mankato
facility. During the quarter ended April 30, 2000, the Company negotiated a new
lease for less space, eliminating the future obligation for the idle space in
its Mankato facility. As a result, the Company reversed $500,000 of the
restructuring accrual representing the remaining obligation for the idle lease
space.

6. NET LOSS PER SHARE

(a) Net Loss Per Share

Net loss per share is computed based on the guidance of SFAS No. 128,
Earnings per Share. SFAS No. 128 requires companies to report both basic loss
per share, which is based on the weighted average number of common shares
outstanding, and diluted loss per share, which is based on the weighted average
number of common shares outstanding and the weighted average dilutive potential
common shares outstanding using the treasury stock method. As a result of the
losses incurred by the Company for both the three and six months ended April 30,
1999 and 2000, all potential common shares were antidilutive and were excluded
from the diluted net loss per share calculations.

Under Securities and Exchange Commission Staff Accounting Bulletin No. 98,
common stock and convertible preferred stock issued or granted for nominal
consideration before the effective date of a company's initial public offering
must be included in the calculation of basic and diluted net loss per share as
if they had been outstanding for all periods presented. The Company has
determined that there were no issuances of common stock and convertible
preferred stock for nominal consideration.

The following table summarizes securities outstanding as of each period-end
which were not included in the calculation of diluted net loss per share since
their inclusion would be antidilutive.

APRIL 30
---------------
1999 2000
------ -----
(IN THOUSANDS)

Common stock options and warrants........................... 5,733 9,990
====== =====
Convertible preferred stock................................. 19,098 --
====== =====
Preferred stock warrants.................................... 864 --
====== =====

The stock dividend of $65,542,000 paid to preferred stockholders increased
the net loss per share applicable to common stockholders by $1.93 and $2.97 for
the three and six months ended April 30, 2000, respectively.

(b) Pro Forma Net Loss Per Share

Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of preferred stock upon the completion of the
Company's initial public offering in February 2000, using the if-converted
method, from the original date of issuance. The computation of pro forma net
loss per share excludes the stock dividend of $65,542,000 paid to preferred
stockholders.

9
11
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

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

THREE MONTHS SIX MONTHS
ENDED APRIL 30, ENDED APRIL 30,
---------------- ----------------
1999 2000 1999 2000
------ ------ ------ ------
(IN THOUSANDS) (IN THOUSANDS)

Pro forma basic and diluted:
Weighted average common shares outstanding
used in computing basic and diluted net
loss per share............................. 10,005 34,039 10,005 22,070
Weighted average common shares issuable upon
the conversion of preferred stock.......... 12,085 596 10,163 7,070
Weighted average common shares issuable upon
settlement of the priority payments........ 3,813 169 3,813 2,011
Weighted average common shares issuable upon
exercise of series F preferred stock
warrants................................... 185 11 93 131
------ ------ ------ ------
Weighted average common shares outstanding
used in computing pro forma basic and
diluted net loss per share................. 26,088 34,815 24,074 31,282
====== ====== ====== ======

7. STOCKHOLDERS' EQUITY (DEFICIT)

(a) Recapitalization

On November 8, 1999, the Company's board of directors approved a
two-for-three reverse stock split of its common stock. The stock split was
effective on January 4, 2000. All shares and per share amounts of common stock
for all periods presented have been retroactively adjusted to reflect the stock
splits.

Upon the closing of the initial public offering in February 2000, the
Company's certificate of incorporation was amended and restated to change its
authorized capital stock to 100,000,000 shares of $0.01 par value common stock
and 5,000,000 shares of $0.01 par value preferred stock.

(b) Stock Options and Warrants

On November 8, 1999 the board of directors adopted and on January 4, 2000
the stockholders approved (1) the 1999 stock option and grant plan under which
3,000,000 shares of the Company's common stock were reserved for future
issuance, (2) the 1999 director stock option plan under which 500,000 shares of
the Company's common stock were reserved for future issuance and (3) an increase
in the number of shares of the Company's common stock reserved for issuance
under the 1997 stock option plan from 7,896,815 shares to 9,396,815 shares.

The Company granted stock options to employees and consultants that require
the recognition of stock-based compensation expense. Additionally, the Company
granted stock warrants to certain customers and to strategic business partners.
Stock-based compensation related to grants to employees represents the
amortization, over the vesting period of the option, of the difference between
the exercise price of options granted to employees and the fair market value of
its common stock for financial reporting purposes. Stock-based compensation
related to grants to non-employees represents the fair market value of the
options and warrants granted as computed using an established option valuation
formula. As of April 30, 2000, the deferred compensation balance was $6,723,000
and will be recognized as an expense over the vesting period of the underlying
stock options for options granted to employees and as earned for non-employees
in accordance with EITF 96-18.

