FIREPOND INC, 424B4, 2000-02-04

FIREPOND INC
424B4, 2000-02-04
COMPUTER PROGRAMMING SERVICES

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<PAGE> 1

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-90911

[FIREPOND LOGO]

5,000,000 SHARES

COMMON STOCK

FirePond, Inc. is offering 5,000,000 shares of its common stock. This is
our initial public offering and no public market currently exists for our
shares. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol FIRE.

------------------------

INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.

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<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ------------
<S> <C> <C>
Public Offering Price....................................... $22.00 $110,000,000
Underwriting Discounts and Commissions...................... $ 1.54 $ 7,700,000
Proceeds to FirePond........................................ $20.46 $102,300,000
</TABLE>

THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

FirePond and one of its stockholders, who is identified on page 56, have
granted the underwriters a 30-day option to purchase up to 750,000 additional
shares of common stock to cover over-allotments. FleetBoston Robertson Stephens
Inc. expects to deliver the shares of common stock to purchasers on February 9,
2000.

------------------------

ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS

SG COWEN
E*OFFERING
The date of this prospectus is February 4, 2000
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(inside front cover)

DESCRIPTION OF ARTWORK

At the top of the page is the name "FirePond" with the company's logo above
it. The following caption is beneath the name of the company and its logo:
The text "FirePond Application Suite(TM) enables selling complex products and
services through e-commerce channels, integrates e-commerce selling channels
with established sales channels, and shares customer information across the
entire enterprise."

In the center of the page is a small shaded circle with the following text:
"FirePond Business Rules Engine." There are two shaded quarter-circles
protruding from the top of the center circle on the left and right. The quarter
circle on the left is labeled: "FirePond Commerce, Internet Selling Software for
E-Commerce." The quarter circle on the right is labeled: "FirePond Sales,
Internet Selling Software for Direct and Indirect Sales Channels."

There is one large rectangle protruding from the bottom of the center
circle. The rectangle is labeled: "FirePond Sales Manager, Enterprise Sales
Administration and Customer Information Management."

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Note on Forward Looking Statements.......................... 10
Use of Proceeds............................................. 10
Dividend Policy............................................. 10
Capitalization.............................................. 11
Dilution.................................................... 12
Selected Consolidated Financial Data........................ 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Business.................................................... 26
Management.................................................. 38
Related Party Transactions.................................. 46
Principal Stockholders...................................... 48
Description of Capital Stock................................ 50
Shares Eligible for Future Sale............................. 54
Underwriting................................................ 56
Legal Matters............................................... 58
Experts..................................................... 59
Where You Can Find More Information......................... 59
Index to Consolidated Financial Statements.................. F-1
</TABLE>

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(This page intentionally left blank)

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PROSPECTUS SUMMARY

This is only a summary and may not contain all of the information that you
should consider before investing in our common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section and our financial
statements and the related notes included in this prospectus. Unless otherwise
indicated, this prospectus assumes that the underwriters have not exercised
their option to purchase additional shares. This prospectus also assumes that
the warrants to purchase series F preferred stock have been exercised, that all
shares of preferred stock have been automatically converted into shares of
common stock and that the priority payments have been made through the issuance
of additional shares of common stock to some common and preferred stockholders.
This prospectus has been adjusted to reflect a two-for-three reverse stock split
of the common stock effected on January 4, 2000.

FIREPOND, INC.

FirePond is a leading provider of integrated e-business sales and marketing
solutions for companies wishing to offer complex products and services through
business-to-business and business-to-consumer e-commerce channels. We provide
software and services that allow companies to merge their e-commerce selling,
customer relationship management, and channel management strategies on a single,
Internet-based platform.

Our FirePond Application Suite allows companies to offer personalized
products, services and content to their customers over the Internet, as well as
through more traditional selling channels, to convert potential customers into
customers and to increase repeat business. Our products are able to link
information obtained from business-to-business or business-to-consumer
e-commerce transactions into traditional sales channels, where it can improve
the ability of both sales models to transact business effectively. Our products
can also share the information from these interactive, Internet-based
transactions across the enterprise to help develop a company's common view of
individual customers. This approach allows companies to manage their ongoing
sales, marketing, product planning and fulfillment activities in a fashion that
encourages long-term customer loyalty.

We target the largest 2,000 companies in the world, commonly known as
Global 2000 companies, in selected industries characterized by complex products,
services or channel relationships, including health care/insurance, financial
services, high technology, telecommunications, automotive/trucking and
manufacturing. Our customers include ADP, Empire Blue Cross Blue Shield,
KLA-Tencor, Renault V.I. and Sprint.

Our goal is to be the leading provider of integrated e-business sales and
marketing solutions. To achieve this goal, key elements of our strategy are to:

- build on our experience to expand into new markets;

- utilize our established international organization to target leading
businesses worldwide;

- utilize our development organization to expand our products' packaged
e-business application functionality;

- expand our relationships with systems integrators and complementary
software vendors to expand our market reach and implementation capacity;

- provide a range of product packaging options to better penetrate Global
2000 accounts; and

- take advantage of our 16 years of implementation expertise to provide
individualized solutions for our customers.

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We were incorporated in Minnesota in 1983 as a provider of custom developed
interactive selling solutions. Although we undertook a strategic restructuring
in late 1996 to focus on providing more standardized software products, we
continue to depend on revenue from our custom development services. For example,
in fiscal 1999 our custom development services revenue accounted for almost half
of our total revenue. In addition, custom development services revenues from two
customers accounted for more than a quarter of our total revenues in fiscal
1999. We released our current product, the FirePond Application Suite, in
October 1999, and we are dependent upon its acceptance by our target markets to
complete our transition to a packaged software company. If the FirePond
Application Suite is not widely adopted, we may never be profitable.

We became a Delaware corporation as a result of a reincorporation merger
effected in December 1999. Our principal executive offices are at 890 Winter
Street, Waltham, Massachusetts 02451 and our telephone number at that address is
(781) 487-8400. Information contained on our web site at http://www.firepond.com
does not constitute part of this prospectus. We own or have rights to trademarks
that we use in conjunction with the sale of our products. FirePond, our logo and
our product names including FirePond Application Suite, FirePond Business Rule
Engine, FirePond Commerce, FirePond Sales, FirePond Sales Manager, FirePond
Process Server, FirePond Enterprise Workbench and Signature Plus are our
trademarks. All other trade names and trademarks used in this prospectus are the
property of their owners.

THE OFFERING

Common stock offered by FirePond............ 5,000,000 shares

Common stock to be outstanding
after the offering........................ 32,751,713 shares

Use of proceeds............................. For debt repayment, working
capital and general corporate
purposes. See "Use of Proceeds."

Proposed Nasdaq National Market Symbol...... FIRE

The number of shares of common stock outstanding after this offering
excludes:

- 10,047,234 shares issuable upon exercise of outstanding options as of
January 31, 2000 at a weighted average exercise price of $5.75 per share;

- 901,234 shares issuable upon exercise of outstanding warrants as of
January 31, 2000 at a weighted average exercise price of $6.42 per share;
and

- warrants to purchase 190,438 shares of series B preferred stock at an
exercise price of $19.69 per share, which will convert into warrants to
purchase 634,794 shares of common stock at an exercise price of $5.91 per
share upon completion of this offering.

As of January 31, 2000, we have also reserved an additional 2,734,808
shares of common stock for future issuance under our stock option plans. We also
plan to issue warrants to purchase up to 500,000 shares of our common stock over
the next 12 months in connection with sales of our products as well as to our
present and future strategic partners.

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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following tables are a summary of financial data for our business. The
pro forma net loss per share calculation reflects the conversion of our
preferred stock into shares of common stock upon the completion of this
offering. See note 3 of notes to consolidated financial statements for an
explanation of the number of shares used in computing per share data.

The pro forma consolidated balance sheet data summarized below reflects:

- the exercise of warrants to purchase series F preferred stock on a net
exercise basis;

- the conversion of all outstanding shares of preferred stock into shares
of common stock; and

- the payment of priority payments through the issuance of additional
shares of common stock to some common and preferred stockholders upon
completion of this offering.

The pro forma as adjusted consolidated balance sheet data summarized below
reflects the sale of the common stock in this offering, after deduction of
underwriting discounts and commissions and our estimated offering expenses and
the use of net proceeds as described in "Use of Proceeds."

<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
-------------------------------
1997 1998 1999
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<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product-related revenues.................................. $ 416 $ 6,860 $ 18,381
Custom development services............................... 27,747 22,142 15,904
-------- ------- --------
Total revenues......................................... 28,163 29,002 34,285
Loss from operations........................................ (25,444) (8,715) (28,224)
Net loss.................................................... (27,035) (9,041) (28,855)
Net loss per share:
Basic and diluted net loss per share...................... $ (2.62) $ (0.91) $ (2.88)
Basic and diluted weighted average common shares
outstanding............................................ 10,319 9,925 10,024
Pro forma net loss per share (unaudited):
Pro forma net loss per share.............................. $ (1.12)
Pro forma basic and diluted weighted average common shares
outstanding............................................ 25,799

<CAPTION>
OCTOBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 2,120 $ 2,120 $ 96,130
Working capital (deficit)................................. (11,380) (11,380) 89,370
Total assets.............................................. 21,660 21,660 115,670
Long-term debt, less current portion...................... 702 702 702
Convertible preferred stock............................... 191 -- --
Total stockholders' equity (deficit)...................... (5,354) (5,354) 95,396

</TABLE>

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RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occur, our business,
financial condition or results of operations could be seriously harmed, the
trading price of our common stock could decline, and you may lose all or part of
your investment.

BECAUSE WE HAVE A LIMITED OPERATING HISTORY AS A SOFTWARE COMPANY, OUR FUTURE
SUCCESS IS UNCERTAIN

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

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 we undertook our strategic restructuring in
late 1996. We incurred net losses of $27.0 million for fiscal 1997, $9.0 million
for fiscal 1998 and $28.9 million for fiscal 1999. We expect to continue to
incur losses on both a quarterly and annual basis and we are uncertain if or
when we will become profitable. Moreover, we expect to continue to incur
significant sales and marketing and research and development expenses, and, as a
result, we will need to generate significant revenues to achieve and maintain
profitability. We may not sustain our growth or generate sufficient revenues to
attain profitability.

DISAPPOINTING QUARTERLY REVENUES OR OPERATING RESULTS COULD CAUSE THE PRICE OF
OUR COMMON STOCK TO FALL

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

A SIGNIFICANT PERCENTAGE OF OUR PRODUCT DEVELOPMENT IS PERFORMED BY A THIRD
PARTY INTERNATIONALLY, THE LOSS OF WHICH WOULD SUBSTANTIALLY HARM OUR PRODUCT
DEVELOPMENT EFFORTS

A significant percentage of our product development work, and some of our
implementation services, are performed by a third-party development organization
in Minsk, Belarus. Unpredictable developments in the political, economic and
social conditions in Belarus, or our failure to renew our consulting agreement
with this organization on terms similar to our current agreement, could
eliminate or reduce the availability of these product development and
implementation services. If access to these services were to be unexpectedly
eliminated or significantly reduced, our ability to meet development objectives
vital to our ongoing strategy would be hindered, and our business could be
seriously harmed.