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12
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

The Company granted options to employees and non-employees to purchase
349,917 and 2,955,690 shares of common stock at a weighted-average exercise
price of $33.33 and $12.96 per share during the three and six months ended April
30, 2000, respectively.

In connection with a consulting arrangement valued at $1.0 million, in
November 1999 the Company issued warrants to purchase an aggregate of 207,900
shares of common stock at an exercise price of $7.22 per share, exercisable
within one year of the Company's initial public offering. The Company also
issued fully-vested warrants to two customers in connection with license
arrangements to purchase a total of 36,667 shares of common stock at an exercise
price of $11.00 per share. The estimated value of these warrants totaled
$224,000 at the time of grant and was recorded as a reduction in the amount of
future revenue to be recognized associated with these two customers.

8. SEGMENT REPORTING

The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for reporting
information related to operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are defined as components of an enterprise about which
separate, discrete financial information is available for evaluation by the
chief operating decision maker, or decision-making group, in making decisions
how to allocate resources and assess performance. The Company's chief operating
decision maker, as defined under SFAS No. 131, is its chief executive officer.

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

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

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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 these expressed in such
forward-looking statements. Factors that might cause such a difference include,
among other things, those set forth under "Overview", "Liquidity and Capital
Resources" and "Risk Factors" included in these sections and those appearing
elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only as
of the date hereof. We assume no obligation to update these forward-looking
statements to reflect actual results or changes in factors or assumptions
affecting forward-looking statements.

OVERVIEW

We are a leading global provider of integrated e-business sales and
marketing solutions that enable companies to optimize their customer
relationships and maximize the effectiveness of their Internet-based and
traditional sales channels. We provide software and services that allow its
customers to merge their e-commerce selling, customer relationship management,
and channel management strategies on a single, Internet-based platform. From our
inception in 1983 through 1997, we generated revenues primarily through
providing custom development services. These services consisted of the
development of highly customized applications utilizing core software
technology, and related software maintenance and data maintenance services. In
early fiscal 1997, we undertook a plan to change our strategic focus from a
custom development services company to a software product company providing more
standardized solutions. As a result, we exited several of our unrelated business
activities, changed our management team and reduced our workforce to be in line
with our newly defined business strategy. Our first packaged software product
was introduced in May 1997 and we released our current product, the FirePond
Application Suite, in October 1999. As a result of these efforts,
product-related revenues as a percentage of total revenues increased from 1.5%
in fiscal 1997 to 23.6% in fiscal 1998 to 53.6% in fiscal 1999 and from 46.5% in
the six months ended April 30, 1999 to 71.8% in the six months ended April 30,
2000.

We anticipate that product-related revenues from product licenses will
continue to grow as result of increased market acceptance of our products, the
recent introduction of the FirePond Application Suite, and increases in both the
size and productivity of our sales force. Therefore, we expect that a higher
percentage of total revenues will be attributable to product-related revenues in
the future. Unlike our custom development services, our product-related services
represent the implementation of our packaged software products.

We also anticipate a decline in custom development services revenues, as we
have strategically de-emphasized that business and do not plan to accept new
custom development contracts. Custom development services revenues will continue
to represent a material portion of total revenues until existing custom
development contracts and related maintenance agreements are completed. Custom
development services revenues in the future will be primarily from ongoing
software maintenance and data maintenance services that we provide under custom
development services contracts. The rate of decline in custom development
revenues depends in part on our ability to convert custom development services
customers to our software products. Since the introduction of our first software
product in May 1997, we have converted six custom development customers to our
software products.

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

We recognize revenues under Statement of Position, or SOP, No. 97-2,
Software Revenue Recognition, as amended by SOP No. 98-4 and SOP No. 98-9, and
SOP No. 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. We generally recognize revenues from product-related
license agreements over the implementation period. We recognize these revenues
following the percentage-of-completion method over the implementation period
because we have concluded that the
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14

implementation services are essential to our customers' use of our packaged
software products. Percentage of completion is measured by the percentage of
implementation hours incurred to date to total estimated implementation hours.

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

Revenues from custom software development projects can be either
fixed-price or on a time-and-materials basis. We recognize revenues as the
services are performed when the project is based on time-and-materials. We
recognize revenues on a percentage-of-completion method when the project is a
fixed-price contract. Percentage-of-completion is determined based on the number
of hours incurred to date on a project compared to the total estimated hours.

Since May 1998, we have been investing heavily in the infrastructure
necessary to expand our global operations, including the formation and staffing
of international subsidiaries. We expect to continue to invest in our
international operations as we expand our international direct sales channel and
enhance our marketing effort to increase our worldwide market share.

We have invested heavily in research and development. Research and
development expenses have been increasing since early fiscal 1997 when we began
the development of our software products. During fiscal 1996 and fiscal 1997, we
capitalized software development costs and amortized these costs over a period
of 18 to 36 months. During fiscal 1997, in connection with our change in focus
from providing custom development services to providing more standardized
software products, we reviewed the software development costs capitalized to
date, which principally related to components of custom solutions, and
determined that these costs were not realizable. In connection with our change
in strategic focus, we wrote off $4.0 million of our capitalized software
development costs to costs of custom development services revenues in fiscal
1997. Through May 1997, we capitalized $532,000 of costs related to the
development of our first software product. We have amortized these costs to cost
of license revenues through the end of fiscal 1999.

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

We have granted stock options to employees and consultants that require us
to record stock-based compensation expense. We have also granted stock warrants
to certain customers and to strategic business partners. Stock-based
compensation related to grants to employees represents the amortization, over
the vesting period of the option, of the difference between the exercise price
of options granted to employees and the fair market value of our common stock
for financial reporting purposes. Stock-based compensation related to grants to
non-employees represents the fair market value of the options and warrants
granted as computed using an established option valuation formula. We recorded
stock-based compensation expense of approximately $423,000 and $1.8 million for
the three months ended April 30, 1999 and April 30, 2000, respectively, and
$655,000 and $2.9 million for the six months ended April 30, 1999 and April 30,
2000, respectively. As of April 30, 2000, the deferred compensation balance was
approximately $6.7 million and will be amortized over the remaining vesting
period of the options and warrants.

We have incurred quarterly and annual losses intermittently since we were
formed, and regularly since we began transitioning to a software product
business in early fiscal 1997. In addition, we moved our headquarters from
Mankato, Minnesota to Waltham, Massachusetts in the third quarter of fiscal
1999, and incurred increased costs associated with that relocation. We incurred
net losses of $27.0 million for fiscal 1997, $9.0

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15

million for fiscal 1998, $28.9 million for fiscal 1999, and $10.4 million for
the six months ended April 30, 2000. We expect to continue to incur losses on
both a quarterly and annual basis in the future.

Our previously outstanding series A, series C and series G preferred stock,
as well as shares of our common stock held by some common stockholders, had
rights that allowed holders to receive a priority payment upon the completion of
our initial public offering. These priority payments totaled $35,750,000 for the
series A, series C and series G preferred stockholders, and $10,000,000 to some
of the holders of our common stock. These amounts were payable in cash, or, at
our option, a number of shares of common stock determined by dividing the amount
payable by $12.00. Our board of directors elected to make these payments as a
stock dividend of 3,812,532 shares of common stock upon consummation of our
initial public offering. At the initial public offering price of $22.00 per
share, the value of the stock dividend to preferred shareholders totaled
$65,542,000 and the value of the stock dividend to some of the holders of our
common stock totaled $18,334,000. The stock dividend on the preferred stock
increased the loss attributable to common stockholders by $65,542,000 for the
three and six months ended April 30, 2000.

As of October 31, 1999, we had available a net operating loss carryforward
of approximately $36.0 million to reduce future federal and state income taxes,
if any. This carryforward expires beginning in 2012 and may be subject to review
and possible adjustment by the Internal Revenue Service. The Tax Reform Act of
1986 contains provisions that may limit the amount of net operating loss
carryforwards that we may utilize in any one year in the event of cumulative
changes in ownership over a three-year period in excess of 50%.

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RESULTS OF OPERATIONS

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

THREE MONTHS SIX MONTHS
ENDED APRIL 30, ENDED APRIL 30,
---------------- ----------------
1999 2000 1999 2000
------ ------ ------ ------

Revenues:
Product-related revenues:
License........................................ 28.6% 36.2% 25.7% 34.5%
Services and maintenance....................... 23.1 37.2 20.8 37.3
----- ----- ----- -----
Total product-related revenues............ 51.7 73.4 46.5 71.8
Custom development services.................... 48.3 26.6 53.5 28.2
----- ----- ----- -----
Total revenues............................ 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
License........................................... 0.6 1.0 0.6 1.0
Product-related services and maintenance.......... 16.7 20.8 15.4 20.0
Custom development services....................... 32.4 10.4 36.7 11.8
----- ----- ----- -----
Total cost of revenues.................... 49.7 32.2 52.7 32.8
----- ----- ----- -----
Gross profit........................................ 50.3 67.8 47.3 67.2
Operating expenses:
Sales and marketing............................... 77.6 49.1 72.4 51.3
Research and development.......................... 21.7 26.9 24.5 28.7
General and administrative........................ 20.4 16.5 20.8 16.4
Stock-based compensation.......................... 5.0 13.0 4.2 11.5
Reversal of restructuring charge.................. -- (3.7) -- (2.0)
----- ----- ----- -----
Total operating expenses.................. 124.7 101.8 121.9 105.9
----- ----- ----- -----
Loss from operations................................ (74.4) (34.0) (74.6) (38.7)
Interest income (expense)........................... (1.2) 8.9 (1.9) 1.6
Other income (expense), net......................... 0.3 2.0 (0.1) 2.0
----- ----- ----- -----
Net loss before extraordinary item.................. (75.3) (23.1) (76.6) (35.1)
Loss on extinguishment of debt...................... -- (10.6) -- (5.6)
----- ----- ----- -----
Net loss............................................ (75.3)% (33.7)% (76.6)% (40.7)%
===== ===== ===== =====