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THE SUCCESS OF OUR BUSINESS DEPENDS ON THE NEW FIREPOND APPLICATION SUITE, WHICH
HAS BEEN RECENTLY INTRODUCED AND MAY NOT BE WIDELY ADOPTED BY OUR CUSTOMERS

We expect to derive substantially all of our product license revenues in
the future from the newly announced FirePond Application Suite and its component
products, which were released in October 1999. Our business depends on the
successful release, introduction and customer acceptance of this new suite of
products. We expect that we will continue to depend on revenues from new and
enhanced versions of the FirePond Application Suite, and our business would be
harmed if our target customers do not adopt and expand their use of the FirePond
Application Suite and its component products.

OUR CUSTOM DEVELOPMENT SERVICES REVENUES ARE EXPECTED TO CONTINUE TO REPRESENT A
SIGNIFICANT PERCENTAGE OF OUR TOTAL REVENUES, AND THE UNEXPECTED LOSS OF A
CONTRACT COULD REDUCE OUR REVENUES

Custom development services revenues represented 99% of total revenues for
fiscal 1997, 76% of total revenues for fiscal 1998 and 46% of total revenues for
fiscal 1999. While we anticipate that custom development services revenues will
decline as a percentage of total revenues as license revenues increase, we
expect that it will continue to represent a significant percentage of our total
revenues. We also expect that a limited number of customers will continue to
account for a substantial portion of these revenues. For example, for fiscal
1999, custom development services revenues from two customers accounted for 27%
of our total revenues in the aggregate. An unexpected decrease in revenues from
our custom development services and related maintenance contracts could
adversely affect our overall revenues and our operating results.

FAILURE TO INCREASE OUR INTERNATIONAL REVENUES COULD SERIOUSLY HARM OUR BUSINESS

International revenues currently account for a significant percentage of
our total revenues. We expect international revenues to continue to account for
a significant percentage of total revenues in the future and we believe that we
must continue to expand our international sales activities to be successful.
However, foreign markets for our products may develop more slowly than currently
anticipated. International revenues represented 11% in fiscal 1999. Our failure
to expand our international sales could have a significant negative impact on
our business.

FAILURE TO EFFECTIVELY MANAGE OUR GEOGRAPHICALLY DISPERSED ORGANIZATION COULD
HAVE A SIGNIFICANT NEGATIVE IMPACT ON OUR BUSINESS OPERATIONS

If we fail to manage our geographically dispersed organization, we may fail
to meet or exceed our objectives and our revenues may decline. We perform
research and development activities in Minnesota, New Jersey, Massachusetts and
Belarus, and our executive officers and other key employees are similarly
dispersed throughout the United States, Europe and Asia. This geographic
dispersion requires significant management resources that our locally-based
competitors do not need to devote to their operations. In addition, the
expansion of our existing international operations and entry into additional
international markets will require significant management attention and
financial resources.

INTEGRATION OF A NEW MANAGEMENT TEAM AND NEW PERSONNEL AND CONTINUED RAPID
GROWTH MAY STRAIN OUR OPERATIONS

We have recently experienced a period of rapid growth and expansion. All
members of our senior management team have joined FirePond since May 1997. From
July 1997 to December 1998, significant turnover of our employees occurred in
conjunction with our change in focus from providing custom development services
to providing packaged software products. A significant increase in domestic and
international personnel will likely be necessary to address potential growth in
our customer base and market opportunities. This may place a significant burden
on our management and our internal resources. If we are not able to install
adequate systems, procedures and controls to support our future operations in an
efficient and timely manner, or if we are unable to otherwise manage growth
effectively, our business could be harmed.

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INTENSE COMPETITION FROM OTHER TECHNOLOGY COMPANIES COULD PREVENT US FROM
INCREASING OR SUSTAINING REVENUES AND PREVENT US FROM ACHIEVING OR SUSTAINING
PROFITABILITY

The market for integrated e-business sales and marketing 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 revenues could significantly decline.

FAILURE TO EXPAND OUR RELATIONSHIPS WITH SYSTEMS INTEGRATORS AND CONSULTING
FIRMS WOULD IMPEDE ACCEPTANCE OF OUR PRODUCTS AND DELAY THE GROWTH OF OUR
REVENUES

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

IF e-BUSINESS SALES AND MARKETING SOLUTIONS ARE NOT WIDELY ADOPTED, WE MAY NOT
BE SUCCESSFUL

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

IF WE ARE UNABLE TO INTRODUCE NEW AND ENHANCED PRODUCTS ON A TIMELY BASIS THAT
RESPOND EFFECTIVELY TO CHANGING TECHNOLOGY, OUR REVENUES MAY DECLINE

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

WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES, THE LOSS OF WHICH COULD
ADVERSELY AFFECT OUR COMPETITIVE POSITION

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

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WE DEPEND ON KEY PERSONNEL AND MUST ATTRACT AND RETAIN ADDITIONAL QUALIFIED
PERSONNEL TO BE SUCCESSFUL

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

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

CLAIMS MAY BE BROUGHT AGAINST US IF WE HIRE FORMER EMPLOYEES OF OUR COMPETITORS,
WHICH MAY CAUSE US TO INCUR SUBSTANTIAL COSTS

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

IF WE ARE UNABLE TO PROVIDE ADEQUATE PROFESSIONAL SERVICE AND CUSTOMER SUPPORT,
OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS WILL BE HARMED

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

IF OUR NEW AND COMPLEX PRODUCTS FAIL TO PERFORM PROPERLY, OUR REVENUES WOULD BE
ADVERSELY AFFECTED

Software products as complex as ours may contain undetected errors, or
bugs, which result in product failures, or may cause our products to fail to
meet our customers' expectations. Our products may be particularly susceptible
to bugs or performance degradation because of the evolving nature of Internet
technologies and the stress that full deployment of our products over the
Internet to thousands of end-users may cause. Because we have only recently
released our primary product, the FirePond Application Suite, it may be
particularly susceptible to bugs. Product performance problems could result in
loss of or delay in revenues, 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.

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IF WE OR OUR KEY SUPPLIERS OR CUSTOMERS FAIL TO BE YEAR 2000 COMPLIANT, OUR
BUSINESS MAY BE SEVERELY DISRUPTED AND OUR RESULTS OF OPERATIONS MAY BE HARMED

The year 2000 problem creates a risk for us. The risk exists primarily in
four areas:

- potential warranty or other claims from our customers, which may result
in significant expense to us;

- failures of systems we use to run our business, which could disrupt our
business operations;

- potential failures of our products, particularly our central office-based
systems, which may require that we incur significant unexpected expenses;
and

- the possibility that our potential customers will reduce spending on
e-business software products such as ours as a result of significant
spending on year 2000 remediation.

Our products are generally integrated into computer systems involving
sophisticated hardware and complex software products, which may not be year 2000
compliant. The failure of our customers' systems to be year 2000 compliant could
limit our ability to remedy known defects in our products. Therefore, known or
unknown defects that affect the operation of our software, could result in delay
or loss of revenues, diversion of development resources, damage to our
reputation, or increased service or warranty costs and litigation costs, any of
which could harm our business.

OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY HARM OUR ABILITY TO
COMPETE

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

CLAIMS ALLEGING INFRINGEMENT OF A THIRD PARTY'S INTELLECTUAL PROPERTY COULD
RESULT IN SIGNIFICANT EXPENSE TO US AND RESULT IN OUR LOSS OF SIGNIFICANT RIGHTS

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

DIFFICULTIES AND FINANCIAL BURDENS ASSOCIATED WITH ACQUISITIONS COULD HARM OUR
BUSINESS AND FINANCIAL RESULTS

We may consider acquiring complementary businesses and technologies in the
future. If we make an acquisition, we could issue equity securities which would
dilute current stockholders' percentage

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<PAGE> 13

ownership, incur substantial debt, assume contingent liabilities, incur a
one-time charge or be required to amortize goodwill. Additionally, we may not be
able to successfully integrate any technologies, products, personnel or
operations of companies that we may acquire in the future. These difficulties
could disrupt our ongoing business, distract our management and employees, and
increase our expenses. If we are unable to successfully address any of these
risks, our business could be seriously harmed.

CONTROL BY OUR EXECUTIVE OFFICERS, DIRECTORS AND THEIR AFFILIATES MAY LIMIT YOUR
ABILITY TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER MATTERS
REQUIRING STOCKHOLDER APPROVAL

Upon completion of this offering, our executive officers, directors and
their affiliates will own 16,739,150 shares, or approximately 51% of the
outstanding shares of common stock, 50% if the underwriters' over-allotment
option is exercised in full. These stockholders can control substantially all
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 acquiror 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.

OUR STOCK PRICE MAY BE VOLATILE WHICH MAY LEAD TO LOSSES BY INVESTORS AND RESULT
IN SECURITIES LITIGATION

There has previously not been a public market for our common stock. We
cannot predict the extent to which investor interest will lead to the
development of a trading market for our common stock or how liquid that market
might become. The initial public offering price for the shares was determined by
negotiations between us and the representatives of the underwriters and may not
be indicative of prices that will prevail in the trading market. The trading
price of our common stock could be subject to wide fluctuations.

In addition, the stock market in general, 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. The trading prices of many
Internet and software companies' stocks are at or near historical highs and
these trading prices are substantially above historical levels. These trading
prices may not be sustained. These broad market and industry factors may
materially adversely affect the market price of our common stock, regardless of
our actual operating performance. In the past, following periods of volatility
in the market price of a company's securities, securities class-action
litigation has often been instituted against publicly traded companies.
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.

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 after this offering could cause the market price of our common stock to
decline. In addition, the sale of these shares could impair our ability to raise
capital through the sale of additional equity securities.

PROVISIONS OF DELAWARE LAW AND OF OUR CHARTER AND BY-LAWS MAY MAKE A TAKEOVER
MORE DIFFICULT AND LOWER THE VALUE OF OUR COMMON STOCK

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

9
<PAGE> 14

NOTE ON FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as anticipates, believes, plans, expects,
future, intends and similar expressions to identify forward-looking statements.
This prospectus also contains forward-looking statements attributed to third
parties relating to their estimates about the growth in the demand for
interactive e-business solution software. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
prospectus. Our actual results could differ materially from those anticipated in
these forward-looking statements for many reasons, including the risks faced by
us and described in the preceding pages and in other sections of this
prospectus.

USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the common stock
in this offering will be approximately $100.8 million, after deducting the
underwriting discounts and commissions and offering expenses payable by us in
connection with the offering. If the underwriters' over-allotment option is
exercised in full, we estimate that our net proceeds will be approximately
$116.1 million. We expect to use the estimated net proceeds for the following
purposes:

- to repay the outstanding principal balance of up to $5.0 million plus
accrued interest on our revolving line of credit, which bears interest
payable monthly at a rate equal to the prime rate plus 2.0% and is due
October 31, 2000;

- to repay a $2.0 million term loan, plus accrued interest, which bears
interest payable monthly at 10.25% and is due October 31, 2000; and

- to repay $6.0 million of subordinated promissory notes plus accrued
interest of approximately $160,000, assuming a repayment date of January
31, 2000, which bear interest at 12.0% and are due upon the earlier of
the closing of this offering or November 11, 2000.

The remainder of the net proceeds will be used for working capital and general
corporate purposes.

As of the date of this prospectus, other than the repayment of debt as
described above, we have not made any specific expenditure plans for the
proceeds of this offering. Therefore, we cannot specify with certainty the
particular uses for the net proceeds to be received upon completion of this
offering.

DIVIDEND POLICY

Since we became a C corporation in May 1997, we have never declared or paid
cash dividends on our capital stock. We currently intend to retain any future
earnings to fund the development and growth of our business and do not currently
anticipate paying any cash dividends. Future dividends, if any, will be
determined by our board of directors after taking into account various factors,
including our financial condition, operating results, and current and
anticipated cash needs. Under the terms of our current line of credit, there are
restrictions on our ability to declare and pay dividends.