Comparison of Three Months Ended April 30, 1999 and 2000

Revenues. Total revenues increased $5.2 million, or 61.3%, to $13.6
million in the three months ended April 30, 2000 from $8.4 million in the three
months ended April 30, 1999. This increase is attributable to a 128.9% increase
in product-related revenues, offset by a planned decrease in custom development
services revenues associated with our change in focus from providing custom
development services to providing more standardized software products.

License. License revenues increased $2.5 million, or 104.2%, to $4.9
million in the three months ended April 30, 2000 from $2.4 million in the
three months ended April 30, 1999. License revenues as a percentage of
total revenues increased to 36.2% in the three months ended April 30, 2000
from 28.6% in the three months ended April 30, 1999. We anticipate that
license revenues will continue to grow as a result of more license sales
and increased average transaction size resulting from increased market
acceptance of our new products, a growing customer reference base,
increased marketing efforts, and improved productivity of our sales force.

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Product service and maintenance. Product service and maintenance
revenues increased $3.1 million, or 159.4%, to $5.1 million in the three
months ended April 30, 2000 from $2.0 million in the three months ended
April 30, 1999. Product services and maintenance revenues as a percentage
of total revenues increased to 37.2% in the three months ended April 30,
2000 from 23.1% in the three months ended April 30, 1999. The increase in
absolute dollars and as a percentage of total revenues is attributable to
the increase in the number of consulting engagements and maintenance
agreements related to the increased license revenues along with the
decrease in custom development services revenues.

Custom development services. Custom development services revenues
decreased $458,000, or 11.3%, to $3.6 million in the three months ended
April 30, 2000 from $4.1 million in the three months ended April 30, 1999.
Custom development services revenues as a percentage of total revenues
decreased to 26.6% in the three months ended April 30, 2000 from 48.3% in
the three months ended April 30, 1999. The decrease in absolute dollars and
as a percentage of total revenues is due to the change of our strategic
focus. We expect custom development services revenues to continue to
decline as a percentage of total revenues.

Cost of revenues. Total cost of revenues increased $188,000, or 4.5%, to
$4.4 million in the three months ended April 30, 2000 from $4.2 million in the
three months ended April 30, 1999. Total cost of revenues as a percentage of
total revenues decreased to 32.2% in the three months ended April 30, 2000 from
49.7% in the three months ended April 30, 1999.

Cost of license revenues. Cost of license revenues consists primarily
of costs of royalties, media, product packaging, documentation and other
production cost. Cost of license revenues increased $91,000, or 193.6% to
$138,000 in the three months ended April 30, 2000 from $47,000 in the three
months ended April 30, 1999. Cost of license revenues as a percentage of
license revenues increased to 2.8% in the three months ended April 30, 2000
from 2.0% in the three months ended April 30, 1999. The increase in cost of
license revenues is due primarily to an increase in royalty charges
associated with the increase in license revenue.

Cost of product-related services and maintenance revenues. Cost of
product-related services and maintenance revenues consists primarily of
salaries and related costs for consulting, training and customer support
personnel, including cost of services provided by third-party consultants
engaged by us. Cost of product-related services and maintenance revenues
increased $1.4 million, or 101.3%, to $2.8 million in the three months
ended April 30, 2000 from $1.4 million in the three months ended April 30,
1999. Cost of product-related services and maintenance revenues as a
percentage of product-related services and maintenance revenues decreased
to 55.9% in the three months ended April 30, 2000 from 72.1% in the three
months ended April 30, 1999. The increase in absolute dollars was primarily
due to increased staff to support a higher number of product-related
engagements. The decrease in cost as a percentage of revenue is due to
increased utilization of professional services staff and a higher billing
rate in the three months ended April 30, 2000.