10
<PAGE> 15

CAPITALIZATION

The following table presents our capitalization as of October 31, 1999:

- on an actual basis;

- on a pro forma basis to reflect the net exercise of warrants to purchase
series F preferred stock, the conversion of all outstanding shares of
convertible preferred stock into shares of common stock and the payment
of priority payments through the issuance of additional shares of common
stock to some common and preferred stockholders upon completion of this
offering; and

- on a pro forma as adjusted basis to reflect the sale of the common stock
in this offering, after deduction of underwriting discounts and
commissions and our estimated offering expenses and the use of net
proceeds as described in "Use of Proceeds" on page 10.

The adjusted information presented below is unaudited and should be read in
conjunction with our consolidated financial statements and notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 15.

<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>

Line of credit.............................................. $ 6,740 $ 6,740 $ --
======== ======== =========
Long-term debt, less current portion........................ $ 702 $ 702 $ 702
Stockholders' equity (deficit):
Preferred stock; 50,000,000 shares authorized:
Series A convertible participating preferred stock;
4,188,880 shares designated, issued and outstanding,
actual; no shares designated, issued and outstanding,
pro forma and pro forma as adjusted..................... 42 -- --
Series B convertible preferred stock; 190,438 shares
designated, no shares issued and outstanding, actual; no
shares designated, issued and outstanding, pro forma and
pro forma as adjusted................................... -- -- --
Series C convertible participating preferred stock;
570,342 shares designated, issued and outstanding,
actual; no shares designated, issued and outstanding,
pro forma and pro forma as adjusted..................... 6 -- --
Series F convertible preferred stock; 7,407,409 shares
designated, 6,734,008 shares issued and outstanding,
actual; no shares designated, issued and outstanding,
pro forma and pro forma as adjusted..................... 67 -- --
Series G convertible participating preferred stock;
7,604,563 shares designated, issued and outstanding,
actual; no shares designated, issued and outstanding,
pro forma and pro forma as adjusted..................... 76 -- --
Common stock, 100,000,000 shares authorized; 10,072,817
shares issued and outstanding, actual; 27,469,142 shares
issued and outstanding, pro forma; and 32,469,142 shares
issued and outstanding, pro forma as adjusted............. 101 275 325
Additional paid-in capital.................................. 62,380 62,397 163,097
Accumulated deficit......................................... (61,793) (61,793) (61,793)
Deferred compensation....................................... (5,893) (5,893) (5,893)
Cumulative translation adjustment........................... (327) (327) (327)
Subscription receivables.................................... (13) (13) (13)
-------- -------- ---------
Total stockholders' equity (deficit)...................... (5,354) (5,354) 95,396
-------- -------- ---------
Total capitalization.................................. $ (4,652) $ (4,652) $ 96,098
======== ======== =========
</TABLE>

The table above excludes as of October 31, 1999:

- - 7,655,121 shares of common stock issuable upon exercise of outstanding stock
options at a weighted average exercise price of $4.17 per share under our
stock option plans;

- - 296,667 shares of common stock subject to outstanding warrants at a weighted
average exercise price of $5.02 per share; and

- - warrants to purchase 190,438 shares of series B preferred stock at an exercise
price of $19.69 per share, which will convert into warrants to purchase
634,794 shares of common stock at an exercise price of $5.91 per share upon
completion of this offering.

11
<PAGE> 16

DILUTION

As of October 31, 1999, we had a pro forma net tangible book deficit of
$5.6 million, or $(0.20) per share.

Pro forma net tangible book deficit per share is equal to:

- our total tangible assets minus total liabilities, divided by

- the number of outstanding shares of our common stock, after giving effect
to the net exercise of warrants to purchase series F preferred stock, the
conversion of all outstanding shares of our convertible preferred stock
into common stock and the payment of priority payments through the
issuance of additional shares of common stock to some common and
preferred stockholders.

If we give effect to our sale of 5,000,000 shares of common stock in this
offering and deduct the underwriting discounts and commissions and the estimated
expenses relating to this offering, our pro forma as adjusted net tangible book
value as of October 31, 1999 would have been $95.2 million, or $2.93 per share.
This represents an immediate increase in pro forma net tangible book value of
$3.13 per share to existing stockholders and an immediate dilution of $19.07 per
share to new investors. The following table illustrates this per share dilution:

Initial public offering price per share.................... $22.00
Pro forma net tangible book deficit per share as of October
31, 1999................................................. $(0.20)
Increase per share attributable to new investors........... 3.13
------
Pro forma as adjusted net tangible book value per share
after the offering....................................... 2.93
------
Dilution per share to new investors........................ $19.07
======
</TABLE>

The following table summarizes, as of October 31, 1999, on the pro forma
basis described above, the difference between the number of shares of common
stock purchased from us, the total consideration paid and the average price per
share paid by the existing stockholders and by new public investors purchasing
shares from us in this offering before deducting estimated underwriting
discounts and commissions and offering expenses:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>

Existing stockholders..... 27,469,142 84.6% $ 54,645,000 33.2% $ 1.99
New investors............. 5,000,000 15.4 110,000,000 66.8 22.00
---------- ----- ------------ -----
Total................ 32,469,142 100.0% $164,645,000 100.0%
========== ===== ============ =====
</TABLE>

The foregoing computations are based on the number of common shares
outstanding as of October 31, 1999 and exclude:

- 7,655,121 shares of common stock issuable upon exercise of outstanding
options at a weighted average exercise price of $4.17 per share under our
stock option plans;

- 296,667 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $5.02 per share; and

To the extent stock is issued upon the exercise of outstanding warrants or
outstanding stock options under our stock option plans, there will be further
dilution to new investors.

12
<PAGE> 17

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected financial data are derived from our consolidated and
combined financial statements. The following data were derived from our audited
consolidated financial statements presented elsewhere in this prospectus:

- consolidated statements of operations for fiscal 1997, 1998 and 1999; and

- consolidated balance sheets at October 31, 1998 and 1999.

The following data were derived from our audited combined financial statements
not included in this prospectus:

- combined statements of operations for fiscal 1995 and 1996; and

- combined balance sheets at October 31, 1995, 1996 and 1997.

When you read this selected financial data, it is important that you also
read the historical consolidated financial statements and related notes included
in this prospectus, as well as the section of this prospectus entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 15. The historical results are not necessarily
indicative of the operating results to be expected in the future.

<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF CONSOLIDATED OPERATIONS DATA:
Revenues:
Product-related revenues:
License(1).............................................. $ -- $ -- $ 416 $ 1,888 $ 9,777
Services and maintenance................................ -- -- -- 4,972 8,604
------- ------- -------- ------- --------
Total product-related revenues........................ -- -- 416 6,860 18,381
Custom development services............................... 31,150 34,158 27,747 22,142 15,904
------- ------- -------- ------- --------
Total revenues........................................ 31,150 34,158 28,163 29,002 34,285
Cost of revenues:
License................................................... -- -- 178 192 238
Product-related services and maintenance(2)............... -- -- -- 3,061 5,677
Custom development services............................... 19,749 20,036 31,365 8,397 10,636
------- ------- -------- ------- --------
Total cost of revenues................................ 19,749 20,036 31,543 11,650 16,551
------- ------- -------- ------- --------
Gross profit (loss)......................................... 11,401 14,122 (3,380) 17,352 17,734
Operating expenses:
Sales and marketing(2).................................... 3,643 5,290 8,080 13,680 23,609
Research and development(2)............................... 723 2,601 3,634 8,199 9,641
General and administrative(2)............................. 4,354 3,081 3,188 3,516 7,084
Stock-based compensation.................................. -- -- 450 672 2,597
Restructuring charge...................................... -- -- 6,712 -- 3,027
------- ------- -------- ------- --------
Total operating expenses.............................. 8,720 10,972 22,064 26,067 45,958
------- ------- -------- ------- --------
Income (loss) from operations............................... 2,681 3,150 (25,444) (8,715) (28,224)
Other expense, net.......................................... 1,039 1,306 1,591 326 631
------- ------- -------- ------- --------
Net income (loss)........................................... $ 1,642 $ 1,844 $(27,035) $(9,041) $(28,855)
======= ======= ======== ======= ========
Net income (loss) per share:
Basic and diluted net income (loss) per share............. $ 0.16 $ 0.18 $ (2.62) $ (0.91) $ (2.88)
======= ======= ======== ======= ========
Basic weighted average common shares outstanding.......... 10,348 10,401 10,319 9,925 10,024
Diluted weighted average common shares outstanding........ 10,379 10,432 10,319 9,925 10,024
</TABLE>

13
<PAGE> 18

<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 467 $ 450 $10,147 $ 2,324 $ 2,120
Working capital (deficit)................................... (553) (3,417) (7,119) (6,240) (11,380)
Total assets................................................ 19,863 23,342 27,906 18,786 21,660
Long-term debt, net of current portion...................... 7,290 7,685 3,991 1,727 702
Total stockholders' equity (deficit)........................ 2,836 4,200 (986) 1,031 (5,354)
</TABLE>

- ------------------------------------
(1) Includes related-party revenues of $350 in fiscal 1997. See note 11(a) in
notes to consolidated financial statements.

(2) Excludes charge for stock-based compensation. See note (2) to consolidated
statements of operations on page F-4.

14
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We are a leading provider of integrated e-business sales and marketing
solutions for companies wishing to offer complex products and services through
business-to-business and business-to-consumer e-commerce channels. 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 and to 53.6% in fiscal 1999.

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 the following sources:

- 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. 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 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

15
<PAGE> 20

compared to the total estimated hours. During fiscal 1997, we increased our
estimates of total contract costs on several of our fixed-priced contracts and
recorded a $5.2 million provision for loss contracts, all of which was accrued
as of October 31, 1997. In fiscal 1998, the loss contract reserve changed
because:

- we charged $1.9 million of costs against the accrual when we fulfilled
our obligations to the customers;

- we reduced the accrual by $2.9 million when we revised our estimated
losses; and

- we increased the accrual by $480,000 for estimated losses on other
contracts.

In fiscal 1999, we charged an additional $500,000 of costs against the accrual
for loss contracts when we fulfilled our obligations to the customer.

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 over
three years to cost of license revenues.

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 a customer and to a strategic business partner. 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 $450,000 in fiscal 1997, $672,000 in
fiscal 1998 and $2.6 million in fiscal 1999. As of October 31, 1999, the
deferred compensation balance was approximately $5.9 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 million for fiscal 1998, and
$28.9 million for fiscal 1999. We expect to continue to incur losses on both a
quarterly and annual basis in the future.

Our series A, series C and series G preferred stock, as well as shares of
our common stock outstanding on May 20, 1997 other than those shares held by
General Atlantic Partners, have rights that allow holders to receive a priority
payment upon the completion of this offering. These priority payments total
$35.8 million for the series A, series C and series G preferred stockholders,
and $10.0 million for the shares of our

16
<PAGE> 21

common stock outstanding on May 20, 1997 other than those shares held by General
Atlantic Partners. These amounts are 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 has elected to make these payments in 3,812,532
shares of common stock upon consummation of this offering. This payment will be
accounted for as a stock dividend. In the period in which this offering is
completed and the payment is made, we will charge our additional paid-in capital
account for the fair value of the shares of common stock issued. At the initial
public offering price of $22.00 per share, the value of the stock dividend will
total $65.5 million for the series A, series C and series G preferred
stockholders, and $18.3 million for the stock dividend on the shares of our
common stock outstanding on May 20, 1997 other than those shares held by General
Atlantic Partners. To the extent that the payment relates to the preferred
stock, we will also increase our net loss and basic and diluted net loss per
share attributable to common stockholders.