Cost of custom development services revenues. Cost of custom
development services revenues consists primarily of salaries and related
costs for development, consulting, training and customer support personnel
related to our custom development projects, including cost of services
provided by third-party consultants engaged by us. Cost of custom
development services revenues decreased $1.3 million, or 48.5%, to $1.4
million in the three months ended April 30, 2000 from $2.7 million in the
three months ended April 30, 1999. Cost of custom development services as a
percentage of custom development services revenues decreased to 39.0% in
the three months ended April 30, 2000 from 67.2% in the three months ended
April 30, 1999. The decrease in absolute dollars is primarily due to
decreased staff supporting fewer custom development services engagements.
The cost as a percentage of revenue in the three months ended April 30,
2000 is less than the same period of fiscal 1999 due to a higher average
billing rate on the fiscal 2000 engagements.

Sales and marketing expenses. Sales and marketing expenses consist
primarily of salaries, commissions and bonuses for sales and marketing personnel
and promotional expenses. Sales and marketing expenses increased $130,000, or
2.0%, to $6.7 million in the three months ended April 30, 2000 from $6.5 million
in the
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18

three months ended April 30, 1999. Sales and marketing expenses as a percentage
of total revenues decreased to 49.1% in the three months ended April 30, 2000
from 77.6% in the three months ended April 30, 1999. Sales and marketing
expenses increased in absolute dollars primarily due to the increase in
headcount in the sales area and costs incurred associated with the marketing
programs to promote our product, FirePond Application Suite. Sales and marketing
expenses decreased as a percentage of total revenue primarily due to our revenue
increasing at a greater rate than our sales and marketing expense. We believe
sales and marketing expenses will continue to increase as we expand our sales
and marketing organization and initiate additional marketing programs.

Research and development expenses. Research and development expenses
consist primarily of salaries and personnel-related costs and the costs of
contractors associated with the development of new products, the enhancement of
existing products, and the performance of quality assurance and documentation
activities. Research and development expenses increased $1.9 million, or 99.7%,
to $3.7 million in the three months ended April 30, 2000 from $1.8 million in
the three months ended April 30, 1999. Research and development expenses as a
percentage of total revenues increased to 26.9% in the three months ended April
30, 2000 from 21.7% in the three months ended April 30, 1999. These expenses
increased in absolute dollars and as a percentage of total revenue as a result
of increased headcount in our product development operation and increased
utilization of engineering and product development contractors associated with
our investment in the FirePond Application Suite. We expect research and
development expenses will continue to increase as we enhance our existing
products and develop new products.

General and administrative expenses. General and administrative expenses
consist primarily of salaries, and other personnel-related cost for executive,
financial, human resource, information services, and other administrative
functions, as well as legal and accounting costs. General and administrative
expenses increased $525,000, or 30.6%, to $2.2 million in the three months ended
April 30, 2000 from $1.7 million in the three months ended April 30, 1999.
General and administrative expenses as a percentage of total revenues decreased
to 16.5% in the three months ended April 30, 2000 from 20.4% in the three months
ended April 30, 1999. These expenses increased in absolute dollars primarily as
a result of increased headcount and increased cost of infrastructure necessary
to support our growth. The decrease in general and administrative expenses as a
percentage of total revenue is attributable to our revenue increasing at a
greater rate than our general and administrative expenses. We expect that
general and administrative expenses will continue to increase to support our
expanding operations.

Stock-based compensation expense. Stock-based compensation expense
increased $1.3 million, or 317.7%, to $1.8 million in the three months ended
April 30, 2000 from $423,000 in the three months ended April 30, 1999.
Stock-based compensation expense as a percentage of total revenues increased to
13.0% in the three months ended April 30, 2000 from 5.0% in the three months
ended April 30, 1999. If we had allocated our stock-based compensation to the
departments for which the services were performed in the three months ended
April 30, 2000, the allocation would have increased cost of revenues by $9,000,
sales and marketing expenses by $1.3 million, research and development expenses
by $407,000 and general and administrative expenses by $25,000. For the three
months ended April 30, 1999, the allocation would have increased research and
development expenses by $5,000 and general and administrative expenses by
$418,000. The increase in stock-based compensation expense in the second quarter
of fiscal 2000 primarily related to $596,000 in awards to sales and marketing
consultants and in connection with strategic business alliances and a
stock-for-stock option exercise which triggered a new measurement date resulting
in a $676,000 charge for the value of the exercised stock options.

Interest Income (Expense), net. Interest income (expense), net, improved
to $1.2 million of income in the three months ended April 30, 2000 from $104,000
of expense in the three months ended April 30, 1999. The improvement is
primarily due to interest earned on increased cash and cash equivalents and
short-term and long-term investments as a result of our initial public offering
on February 4, 2000.