Before May 1997, we had elected to be treated as an S corporation under the
Internal Revenue Code. As an S corporation, federal and some state income tax
consequences of FirePond were passed through to the individual stockholders and
dividend distributions were made to the stockholders for payments of their
individual taxes related to our income. Therefore, no provision for income taxes
had been provided before fiscal 1997. In May 1997, we changed from an S
corporation to a C corporation and, as such, taxes are payable at the corporate
level. 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%.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------
1997 1998 1999
------ ------ -----
<S> <C> <C> <C>
Revenues:
Product-related revenues:
License................................................ 1.5% 6.5% 28.5%
Services and maintenance............................... -- 17.1 25.1
------ ------ -----
Total product-related revenues....................... 1.5 23.6 53.6
Custom development services............................... 98.5 76.4 46.4
------ ------ -----
Total revenues....................................... 100.0 100.0 100.0
------ ------ -----
Cost of revenues:
License................................................... 0.6 0.6% 0.7
Product-related services and maintenance.................. -- 10.6 16.6
Custom development services............................... 111.4 29.0 31.0
------ ------ -----
Total cost of revenues............................... 112.0 40.2 48.3
------ ------ -----
Gross profit (loss)......................................... (12.0) 59.8 51.7
Operating expenses:
Sales and marketing....................................... 28.7 47.2 68.9
Research and development.................................. 12.9 28.3 28.1
General and administrative................................ 11.3 12.1 20.7
Stock-based compensation.................................. 1.6 2.3 7.6
Restructuring charge...................................... 23.8 -- 8.8
------ ------ -----
Total operating expenses............................. 78.3 89.9 134.1
------ ------ -----
Loss from operations........................................ (90.3) (30.2) (82.4)
Other expense, net.......................................... 5.7 1.0 1.8
------ ------ -----
Net loss.................................................... (96.0)% (31.2)% (84.2)%
====== ====== =====
</TABLE>

17
<PAGE> 22

COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 1999 AND 1998

Revenues. Total revenues increased $5.3 million, or 18.2%, to $34.3
million in fiscal 1999 from $29.0 million in fiscal 1998. This increase is
attributable to a 167.9% 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 $7.9 million, or 417.8%, to $9.8
million in fiscal 1999 from $1.9 million in fiscal 1998. License revenues
as a percentage of total revenues increased to 28.5% in fiscal 1999 from
6.5% in fiscal 1998. The increase in license revenues in absolute dollars
and as a percentage of total revenues is primarily attributable to an
increase in the number of licenses implemented at higher average selling
prices. 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 increases in both
the size and productivity of our sales force.

Product service and maintenance. Product service and maintenance
revenues increased $3.6 million, or 73.0%, to $8.6 million in fiscal 1999
from $5.0 million in fiscal 1998. Product services revenues as a percentage
of total revenues increased to 25.1% in fiscal 1999 from 17.1% in fiscal
1998. 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 in fiscal 1999.

Custom development services. Custom development services revenues
decreased $6.2 million, or 28.2%, to $15.9 million in fiscal 1999 from
$22.1 million in fiscal 1998. Custom development services revenues as a
percentage of total revenues decreased to 46.4% in fiscal 1999 from 76.4%
in fiscal 1998. 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 in absolute
dollars and as a percentage of total revenues.

Cost of revenues. Total cost of revenues increased $4.9 million, or 42.1%,
to $16.6 million in fiscal 1999 from $11.7 million in fiscal 1998. Total cost of
revenues as a percentage of total revenues increased to 48.3% in fiscal 1999
from 40.2% in fiscal 1998.

Cost of license revenues. Cost of license revenues consists primarily
of costs of royalties, media, product packaging, documentation and other
production cost as well as amortization of capitalized software development
costs. Cost of license revenues increased 24.0% to $238,000 in fiscal 1999
from $192,000 in fiscal 1998. Cost of license revenues as a percentage of
license revenues decreased to 2.4% in fiscal 1999 from 10.2% in fiscal 1998
due to a 417.8% increase in license revenues while cost of license revenues
increased by only 24.0%.

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 $2.6 million, or 85.5%, to $5.7 million in fiscal 1999 from $3.1
million in fiscal 1998. Cost of product-related services and maintenance
revenues as a percentage of product-related services and maintenance
revenues increased to 66.0% in fiscal 1999 from 61.6% in fiscal 1998. The
increase was primarily due to increased staff to support a higher number of
product-related engagements.

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
as it relates to our custom development projects, including cost of
services provided by third-party consultants engaged by us. Cost of custom
development services revenues increased $2.2 million, or 26.7%, to $10.6
million in fiscal 1999 from $8.4 million in fiscal 1998. Cost of custom
development

18
<PAGE> 23

services as a percentage of custom development services revenues increased
to 66.9% in fiscal 1999 from 37.9% in fiscal 1998. The increase resulted
primarily from the following factors:

- we reduced the estimated losses on contracts in fiscal 1998 by a net
amount of approximately $2.4 million; and

- we charged costs incurred of $1.9 million on loss contracts in fiscal
1998 to the accrual for loss contracts.

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 $9.9 million,
or 72.6%, to $23.6 million in fiscal 1999 from $13.7 million in fiscal 1998.
Sales and marketing expenses as a percentage of total revenues increased to
68.9% in fiscal 1999 from 47.2% in fiscal 1998. Sales and marketing expenses
increased in absolute dollars and as a percentage of total revenues primarily
due to increased headcount in our sales operations, particularly our
international direct sales channel and the infrastructure of our global
operations, as well as a $1.0 million increase in marketing programs to promote
the new FirePond Application Suite. 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 $1.4 million, or 17.6%
to $9.6 million in fiscal 1999 from $8.2 million in fiscal 1998. Research and
development expenses as a percentage of total revenues decreased to 28.1% in
fiscal 1999 from 28.3% in fiscal 1998. These expenses increased in absolute
dollars as a result of increased engineering and product development activities
associated with our investment in the FirePond Application Suite. We expect
research and development expenses will continue to increase as we maintain and
enhance our existing products and conduct research for 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 $3.6 million, or 101.5%, to $7.1 million in fiscal 1999 from
$3.5 million in fiscal 1998. General and administrative expenses as a percentage
of total revenues increased to 20.7% in fiscal 1999 from 12.1% in fiscal 1998.
These expenses increased in absolute dollars and as a percentage of total
revenues primarily as a result of increased costs of our infrastructure
necessary to support our growth. We expect that general and administrative
expenses will continue to increase as we continue to add personnel to support
our expanding operations, incur additional costs related to the growth of our
business, and assume the responsibility and the costs associated with becoming a
public company.

Stock-based compensation expense. Stock-based compensation expense
increased $1.9 million, or 286.5%, to $2.6 million in fiscal 1999 from $672,000
in fiscal 1998. Stock-based compensation expense as a percentage of total
revenues increased to 7.6% in fiscal 1999 from 2.3% in fiscal 1998. If we had
allocated our stock-based compensation to the departments for which the services
were performed, general and administrative expenses would have increased by
$672,000 in fiscal 1998. In fiscal 1999, the allocation would have increased
cost of revenues by $40,000, sales and marketing expenses by $1,327,000,
research and development expenses by $913,000 and general and administrative
expenses by $317,000. The increase in stock-based compensation expense related
to sales and marketing activities in fiscal 1999 resulted from $622,000 in
awards to employees at exercise prices below fair market value, $474,000 in
awards to terminated employees, and $231,000 in awards to consultants and in
connection with strategic business alliances. The increase in stock-based
compensation expense related to research and development activities in fiscal
1999 resulted from $237,000 in awards to consultants and $676,000 in awards to
employees at exercise prices below fair market value.

Restructuring charge. During fiscal 1999, we undertook a plan to relocate
our corporate offices from Minnesota to Massachusetts. In connection with this
plan, we incurred $3.0 million of restructuring charges,

19
<PAGE> 24

which included $1.5 million for asset impairments, $1.0 million for idle lease
space and $500,000 for employee severance costs.

Other expense, net. Other expense, net consists of interest expense,
interest income, bank fees, and foreign currency transaction gains/losses. Other
expense, net increased $305,000, or 93.6%, to $631,000 in fiscal 1999 from
$326,000 in fiscal 1998 and represented less than 2.0% of total revenues in each
period.

COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 1998 AND 1997

Revenues. Total revenues increased $839,000, or 3.0%, to $29.0 million in
fiscal 1998 from $28.2 million in fiscal 1997. The increase in total revenues
from fiscal 1997 to fiscal 1998 was primarily due to the increased number of
user license sales and related consulting and training engagements related to
the release of our first software product in May 1997.

License. License revenues increased $1.5 million, or 353.8%, to $1.9
million in fiscal 1998 from $416,000 in fiscal 1997. License revenues as a
percentage of total revenues increased to 6.5% in fiscal 1998 from 1.5% in
fiscal 1997. The increase in absolute dollars and as a percentage of total
revenues was primarily due to the introduction of our first software
product in May 1997, and the subsequent market acceptance of these
products.

Product service and maintenance. Product service and maintenance
revenues increased to $5.0 million in fiscal 1998 from $0 in fiscal 1997.
Product service and maintenance revenues as a percentage of total revenues
was 17.1% in fiscal 1998. The increase was primarily due to the increased
customer support, consulting services and training programs we provided for
our customers as we increased the number of software license sales upon the
release of our new product.

Custom development services. Custom development services revenues
decreased $5.6 million, or 20.2%, to $22.1 million in fiscal 1998 from
$27.7 million in fiscal 1997. Custom development services revenues as a
percentage of total revenues decreased to 76.4% in fiscal 1998 from 98.5%
in fiscal 1997. 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 decreased $19.9 million, or
63.1%, to $11.6 million in fiscal 1998 from $31.5 million in fiscal 1997. Total
cost of revenues as a percentage of total revenues decreased to 40.2% in fiscal
1998 from 112.0% in fiscal 1997.

Cost of license revenues. Cost of license revenues increased to
$192,000 in fiscal 1998 from $178,000 in fiscal 1997. Cost of license
revenues as a percentage of license revenues decreased to 10.2% in fiscal
1998 from 42.8% in fiscal 1997 due to a 353.8% increase in license revenue
while cost of license revenues increased by only 7.9%.

Cost of product-related services and maintenance revenues. Cost of
product-related services and maintenance revenues increased $3.1 million,
to $3.1 million in fiscal 1998 from $0 in fiscal 1997. Cost of
product-related services and maintenance revenues as a percentage of
product-related service and maintenance revenues was 61.6% in fiscal 1998.
The increase was primarily due to the increased number of contracts for our
new software product in fiscal 1998.

Cost of custom development services revenues. Cost of custom
development services revenues decreased $23.0 million, or 73.2%, to $8.4
million in fiscal 1998 from $31.4 million in fiscal 1997. Cost of custom
development services as a percentage of custom development services
revenues decreased to 37.9% in fiscal 1998 from 113.0% in fiscal 1997. This
decrease is partially because cost of custom development services revenues
in fiscal 1997 included the following:

- a $5.2 million provision for loss contracts reserve;

- a $4.0 million write-off of our capitalized software development costs;
and

- amortization of $1.1 million of capitalized software development costs.