Other income (expense), net. Other income (expense), net primarily
consists of bank fees and foreign currency transaction gains and losses. Other
income (expense), net increased $245,000 to $271,000 in the

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19

three months ended April 30, 2000 from $26,000 in the three months ended April
30, 1999. The increase is primarily due to foreign currency transaction gains in
the three months ended April 30, 2000.

Comparison of Six Months Ended April 30, 1999 and 2000

Revenues. Total revenues increased $10.0 million, or 63.7%, to $25.6
million in the six months ended April 30, 2000 from $15.6 million in the six
months ended April 30, 1999. This increase is attributable to a 152.6% increase
in product-related revenues, offset by a planned decrease in custom development
services revenues associated with our change in focus from providing custom
development services to providing more standardized software products.

License. License revenues increased $4.8 million, or 119.8%, to $8.8
million in the six months ended April 30, 2000 from $4.0 million in the six
months ended April 30, 1999. License revenues as a percentage of total
revenues increased to 34.5% in the six months ended April 30, 2000 from
25.7% in the six months ended April 30, 1999. The increase in license
revenues in absolute dollars and as a percentage of total revenues is
attributable to an increase in the number of licenses implemented at higher
average selling prices.

Product service and maintenance. Product service and maintenance
revenues increased $6.3 million, or 193.2%, to $9.5 million in the six
months ended April 30, 2000 from $3.2 million in the six months ended April
30, 1999. Product services and maintenance revenues as a percentage of
total revenues increased to 37.3% in the six months ended April 30, 2000
from 20.8% in the six months ended April 30, 1999. The increase in absolute
dollars and as a percentage of total revenues is attributable to the
increase in the number of consulting engagements and maintenance agreements
related to the increased license sales during the period.

Custom development services. Custom development services revenues
decreased $1.1 million, or 13.5%, to $7.2 million in the six months ended
April 30, 2000 from $8.3 million in the six months ended April 30, 1999.
Custom development services revenues as a percentage of total revenues
decreased to 28.2% in the six months ended April 30, 2000 from 53.5% in the
six months ended April 30, 1999. The decrease in absolute dollars and as a
percentage of total revenues is due to the change of our strategic focus.

Cost of revenues. Total cost of revenues increased $154,000, or 1.9%, to
$8.4 million in the six months ended April 30, 2000 from $8.2 million in the six
months ended April 30, 1999. Total cost of revenues as a percentage of total
revenues decreased to 32.8% in the six months ended April 30, 2000 from 52.7% in
the six months ended April 30, 1999.

Cost of license revenues. Cost of license revenues increased
$174,000, or 187.1% to $267,000 in the six months ended April 30, 2000 from
$93,000 in the six months ended April 30, 1999. Cost of license revenues as
a percentage of license revenues increased to 3.0% in the six months ended
April 30, 2000 from 2.3% in the six months ended April 30, 1999. The
increase in cost of license revenues is due primarily to an increase in
royalty charges associated with the increase in license revenues.

Cost of product-related services and maintenance revenues. Cost of
product-related services and maintenance revenues increased $2.7 million,
or 112.7%, to $5.1 million in the six months ended April 30, 2000 from $2.4
million in the six months ended April 30, 1999. Cost of product-related
services and maintenance revenues as a percentage of product-related
services and maintenance revenues decreased to 53.7% in the six months
ended April 30, 2000 from 74.0% in the six months ended April 30, 1999. The
increase in absolute dollars is primarily due to increased staff to support
the higher number of product-related engagements. The decrease in cost as a
percentage of revenue is due to increased utilization of professional
services staff and a higher average billing rate in the six months ended
April 30, 2000.

Cost of custom development services revenues. Cost of custom
development services revenues decreased $2.7 million, or 47.6%, to $3.0
million in the six months ended April 30, 2000 from $5.7 million in the six
months ended April 30, 1999. Cost of custom development services as a
percentage of custom development services revenues decreased to 41.6% in
the six months ended April 30, 2000 from 68.7% in
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20

the six months ended April 30, 1999. The decrease in absolute dollars is
primarily due to decreased staff supporting fewer custom development
services engagements. The cost as a percentage of revenue in the six months
ended April 30, 2000 is less than the same period of fiscal 1999 due to a
higher average billing rate on the fiscal 2000 engagements.

Sales and marketing expenses. Sales and marketing expenses increased $1.8
million, or 15.8%, to $13.1 million in the six months ended April 30, 2000 from
$11.3 million in the six months ended April 30, 1999. Sales and marketing
expenses as a percentage of total revenues decreased to 51.3% in the six months
ended April 30, 2000 from 72.4% in the six months ended April 30, 1999. Sales
and marketing expenses increased in absolute dollars primarily due to increased
headcount in our sales operations, particularly our international direct sales
channel, as well as increase in commissions on product-related sales. Sales and
marketing expenses decreased as a percentage of total revenue primarily due to
our revenue increasing at a greater rate than our sales and marketing expense.