20
<PAGE> 25

Sales and marketing expenses. Sales and marketing expenses increased $5.6
million, or 69.3%, to $13.7 million in fiscal 1998 from $8.1 million in fiscal
1997. Sales and marketing expenses as a percentage of total revenues increased
to 47.2% in fiscal 1998 from 28.7% in fiscal 1997. These expenses increased in
absolute dollars and as a percentage of total revenues primarily due to
increased headcount in our sales operations, especially as we began to increase
the size of our international direct sales channel and the infrastructure of our
global operations in fiscal 1998.

Research and development expenses. Research and development expenses
increased $4.6 million, or 125.6%, to $8.2 million in fiscal 1998 from $3.6
million in fiscal 1997. Research and development expenses as a percentage of
total revenues increased to 28.3% in fiscal 1998 from 12.9% in fiscal 1997.
These expenses increased in absolute dollars and as a percentage of total
revenues as a result of increased engineering and product development activity
associated with our investment in our new products. In addition, all development
costs were expensed as incurred in fiscal 1998; while in fiscal 1997, $2.6
million of software development costs were capitalized.

General and administrative expenses. General and administrative expenses
increased $328,000, or 10.3%, to $3.5 million in fiscal 1998 from $3.2 million
in fiscal 1997. General and administrative expenses as a percentage of total
revenues increased to 12.1% in fiscal 1998 from 11.3% in fiscal 1997. The
increase in absolute dollars was largely due to additional costs necessary to
support the growth in our operations.

Stock-based compensation expense. Stock-based compensation expense
increased $222,000, or 49.3%, to $672,000 in fiscal 1998 from $450,000 in fiscal
1997. Stock-based compensation expense as a percentage of total revenues
increased to 2.3% in fiscal 1998 from 1.6% in fiscal 1997. This expense
increased primarily due to a higher number of stock options granted to
non-employees in fiscal 1998. If we had allocated our stock-based compensation
to our functional departments, general and administrative expenses would have
increased by $450,000 in fiscal 1997 and $672,000 in fiscal 1998, resulting from
stock option awards to consultants.

Restructuring charge. In May 1997, we undertook a plan to change our
strategic focus and, in connection with this change, decided to exit several of
our unrelated business activities, change our management team and reduce our
workforce. In connection with this plan, we incurred $6.7 million of
restructuring charges in fiscal 1997, which includes $2.7 million of employee
severance costs, $1.2 million of costs to exit several of our business
activities, and $2.8 million of asset impairments.

Other expense, net. Other expense, net decreased $1.3 million, or 79.5%,
to $326,000 in fiscal 1998 from $1.6 million in fiscal 1997. Other expense, net
as a percentage of total revenues decreased to 1.0% in fiscal 1998 from 5.7% in
fiscal 1997 due primarily to a $920,000 decrease in interest expense resulting
from a decrease in outstanding borrowings.

QUARTERLY RESULTS OF OPERATIONS

The following table presents our unaudited consolidated statement of
operations data for the eight quarters in the period ended October 31, 1999, as
well as the percentage of our total revenues represented by each item. We have
prepared this unaudited consolidated information on a basis consistent with our
audited consolidated financial statements, and in the opinion of our management,
this information reflects all normal recurring adjustments necessary for a fair
presentation of our operating results for the quarters presented.

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<PAGE> 26

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
JAN. 31, APR. 30, JUL. 31, OCT. 31, JAN. 31, APR. 30, JUL. 31, OCT. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product-related revenues:
License.......................... $ 144 $ 447 $ 706 $ 591 $ 1,607 $ 2,410 $ 2,615 $ 3,145
Services and maintenance......... 1,594 1,163 944 1,271 1,296 1,950 2,359 2,999
------- ------- ------- ------- ------- ------- ------- -------
Total product-related
revenues.................... 1,738 1,610 1,650 1,862 2,903 4,360 4,974 6,144
Custom development services...... 5,255 6,888 5,399 4,600 4,283 4,066 3,712 3,843
------- ------- ------- ------- ------- ------- ------- -------
Total revenues................. 6,993 8,498 7,049 6,462 7,186 8,426 8,686 9,987
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Licenses........................... 44 46 51 51 46 47 45 100
Product-related services and
maintenance...................... 890 749 742 680 998 1,405 1,487 1,787
Custom development services........ 2,652 620 3,065 2,060 3,001 2,733 2,888 2,014
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues......... 3,586 1,415 3,858 2,791 4,045 4,185 4,420 3,901
------- ------- ------- ------- ------- ------- ------- -------
Gross profit......................... 3,407 7,083 3,191 3,671 3,141 4,241 4,266 6,086
Operating expenses:
Sales and marketing................ 3,098 3,211 3,456 3,915 4,758 6,541 5,736 6,574
Research and development........... 1,933 1,950 2,047 2,269 1,997 1,828 2,547 3,269
General and administrative......... 907 704 995 910 1,531 1,717 1,814 2,022
Stock-based compensation........... 36 36 244 356 232 423 143 1,799
Restructuring charge............... -- -- -- -- -- -- 2,625 402
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses....... 5,974 5,901 6,742 7,450 8,518 10,509 12,865 14,066
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations........ (2,567) 1,182 (3,551) (3,779) (5,377) (6,268) (8,599) (7,980)
Other expense, net................... 34 209 51 32 235 78 92 226
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).................... $(2,601) $ 973 $(3,602) $(3,811) $(5,612) $(6,346) $(8,691) $(8,206)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
JAN. 31, APR. 30, JUL. 31, OCT. 31, JAN. 31, APR. 30, JUL. 31, OCT. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product-related revenues:
License............................ 2.1% 5.3% 10.0% 9.1% 22.4% 28.6% 30.1% 31.5%
Services and maintenance........... 22.8 13.6 13.4 19.7 18.0 23.1 27.2 30.0
----- ----- ----- ----- ----- ----- ----- -----
Total product-related revenues... 24.9 18.9 23.4 28.8 40.4 51.7 57.3 61.5
Custom development services........ 75.1 81.1 76.6 71.2 59.6 48.3 42.7 38.5
----- ----- ----- ----- ----- ----- ----- -----
Total revenues................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
Licenses............................. 0.6 0.5 0.8 0.8 0.6 0.6 0.5 1.0
Product-related services and
maintenance........................ 12.8 8.8 10.5 10.5 13.9 16.8 17.1 17.9
Custom development services.......... 37.9 7.3 43.5 31.9 41.8 32.4 33.2 20.2
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenues........... 51.3 16.6 54.8 43.2 56.3 49.6 50.8 39.1
----- ----- ----- ----- ----- ----- ----- -----
Gross profit........................... 48.7 83.4 45.2 56.8 43.7 50.4 49.2 60.9
Operating expenses:
Sales and marketing.................. 44.3 37.8 49.0 60.6 66.2 77.6 66.0 65.8
Research and development............. 27.6 22.9 29.0 35.1 27.8 21.7 29.3 32.7
General and administrative........... 13.0 8.3 14.1 14.1 21.3 20.4 20.9 20.2
Stock-based compensation............. 0.5 0.4 3.5 5.5 3.2 5.0 1.6 18.0
Restructuring charge................. -- -- -- -- -- -- 30.2 4.0
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses......... 85.4 69.4 95.6 115.3 118.5 124.7 148.0 140.7
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations.......... (36.7) 14.0 (50.4) (58.5) (74.8) (74.3) (98.8) (79.8)
Other expense, net..................... 0.5 2.5 0.7 0.5 3.3 0.9 1.1 2.3
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)...................... (37.2)% 11.5% (51.1)% (59.0)% (78.1)% (75.2)% (99.9)% (82.1)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>

22
<PAGE> 27

Our operating results have varied significantly from quarter to quarter in
the past and may continue to fluctuate in the future. The quarterly fluctuations
are caused by a number of factors, including demand for our products and
services, size and timing of specific sales, level of product and price
competition, timing and market acceptance of new product introductions and
product enhancements by us and our competitors, the length of our sales cycle,
personnel changes, budgeting cycles of our customers, the impact of our revenue
recognition policies, changes in technology and changes caused by the rapidly
evolving e-business market and the impact of year 2000 investments by us and our
customers. Many of these factors are beyond our control. Therefore, we believe
that results of operations for interim periods should not be relied upon as any
indication of the results to be expected in any future period.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations and met our capital
expenditure requirements primarily through the sale of private equity
securities, borrowings on our line of credit and capital equipment leases.

As of October 31, 1999, we had $2.1 million of cash and cash equivalents,
compared with $2.3 million as of October 31, 1998. Our working capital deficit
at October 31, 1999 was $11.4 million, compared to a working capital deficit of
$6.2 million at October 31, 1998.

Net cash used in operating activities was $19.9 million in fiscal 1999,
$10.5 million in fiscal 1998, and $3.0 million in fiscal 1997. Cash used in
operating activities in fiscal 1999 was primarily attributable to our net loss
and increases in accounts receivable and prepaid expense, offset in part by an
increase in deferred revenues, accounts payable and accrued liabilities and
non-cash expenses including depreciation, amortization, stock-based compensation
expense and a restructuring charge.

Net cash used in investing activities was $2.1 million in fiscal 1999, $1.5
million for fiscal 1998, and $6.6 million for fiscal 1997. Net cash used in
investing activities in fiscal 1999 was primarily attributable to purchases of
property and equipment to support our expanding operations, offset in part by
proceeds from the sale of our Mankato, Minnesota facility.

Net cash provided by financing activities provided net cash of $21.9
million in fiscal 1999, $4.1 million in fiscal 1998, and $19.3 million for
fiscal 1997. Proceeds from financing activities for fiscal 1999 were primarily
from the sale of our series F preferred stock and net borrowings on our line of
credit and term note, offset in part by payments on long-term debt.

On July 31, 1998, we established a $5.0 million line of credit with a
financial institution to replace our $4.3 million line of credit which expired
on April 1, 1998. Effective September 29, 1999, we amended our line of credit
agreement to increase the commitment by $2.0 million. This additional commitment
was reached through the conversion of outstanding borrowings on the existing
line of credit to a $2.0 million term loan. The entire unpaid principal balance
of the term loan is payable upon the termination of the agreement. The line of
credit expires on October 31, 2000. The amount available for borrowing is based
on 80% of eligible accounts receivable. Eligible accounts receivable are defined
as accounts receivable from United States based contracts that are payable
within six months and which are not in dispute or delinquent. Interest on the
line of credit is at the prime rate plus 2.0% limited to a minimum of 8.0% per
year, and is payable monthly. We also pay a monthly fee of 0.5% per year on the
unused line of credit. As of October 31, 1999, we had $4.7 million outstanding
under the line of credit and available borrowing capacity of $37,000.

On November 12, 1999, we borrowed $6.0 million of subordinated indebtedness
from an outside investor and two of our existing stockholders. The indebtedness
bears interest at 12.0% and is due upon the earlier of the closing of this
offering or November 11, 2000. 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 will record the warrants as a discount totaling $1.9
million against the carrying value of the subordinated notes payable.

We anticipate a substantial increase in our capital expenditures consistent
with anticipated growth in operations, infrastructure and personnel. We believe
that existing cash and cash equivalents, together with the net proceeds of this
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
23
<PAGE> 28

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 stockholders would be reduced. Furthermore, these securities
may have rights, preferences or privileges senior to our common stock.

YEAR 2000 READINESS

Background of Year 2000 Issue

The year 2000 issue refers generally to the problems that some software may
have in determining the correct date as a result of the millennium change. We
define year 2000 ready to mean that testing has revealed that the electronic
components at issue will recognize and properly perform date sensitive functions
into and beyond the year 2000. Software with date sensitive information that is
not year 2000 ready may not be able to distinguish whether 00 means 1900 or
2000, which may result in system failures or the creation of erroneous results.
We are subject to potential year 2000 issues affecting our products, our
internal systems and the systems of our suppliers and customers, any of which
could harm our business.

State of Readiness

We organized a year 2000 task force to address our year 2000 issues. The
task force concluded all testing and remediation efforts in relation to year
2000 issues on December 15, 1999 as discussed below.

We have tested all custom and product implementations currently being
utilized by customers and, as necessary, have remediated and made all of these
implementations year 2000 ready. We have further tested all existing and past
FirePond products for year 2000 issues and, as necessary, remediated and made
all of these products year 2000 ready. However, we have not tested independently
installed third-party software which may be integrated within our customer's
systems. Integrated software could be susceptible to year 2000 issues and the
failure of our customers' systems to be year 2000 ready could impede the success
of our applications in their systems.

We have tested all internal hardware and software for 2000 issues and, as
necessary, have remediated and made all of these systems year 2000 ready. For
our non-information technology, we have obtained year 2000 ready statements from
all of our material suppliers and do not anticipate any year 2000 problems.

The Cost to Address Our Year 2000 Issues

We have incurred costs in replacing hardware as well as labor in assessing,
testing and remediating all of our software and hardware. All costs incurred in
our process to be year 2000 ready are covered by our general budget to fund the
activities of the year 2000 task force. These costs are divided into two
categories:

- our internal systems and hardware; and

- custom and product customer implementations.

The majority of costs were incurred during calendar year 1999. We incurred
approximately:

- 2000 employee hours;

- $10,000 in contract fees; and

- $75,000 in capital expenditures remediating our internal hardware and
software systems.

We anticipate no further material costs associated with remediating year 2000
issues.

The Risk of Our Year 2000 Issues

We have assessed, tested and remediated all anticipated year 2000 issues.
Therefore, currently we are not aware of any material operational issues or
costs associated with year 2000 issues. The only potential

24
<PAGE> 29

problems we anticipate in relation to the year 2000 are minor internal or
customer associated year 2000 issues which may have been overlooked by our year
2000 task force or year 2000 issues which are beyond our control.

Our Contingency Plan

We have prepared a contingency plan if we are not year 2000 ready. All key
personnel are available to address all potential problems which may occur with
our own internal systems as well as unanticipated problems with our customers
use of our software products and implementations. We have taken further
contingency plans designed to protect software code that is material to our
business operation.

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.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

25
<PAGE> 30

BUSINESS

INDUSTRY BACKGROUND

In today's highly competitive global marketplace, it is increasingly
critical for companies to prioritize their businesses around the attraction,
conversion and retention of customers. As a result, many companies are
redirecting their technology investments toward systems that will maximize their
long-term revenue streams by increasing customer loyalty. Within industries that
are characterized by complex products, services, or channel relationships,
competitive advantage often results from a company's ability to provide
products, services and content that are specific to the preferences of
individual customers, particularly when they are making a buying decision.
Companies are also realizing that existing and potential customers often access
their organization through multiple business channels, including e-commerce
channels, traditional direct sales forces, and indirect channel partners. It is
therefore important that companies not only equip these channels with systems
that provide competitive differentiation when a customer's buying decision is
being made, but that they provide the customer with consistent, valuable service
across all channels.

In response to this shift toward customer-oriented systems, companies
originally invested heavily in traditional customer relationship management, or
CRM, software, which was designed to automate administrative support for
traditional corporate sales, call center, and service employees to more
effectively manage customer relationships. These solutions, which traditionally
have included functionality such as customer contact management, sales force
administration, call center service and support, and marketing automation, have
helped to eliminate cost inefficiencies within a company's sales and marketing
organization by streamlining and consolidating customer information and other
internal administrative tasks. However, because these applications are focused
on administrative aspects of a company's sales and marketing efforts, they
generally have not directly enhanced the customer's buying experience.
Traditional CRM solutions are further prevented from providing value directly to
customers because they were typically designed before the widespread commercial
use of the Internet, and were not intended for large scale, Internet-based
customer-driven transactions. Many companies that implemented traditional CRM
systems therefore have found themselves with systems that do not interactively
engage the customer in ways that add value to those relationships or enhance
individual buying decisions.

The rapid evolution and acceptance of the Internet as a means for
communicating, sharing information, and transacting directly with customers
worldwide has dramatically changed the focus of customer relationship
management. The Internet offers new opportunities for increased interactivity
and self-service, enabling companies to create new approaches for initiating,
developing and managing customer relationships over time. The Internet enables
the creation of powerful new revenue channels, while simultaneously improving
the effectiveness with which existing distribution channels market, sell and
support product and service offerings. Forrester Research, Inc. estimates that
the total value of U.S. business trade on the Internet will grow to
approximately $1.3 trillion in 2003. International Data Corporation, or IDC,
estimates that the market for Internet Commerce applications will grow 280% to
$1.7 billion in 1999 and projects the market to top $13 billion by 2003. We have
derived this information from Internet Commerce Software Applications Market
Review and Forecast, 1998-2003, April 1999.

As a result of these developments, the market for sales and marketing
oriented e-business software offerings has also evolved rapidly. The first
generation of e-business software was primarily focused on providing the back
office infrastructure to enable secure commerce transactions. More recently, a
variety of niche e-business software applications have been introduced,
including Internet content management and personalization offerings, which
target a specific aspect of the customer relationship or buying process. These
point solutions have provided tactical value in encouraging the adoption of the
Internet for the purchase of more basic, consumer-oriented goods. However, they
have typically not provided the advanced, comprehensive selling functionality
necessary to offer targeted products, services and content based upon a
customer's individual profile or stated requirements, which we believe is a
critical success factor for companies using e-commerce to sell complex products
and services. In addition, these Internet applications typically do not interact
with a company's traditional sales and distribution channels. Because these
applications were designed to support only Internet-based interactions, they
typically are unable to collect information about
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<PAGE> 31

customers when they access a company's traditional sales channels, leaving a
company with an incomplete view of an individual customer's behavior,
requirements and preferences. This inability to enable a common view of
individual customers across multiple selling channels limits a company's ability
to develop strategies for improving its product offerings, services, and selling
processes in ways that would encourage repeat business from those customers.

Companies that sell complex products and services require a new generation
of e-business sales and marketing applications to offer targeted products,
services, and content to individual customers. Without these applications,
companies with complex selling activities may not be able to execute successful
e-commerce strategies, and may be forced to rely exclusively on traditional
human-assisted selling channels for their revenue streams. To encourage
conversion of potential customers into customers and repeat business from
individual customers, these companies must utilize advanced, Internet-based
technologies that offer enhanced customer interactivity and can support the
creation of personalized solutions in a highly scalable and reliable fashion at
the time of customer buying decisions. These capabilities must support the rapid
deployment of an effective e-commerce channel for selling complex products and
services, and must also automate complex selling activities within traditional
direct and indirect selling channels to maximize the ability of all channels to
transact new business. This next-generation software must also capitalize on the
highly interactive nature of the Internet to collect real-time customer
information from individual selling interactions across all sales channels, so
that this common view of customer activity may be shared across a company's
enterprise as a basis for developing improved product offerings, services, and
selling processes that encourage long-term customer loyalty.

THE FIREPOND SOLUTION

FirePond is a leading provider of integrated e-business sales and marketing
solutions for companies wishing to offer complex products and services through
business-to-business and business-to-consumer e-commerce channels. We offer
packaged software applications and related services that allow these companies
to deploy comprehensive, highly interactive selling systems that increase
customer conversion and retention of individual customers over the long term, in
both e-commerce and more traditional sales channels. Our packaged software
product, the FirePond Application Suite, allows companies in our targeted
markets to offer personalized products, services and content when a customer is
preparing to buy, either on an e-commerce web-site, or from a direct
salesperson, distributor, dealer or agent. Using our software, companies are
able to share customer information obtained from business-to-business or
business-to-consumer e-commerce sales transactions with traditional sales
channels, where that information is used by sales people to improve individual
customer relationships and develop additional revenue opportunities. By enabling
these interactive, Internet-based selling transactions, our products are able to
collect from multiple selling channels real-time information about individual
customer behavior, preferences and transaction activity, creating a common view
of individual customers. Our software then distributes this customer information
across the enterprise, where it provides the basis for developing improved
product offerings, services and selling processes that will increase the
likelihood of long-term customer retention.

Using our integrated e-business sales and marketing solutions, companies
that offer complex products and services are able to:

- quickly develop an effective e-commerce sales channel by delivering
interactive selling capabilities to business-to-business and
business-to-consumer e-commerce sites;

- automate highly complex selling tasks within direct and indirect selling
channels to ensure the accuracy and personalization of products and
services offered to customers throughout those channels;

- utilize the same business rules, data and selling functionality across
all e-commerce and traditional sales channels, so that individual
customers receive consistent, high quality information when they are
ready to buy products or services;

- develop a common view of each customer across all e-commerce and
traditional sales channels to bring intelligence and consistency to every
customer interaction;

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<PAGE> 32

- take advantage of the interactivity of the Internet to create a common
view of individual customers from real-time interactions across selling
channels, and share that information across the enterprise to enable
strategies for improved product offerings, services, and selling
processes, increasing the likelihood of achieving long-term customer
loyalty; and

- achieve high reliability, performance and scalability in e-commerce
environments, as well as in broader enterprise environments that support
multiple selling channels.

STRATEGY

Our goal is to be the leading provider of integrated e-business sales and
marketing solutions. To achieve this goal, key elements of our strategy include:

Pursue Targeted Vertical Markets. We currently focus on industries that
are typically characterized by complex products, services or channel
relationships, including health care/insurance, financial services, high
technology, telecommunications, automotive/trucking and manufacturing. We
believe that our focused pursuit of these targeted markets increases our ability
to offer solutions that meet the unique needs of our target customers, which may
vary greatly across industry segments. To further our vertical market focus, our
sales efforts are organized around complementary industry segments so that we
may offer more specialized, consultative expertise when customers evaluate and
license our products. We will continue to deepen our focus on target industry
markets and translate customer requirements into industry-specific product
features and functions, which we believe will create barriers to entry for our
competitors. During fiscal 2000, we also plan to expand into new vertical
industries with similar characteristics and will target leading companies in
those industries.

Expand Established International Infrastructure to Gain Global Market
Share. During fiscal 1999, we invested heavily in a global infrastructure to
target leading businesses worldwide. We have increased the number of FirePond
employees internationally to 78 as of November 30, 1999 from 24 on October 31,
1998. Our international revenues as a percentage of total revenues were 11% in
fiscal 1999. Our leading international customers include Ford Motor
Company-Europe, Hitachi, Packard Bell/NEC, Renault V.I, and Scania. We plan to
use new customers and existing and new partner relationships to complement our
infrastructure and grow market share in international markets.

Expand Our E-Business Solutions. Our internal development organization,
combined with our strategic relationship with an offshore development
organization, creates a highly scalable product delivery model that allows us to
rapidly introduce significant new product features and functionality. We believe
these combined resources provide us with significant advantages, including ready
access to a highly-skilled labor pool, reduced turnover and rapid development
cycles. The use of this model was integral to the rapid development and timely
release of the FirePond Application Suite, which includes functionality,
features, and underlying architecture not available in our prior product
offerings. We intend to continue to use this combined organization to expand the
functionality of our products and incorporate new technologies to meet the
demands of the marketplace.