Research and development expenses. Research and development expenses
increased $3.5 million, or 92.0%, to $7.3 million in the six months ended April
30, 2000 from $3.8 million in the six months ended April 30, 1999. Research and
development expenses as a percentage of total revenues increased to 28.7% in the
six months ended April 30, 2000 from 24.5% in the six months ended April 30,
1999. These expenses increased in absolute dollars and as a percentage of total
revenue as a result of increased headcount in product development and increased
utilization of engineering and product development contractors associated with
our investment in the FirePond Application Suite.

General and administrative expenses. General and administrative expenses
increased $956,000, or 29.4%, to $4.2 million in the six months ended April 30,
2000 from $3.2 million in the six months ended April 30, 1999. General and
administrative expenses as a percentage of total revenues decreased to 16.4% in
the six months ended April 30, 2000 from 20.8% in the six months ended April 30,
1999. These expenses increased in absolute dollars primarily as a result of
increased headcount in our general and administrative functions and increased
cost of infrastructure necessary to support our growth. The decrease in general
and administrative expenses as a percentage of total revenue is attributable to
our revenue increasing at a greater rate than our general and administrative
expenses.

Stock-based compensation expense. Stock-based compensation expense
increased $2.3 million, or 347.9%, to $2.9 million in the six months ended April
30, 2000 from $655,000 in the six months ended April 30, 1999. Stock-based
compensation expense as a percentage of total revenues increased to 11.5% in the
six months ended April 30, 2000 from 4.2% in the six months ended April 30,
1999. If we had allocated our stock-based compensation to the departments for
which the services were performed in the six months ended April 30, 2000, the
allocation would have increased cost of revenues by $53,000, sales and marketing
expenses by $1.9 million, research and development expenses by $703,000 and
general and administrative expenses by $212,000. For the six months ended April
30, 1999, the allocation would have increased research and development expenses
by $71,000 and general and administrative expenses by $584,000. The increase in
stock-based compensation expense in the first six months of fiscal 2000
primarily related to $937,000 in awards to sales and marketing consultants and
in connection with strategic business alliances, $566,000 in awards to
development contractors, and a stock-for-stock option exercise which triggered a
new measurement date resulting in a $676,000 charge for the value of the
exercised stock options.

Interest Income (Expense), net. Interest income (expense), net, improved
to $398,000 of income in the six months ended April 30, 2000 from $289,000 of
expense in the six months ended April 30, 1999. The improvement is primarily due
to interest earned on increased cash and cash equivalents and short and long-
term investments as a result of our initial public offering offset by interest
expense primarily related to the issuance of subordinated notes payable.

Other income (expense), net. Other income (expense), net improved to
$529,000 of income in the six months ended April 30, 2000 from $24,000 of
expense in the six months ended April 30, 1999. The improvement is primarily
attributed to foreign currency transaction gains in the six months ended April
30, 2000.

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21

LIQUIDITY AND CAPITAL RESOURCES

On February 4, 2000, we completed our initial public offering of 5,000,000
shares of common stock. Additionally, on February 25, 2000, the underwriters of
the initial public offering exercised their over-allotment option to purchase an
additional 666,666 shares. At the offering price of $22.00 per share, we
received $113.8 million from these transactions, net of underwriting discounts
and commissions and offering expenses.

As of April 30, 2000, cash and cash equivalents were $92.0 million,
short-term investments were $16.4 million and long-term investments were $2.5
million as compared with $2.1 million of cash and cash equivalents as of October
31, 1999. Our working capital at April 30, 2000 was $100.8 million, compared to
a working capital deficit of $11.4 million at October 31, 1999.

Net cash used in operating activities was $4.4 million in the six months
ended April 30, 2000, compared with $11.0 million in the six months ended April
30, 1999. Cash used in operating activities in the six months ended April 30,
2000 was primarily attributable to our net loss, increases in accounts
receivable and a decrease in accounts payable, offset in part by an increase in
accrued liabilities, non-cash expenses including depreciation, amortization,
stock-based compensation expense and the loss on early extinguishment of debt.

Net cash used in investing activities was $20.7 million in the six months
ended April 30, 2000, compared with net cash provided by investing activities of
$1.5 million in the six months ended April 30, 1999. Net cash used in investing
activities in the six months ended April 30, 2000 was primarily attributable to
utilizing the proceeds from our initial public offering to purchase short-term
and long-term investments and to a lesser extent the purchase of property and
equipment to support our expanding operations.

Net cash provided by financing activities was $115.0 million in the six
months ended April 30, 2000, compared with $20.0 million in the six months ended
April 30, 1999. Proceeds from financing activities for the six months ended
April 30, 2000 were primarily from the sale of common stock during our initial
public offering partially offset by payment on the line of credit. Net cash
provided by financing activity for the six months ended April 30, 1999 was
primarily from our sale of 6,734,008 shares of series F preferred stock at $2.97
per share totaling $20.0 million in February 1999.

Effective September 29, 1999, we amended our line of credit agreement with
a financial institution to increase the total commitment to $7.0 million. This
additional commitment was reached by converting $2.0 million outstanding
borrowings on the existing line of credit to a term note and established a new
line of credit based on 80% of qualifying accounts receivables, as defined, up
to $5.0 million. The amended line of credit and term loan matured on October 21,
2000 and charged interest at prime rate plus 2.0%, limited to a minimum of 8.0%
per year, payable monthly. We also paid a fee of 0.5% per year on the unused
line of credit. In February 2000, we repaid and terminated the line of credit
and term note with the proceeds from our initial public offering.

On November 12, 1999, we borrowed $6.0 million of subordinated indebtedness
from an outside investor and two of our existing stockholders. The indebtedness
bore interest at 12.0% and was due upon the closing of our initial public
offering. We also issued to these lenders warrants to purchase an aggregate of
360,000 shares of our common stock at an exercise price of $5.25 per share. We
recorded the warrants as a discount totaling $1.9 million against the carrying
value of the subordinated notes payable. In February 2000, we repaid the
subordinated notes with the proceeds from our initial public offering.

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

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22

YEAR 2000 READINESS

We experienced no significant disruptions in either information technology
systems or non-information systems as a result of the date change to the year
2000. We continue to monitor these systems to ensure any latent date-related
matters that may arise are properly addressed. Costs associated with the
evaluation and modification of information and non-information systems were
expensed as incurred and were not material to the financial position or results
of our operations.

To date, we have not experienced any problems with its computer systems
relating to the Year 2000 issue. We also are unaware of any material Year 2000
problems with our clients or vendors. Accordingly, we do not anticipate
incurring material expenses or experiencing any material operational disruptions
as a result of any Year 2000 problems.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standard, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. SFAS No. 133 is not expected to
have a material impact on our consolidated financial statements.

In December 1998, the AICPA issued Statement of Position 98-9, Modification
of SOP 97-2 Software Revenue Recognition, With Respect to Certain Transactions.
SOP 98-9 requires use of the residual method of recognition of revenues when
vendor-specific objective evidence exists for undelivered elements but does not
exist for delivered elements of a software arrangement. We will be required to
comply with the provisions of SOP 98-9 for transactions entered into beginning
January 1, 2000. We do not expect the adoption of SOP 98-9 will have a material
effect on our financial position or operating results.

RISK FACTORS

As defined under Safe Harbor provisions of The Private Securities
Litigation Reform Act of 1995, 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. These
factors include, but are not limited to: market acceptance of the FirePond
Application Suite and its components, quarterly fluctuations in operating
results attributable to the timing and amount of orders for our products and
services, our ability to keep pace with changing product requirements, factors
affecting the demand for e-business sales and marketing solutions, the timing of
the implementation of the software in the customers' applications, and those
risks factors contained in the section titled "Risk Factors" beginning on page 4
of our Registration Statement on Form S-1 (No. 333-90911) declared effective on
February 3, 2000 by the Securities and Exchange Commission. If any of those
risks actually occur, our business, financial condition or results of operations
could be seriously harmed and the trading price of our common stock could
decline.

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23

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We develop products in the United States and Belarus and sell them
worldwide. As a result, our financial results could be affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in
foreign markets. Since the majority of 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. Our interest
income is sensitive to changes in the general level of U.S. interest rates,
particularly since the majority of our investments are in short-term
instruments. Due to the short-term nature of our investments, we do not believe
that we have a material risk exposure.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are engaged in legal proceedings incidental to the normal course of
business. Although the ultimate outcome of these matters cannot be determined,
we believe that the final outcome of these proceedings will not seriously harm
our business.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

ITEM 5. OTHER INFORMATION

Not applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

See the Exhibit Index attached thereto.

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24

SIGNATURES

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

FIREPOND, INC.

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

/s/ PAUL K. MCDERMOTT
--------------------------------------
Paul K. McDermott
Chief Financial Officer and Vice
President of Finance
and Administration (Principal
Financial
Officer and Principal Accounting
Officer)

Dated: June 14, 2000

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EXHIBIT INDEX

EXHIBIT
NO. DESCRIPTION
- ------- -----------

27.1 Financial Data Schedule for the six months ended April 30,
2000