Expand Relationships with Partners. We have established strategic
marketing alliances with industry leading systems integrators, including Ernst &
Young, Viant, EDS and Intelligroup, and with complementary software vendors,
such as E.piphany, Talus Software, Silverstream and Oberon Software and
application service providers such as GTE Internetworking. These alliances help
extend our market coverage and provide us with new business leads and access to
a large pool of highly trained implementation personnel. On an ongoing basis, we
will seek to expand the number of partners we work with to further penetrate the
market and accelerate our growth.

Offer Packaging Flexibility to Strategically Penetrate Global 2000
Accounts. We offer a suite of e-business products, which may be purchased as
separate components or as an enterprise platform for integrated e-business sales
and marketing solutions. This has allowed us to penetrate accounts that differ
greatly in their current stages of developing and implementing their e-business
strategies. When we are successful in selling our independent component
offerings, we create future opportunities for up-selling customers to our
enterprise

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<PAGE> 33

platform which we intend to pursue. In addition, we offer a migration path to an
enterprise platform for integrated e-business sales and marketing solutions to
increase the likelihood that we will successfully sell our independent
components to accounts that are not yet ready for enterprise-wide solutions. We
also offer innovative pricing alternatives such as annual licensing and
transaction-based pricing that provide our customers with a wide variety of
licensing options. We will continue to package and price our product offerings
in a fashion designed to remove sales barriers and create recurring revenue
streams.

Incorporate Expertise from Prior Custom Development Business. We have been
engaged for 16 years in the development of custom interactive selling solutions
for Global 2000 companies and have utilized that expertise in developing and
implementing the FirePond Application Suite. We have successfully transitioned
the majority of our business from providing custom development services to
providing more standardized software products and product-related services,
while maintaining the technical expertise and knowledge developed in providing
customized solutions in our prior business model. We believe that our historical
expertise in this area represents a significant competitive advantage. We intend
to expand upon this expertise to develop products by creating packaged software
versions of previously installed custom functionality and by re-using highly
specialized implementation methodologies developed over the course of our
history.

FIREPOND PRODUCTS

The FirePond Application Suite is a suite of packaged, Internet-based
software applications, enabling companies that offer complex products and
services to deploy integrated e-business sales and marketing solutions. The
FirePond Application Suite includes packaged software components for
Internet-based guided selling, which allow companies to offer personalized
products, services and content to customers when they are ready to make a buying
decision, whether on an e-commerce site or through a traditional sales channel.
Within the FirePond Application Suite, we also offer enterprise customer
information management and sales administration capabilities, which allow
customer information collected from selling interactions across multiple sales
channels to be consolidated in a single administrative application. Finally, our
software includes a process workflow engine, which enables companies to design
processes that distribute information collected from real-time selling events
across a company's enterprise.

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<PAGE> 34

The table below describes the packaged software components of the FirePond
Application Suite, all of which, other than the FirePond Business Rule Engine,
were released in October 1999. Previous versions of the FirePond Business Rule
Engine have been used in our custom software development implementations as well
as in our prior software products.

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
FIREPOND APPLICATION SUITE
COMPONENT COMPONENT DESCRIPTION
- ---------------------------------------------------------------------------------------------------
<S> <C>
FirePond Business Rule Engine Industry-leading business intelligence engine for
rules-based product configuration, pricing, customer needs
analysis and transactional personalization during the sale
of complex products and services
- ---------------------------------------------------------------------------------------------------
FirePond Commerce Guided selling application that enable consultative selling
processes within business-to-business or
business-to-consumer e-commerce web-sites, utilizing the
configuration and business rule services of the FirePond
Business Rule Engine
- ---------------------------------------------------------------------------------------------------
FirePond Sales Guided selling application that automates complex selling
activities for assisted direct and indirect sales channels,
utilizing the configuration and business rule services of
the FirePond Business Rule Engine
- ---------------------------------------------------------------------------------------------------
FirePond Sales Manager Sales administration and customer information management
system
- ---------------------------------------------------------------------------------------------------
FirePond Process Server Transaction-based process workflow engine, enabling
companies to design processes that share customer
information collected by FirePond Commerce and FirePond
Sales across connected systems and individuals within the
enterprise
- ---------------------------------------------------------------------------------------------------
FirePond Enterprise Workbench Application administration platform, including tools for
managing functionality, content, business rules, enterprise
process flows and system administration activities
- ---------------------------------------------------------------------------------------------------
</TABLE>

FirePond Product Packaging and Pricing

We offer a variety of packaging and pricing options for the FirePond
Application Suite, to achieve flexibility in aligning our technology with
companies in different stages of executing their e-business strategies.
Customers seeking an enterprise platform for integrated e-business sales and
marketing may license the entire FirePond Application Suite, including all
associated components. Those companies pursuing less comprehensive initiatives,
but which are still focused on making strategic investments in e-commerce
selling, channel management or customer information management solutions, may
license FirePond Commerce or FirePond Sales, each bundled with the FirePond
Business Rule Engine, as well as FirePond Sales Manager, as standalone
applications. By offering this variety of packaging options, we allow our
customers to make strategic investments in our technology, without necessarily
committing to a larger enterprise platform.

We also offer a wide variety of pricing options to our customers. We
currently offer our packaged software on a price per user or group of concurrent
users basis, which customers can then license on a perpetual or annual basis. We
also offer transaction-based pricing that ties the overall cost of owning our
software to the value provided to the company. To date, substantially all of our
licenses have been perpetual licenses. License fees for our products typically
range from approximately several hundred thousand dollars to several million
dollars.

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<PAGE> 35

FirePond Business Rule Engine

The FirePond Business Rule Engine, or FirePond BRE, is an industry-leading
business intelligence engine for executing rules-based product configuration,
pricing, customer needs analysis and transactional personalization during the
sale of complex products and services. The FirePond BRE was originally utilized
in our previous business model, as the centerpiece of custom software
developments, and was incorporated in the FirePond Application Suite. The
FirePond BRE has proven highly scalable in large-scale enterprise environments.
The FirePond BRE evaluates customer requirements and characteristics, then
matches them to specific products, pricing and content, all at the time of
evaluation and purchase. Using accompanying tools in the FirePond Enterprise
Workbench, companies create multi-tiered business rule models that govern how
products are configured, offered and sold to individual customers, customer
types, or market segments, in both e-commerce and traditional sales channels. At
the time of customer evaluation or purchase, the FirePond BRE will evaluate
customer information input, draw from the underlying business rule models,
configure targeted products, generate customer-specific pricing, and offer
relevant content to facilitate the customer buying decision. This interactive
information exchange, or customer needs analysis, shields customers from the
complexity of the product being sold, allowing targeted solutions to be
configured based on customers' high level descriptions of intended use, personal
preferences, business priorities, or price sensitivities, rather than detailed
option selection.

FirePond Commerce

FirePond Commerce allows companies to offering complex products or services
to quickly deploy highly interactive, consultative e-commerce web sites for
selling. Companies receive the base packaged selling functionality of FirePond
Commerce, then collaborate with FirePond or third-party implementation partners
to organize the selling functionality in ways that reflect their unique
strategies and best practices for selling. Associated tools in the FirePond
Enterprise Workbench allow us, our partners, or the company to organize and
deploy this functionality. Using the FirePond Business Rule Engine to apply
business rules intelligence to independent components of functionality,
companies can easily construct comprehensive e-commerce selling sites that
emulate the consultative nature of traditional sales channels. The packaged
functionality of FirePond Commerce allows customers to proceed through an entire
complex sales process in an e-commerce environment, beginning with an
interactive needs analysis session, creating a targeted product configuration
with a personalized price quote, exploring optimal financing recommendations,
comparing relevant competitive offerings, obtaining individualized product
content, generating a company-branded proposal, and completing the order.
FirePond Commerce then logs these interactions to share real-time information
with other FirePond applications as well as with the larger enterprise.

FirePond Sales

FirePond Sales is a guided selling application which automates complex
selling activities for sales people in traditional selling channels, including
direct sales forces, distributors, dealers, agents and others who deal
interactively with customers. Similar to FirePond Commerce, companies receive
the base packaged selling functionality of FirePond Sales, then use associated
tools in the FirePond Enterprise Workbench to organize the functionality to
represent their unique strategies and best practices for selling. FirePond Sales
provides the same functionality offered in FirePond Commerce to personalize
products, services and content to individual customers when they are ready to
buy. However, the functionality is typically presented differently due to the
presence of human interaction in the sales process. The underlying data model
and architecture that support FirePond Sales are also the same as that which
supports FirePond Commerce, allowing for collaboration between the two
applications. For example, when a customer creates and saves a personalized
solution on a FirePond Commerce-enabled site, a sales person can access that
solution and use FirePond Sales to offer informed alternatives to further
develop the opportunity.

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<PAGE> 36

FirePond Sales Manager

FirePond Sales Manager is an integrated, web-based sales administration and
customer information management system. FirePond Sales Manager allows sales
people and their managers to perform a wide variety of customer information
management activities, including managing customer contacts and profiles,
coordinating activities, defining and assessing opportunities, managing a sales
pipeline, aligning sales territories, and generating and analyzing forecasts.
Because it is typically linked to FirePond Commerce and FirePond Sales, data
from real-time customer interactions is automatically delivered to FirePond
Sales Manager, rather than input by a salesperson. For example, if a customer
engages in a buying session on a FirePond Commerce-enabled web site, that event,
along with all of the customer profile information associated with that session,
is delivered to FirePond Sales Manager, where assigned next steps will be
presented to the sales person for effective pursuit of the sale.

FirePond Process Server

FirePond Process Server is a transaction-based workflow engine that enables
companies to coordinate connected software systems and individuals in organized,
customer-driven processes. Using intuitive visual tools in FirePond Enterprise
Workbench, companies can design business processes for responding to real-time
events generated from interactive sessions occurring within FirePond Commerce or
FirePond Sales. Using FirePond Process Server and its related tools, companies
can identify organizational roles, assign tasks, and connect software systems to
each process. Companies then apply logic that defines how and when these
organizational roles, tasks, and software systems will be invoked, based on
different events. When events trigger these processes, FirePond Process Server
ensures that the process is triggered across the enterprise, while maintaining
the integrity of underlying corporate databases. Companies then use FirePond
Process Server tools to test and analyze these processes for maximum benefit.
For example, companies use FirePond Process Server to define the processes that
will be triggered when an individual customer creates a solution on a FirePond
Commerce-enabled web site. Using the associated tools, companies may create
processes that inform the appropriate sales person of this event, attach
relevant customer information from the session, update the corporate customer
information database, or send an e-mail to that customer's service team.

FirePond Enterprise Workbench

FirePond Enterprise Workbench is a maintenance and development platform for
defining, analyzing, and managing functions, data, content and processes within
the FirePond Application Suite. FirePond Enterprise Workbench is comprised of
several tools, which allow companies to:

- author and manage business rules that support product configuration,
pricing and transactional personalization in the FirePond Business Rule
Engine;

- organize packaged FirePond selling functionality within FirePond Commerce
and FirePond Sales to comply with their strategies and best practices for
selling;

- develop and deploy additional e-business functionality that complements
the packaged application functions of FirePond Commerce, FirePond Sales
and FirePond Sales Manager;

- visually create, manage, and monitor transaction-based business processes
that span multiple applications;

- define connectivity and data flows between the FirePond Application Suite
and third-party applications; and

- assign users, manage security, and troubleshoot the distributed
components of a FirePond Application Suite deployment.

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<PAGE> 37

PROFESSIONAL SERVICES AND SUPPORT

We offer a range of professional services that help companies use the
packaged software functionality of the FirePond Application Suite to create
deployments that are highly specific to their businesses. Our professional
services personnel typically have extensive experience in the deployment of
enterprise-scale selling systems, as many have participated in projects
associated with our prior custom development services business model. When we
assist companies in the implementation of the FirePond Application Suite, or one
of its components, we help them determine how their individual selling
strategies can be reflected in our packaged technology, then provide specialized
professional services resources who use FirePond Enterprise Workbench to assist
in the creation of a functional application workflow, data models, automated
enterprise processes, highly branded user interfaces, and functional extensions
to our packaged software applications to support those strategies. Our
professional services implementation teams are organized around the following
roles:

- Project Manager -- Business manager of the FirePond Application Suite
implementation, responsible for leading project strategies and
coordinating our resources in support of those strategies

- Business Analyst -- Strategic business consultant responsible for mapping
a company's corporate selling strategies to the packaged product
functionality in the FirePond Commerce and FirePond Sales applications,
and for designing customer-focused business processes within FirePond
Process Server

- Product Architect -- Technical architecture specialist responsible for
compliance of the FirePond Application Suite with the technical
infrastructure of individual companies, including strategies for data
management, communication, and integration between the FirePond
Application Suite and third party applications

- BRE Engineer -- Highly specialized resource responsible for implementing
business rule models that allow the FirePond Business Rule Engine to
reflect a company's product configuration, pricing and transactional
personalization strategies

- Interactive Consultant -- Graphic design specialist responsible for using
FirePond Enterprise Workbench to create a user interface for FirePond
Commerce and FirePond Sales systems, which reflect a company's individual
brand identity

We may also involve third-party systems integrators to perform these roles
and supplement our professional services personnel on particular accounts.

We provide support services, as well as software upgrades, under annual
software maintenance contracts. These annual maintenance contracts are renewable
at the company's option. Our support services are available seven days per week,
24 hours per day, and 365 days per year.

In addition to the services provided in connection with the FirePond
Application Suite, we also provide custom development and support services. From
our inception through 1997, we generated revenues primarily through custom
development services, and the ongoing support of the implementations from our
prior business model continues to represent a significant portion of our
revenues. Although we do not offer custom development services to new customers
and we expect revenues from our custom development services to decline as a
percentage of overall revenues over time, we intend to continue to provide these
services in support of our established custom development services contracts.

SALES AND MARKETING

We market and sell our products primarily through our direct sales force,
which is located throughout North America, Europe and Asia. In North America,
the FirePond sales organization is focused on our targeted vertical markets,
with resources assigned to health care/insurance, financial services, high
technology, telecommunications, automotive/trucking and manufacturing. In Europe
and Asia, the FirePond sales organization is deployed by geographic region, but
focuses on the same vertical markets that we target in North America.

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<PAGE> 38

We have multi-disciplined sales teams that consist of sales, technical and
sales support professionals. Our senior management also takes an active role in
our sales efforts. Frequently, we use FirePond Enterprise Workbench to develop
customer-specific demonstrations of FirePond Commerce and FirePond Sales to
support selling cycles which we or our partners then use as a basis for the
actual full-scale implementations. We typically direct our sales efforts to the
chief executive officer, the chief information officer, the vice presidents of
sales and marketing and other senior executives responsible for e-business or
multiple selling strategies at our customers' organizations.

FirePond has sales offices in the Boston, Chicago, Detroit, Minneapolis,
Pittsburgh, San Francisco, St. Louis, Amsterdam, Dusseldorf, London, Paris,
Stockholm and Tokyo areas. As of November 30, 1999, our world-wide sales
organization consisted of 62 employees.

A key element of our growth strategy is the formation of strategic
relationships with industry leaders whose business offerings complement our own.
We believe that these relationships allow us to scale our business rapidly and
effectively, by enabling the expansion of our:

- global brand exposure;
- pipeline of qualified sales opportunities;
- capacity to effectively implement our software offerings for new
customers; and
- ability to deliver enhanced value to our customers.

FirePond has successfully established relationships with large,
international systems integrators and consulting services companies, including
Ernst & Young, Viant, EDS, Intelligroup, Debis Systemhaus, and WM Data. We
intend to expand these relationships and add new relationships in this area to
increase our capacity to sell and implement our products on a global basis. With
existing partners, such as Ernst & Young and Intelligroup, we align our
relationships to coincide with our target vertical markets, including the
healthcare/insurance, telecommunications, and automotive market sectors. We will
continue to pursue relationships that augment our vertical market strategy.

FirePond also has relationships with vendors whose products are generally
believed to be complementary to our own, including E.piphany, Talus Solutions,
Silverstream, Sun Microsystems and Oberon Software. On an ongoing basis, we will
pursue additional technology relationships that increase our value to potential
customers, expand our ability to offer integrated enterprise solutions, and
increase our market opportunities.

Recently, several companies have emerged that offer outsourced software
application hosting services to a wide variety of companies that may not want to
incur the cost of hosting and maintaining enterprise software applications
within their internal technology infrastructure. We believe that these
alternative hosting models provide an opportunity to expand our market reach,
because they offer a lower ownership cost to companies that might not otherwise
be able to justify a large software investment. We have commenced pursuit of
this opportunity by establishing a relationship with GTE Internetworking that
provides the FirePond Application Suite on a GTE hosted platform. We will expand
our pursuit of partners that offer alternative software hosting models to
increase our market reach into companies outside the Global 2000.

As of November 30, 1999, FirePond had 3 employees focused on the
development of corporate partnerships and strategic alliances. In addition, our
senior management takes an active role in the development of these key
relationships.

FirePond's marketing organization utilizes a variety of programs to support
our sales efforts, including:

- market and product research and analysis;
- product and strategy updates with industry analysts;
- public relations activities and speaking engagements;
- internet-based and direct mail marketing programs;
- seminars and trade shows;
- brochures, data sheets and white papers; and
- web site marketing.

As of November 30, 1999, FirePond's marketing organization consisted of 11
employees.

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<PAGE> 39

CUSTOMERS

FirePond has targeted and will continue to target selected vertical
industries with complex products, services or channel relationships, including
health care/insurance, financial services, high technology, telecommunications,
automotive/trucking and manufacturing. The following is a list of some of our
better-known customers to whom we have provided our products or services in
fiscal 1998 or fiscal 1999:

ADP
American Isuzu Motors*
Bell Atlantic Network Integration
Blue Cross Blue Shield
Minnesota
Compaq
Cummins Power Generation
Group
DAF Trucks N.V.*
Empire Blue Cross Blue Shield
Ford Motor Company -- Europe
Freightliner*
General Motors
Hitachi
IBM*
Ingersoll-Rand
Isuzu-General Motors Australia*
JI Case*
John Deere*
Johnson Controls*
KLA-Tencor
Norwest Services
Packard Bell/NEC
Peugeot SA
Renault V.I.
Savings Bank Life Insurance
Scania
Sprint
Subaru
Sunds Defibrator

- ------------
* Customer relationships based on custom development services exclusively

The following table is a list of customers from whom we derived revenues
equal to 10% or more of our total revenues during fiscal 1997, fiscal 1998 or
fiscal 1999, and whose loss would seriously harm our business:

<TABLE>
<CAPTION>
FISCAL 1997 REVENUES FISCAL 1998 REVENUES FISCAL 1999 REVENUES
--------------------------- --------------------------- ---------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
CUSTOMER AMOUNT TOTAL REVENUES AMOUNT TOTAL REVENUES AMOUNT TOTAL REVENUES
-------- ---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
General Motors....... $6,005,000 21% $7,152,000 25% $8,143,000 24%
Blue Cross Blue
Shield Minnesota..... -- -- 147,000 1% 4,993,000 15%
</TABLE>

RESEARCH AND DEVELOPMENT

As of November 30, 1999, FirePond employed 87 people in research and
development throughout its U.S. offices. This team is responsible for product
planning and design, development of particular functionality within the FirePond
Application Suite and general release and quality assurance functions.

We contract with a third party, Soft OS, to provide software development
and implementation services on an outsourced basis. Soft OS subcontracts to have
these services provided to us by Effective Programming, a development
organization located in Minsk, Belarus, and EPAM Systems, a related development
organization located in New Jersey. Under this arrangement, Effective
Programming and EPAM Systems provide software developers dedicated to our
projects to develop products and application functionality based on
specifications provided by us and to provide implementation services to our
customers. The agreement expires in February 2002. As of November 30, 1999,
approximately 85 employees and contractors of Effective Programming and EPAM
Systems were performing services for us. Each of Effective Programming and EPAM
Systems is majority owned by one of our employees, Arkadiy Dobkin, our vice
president of product research and development. We believe our relationship with
Effective Programming and EPAM Systems is a significant competitive advantage
and provides us with ready access to a highly-skilled labor pool, reduced
turnover, rapid development cycles and a cost-effective solution to our research
and development needs.

Our research and development expenses were $9.6 million for fiscal 1999,
$8.2 million for fiscal 1998 and $3.6 million for fiscal 1997. We expect to
continue to invest significantly in research and development in the future.

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<PAGE> 40

COMPETITION

The market for e-business sales and marketing solutions is intensely
competitive, fragmented and subject to rapid technological change. The principal
competitive factors in this market include:

- adherence to emerging Internet-based technology standards;

- comprehensiveness of applications;

- adaptability, flexibility and scalability;

- real-time, interactive capability with customers, partners, vendors and
suppliers;

- ability to support vertical industry requirements;

- ease of application use and deployment;

- speed of implementation;

- customer service and support; and

- initial price and total cost of ownership.

Because we offer both independent packaged applications, as well as an
enterprise platform for integrated e-business sales and marketing solutions, we
consider a number of companies in different market categories to be our
competitors. Companies focused on providing advanced selling applications for
e-commerce and traditional sales channels include Calico Commerce, Selectica and
Trilogy Software. Companies offering e-commerce software that focuses on a
specific aspect of the customer relationship or buying process, including
personalization, content management or self-service applications, include
BroadVision, Vignette, and Silknet. Finally, companies that offer enterprise
platforms for customer information management include Siebel Systems and Oracle
Corporation. There are a substantial number of other companies focused on
providing Internet-based software applications for customer relationship
management that may offer competitive products in the future. We believe that
the market for integrated e-business sales and marketing solutions is still in
its formative stage, and that no currently identified competitor represents a
dominant presence in this market.

We expect competition to increase as a result of software industry
consolidation. For example, a number of enterprise software companies have
acquired point solution providers to expand their product offerings. Our
competitors may also package their products in ways which may discourage users
from purchasing our products. Current and potential competitors may establish
alliances among themselves or with third parties or adopt aggressive pricing
policies to gain market share. In addition, new competitors could emerge and
rapidly capture market share.

Although we believe we have advantages over our competitors in terms of the
comprehensiveness of our solution, as well as our targeted vertical focus, there
can be no assurance that we can maintain our competitive position against
current and potential competitors, especially those with longer operating
histories, greater name recognition and substantially greater financial,
technical, marketing, management, service, support and other resources.

INTELLECTUAL PROPERTY

We believe our intellectual property rights are significant and that the
loss of all or a substantial portion of our intellectual property rights could
seriously harm our success and ability to compete. We rely on a combination of
copyright, patent, trade secret, trademark, and other intellectual property law,
nondisclosure agreements and other protective measures to protect our
proprietary rights. There can be no assurance that our intellectual property
protection measures will be sufficient to prevent misappropriation of our
technology. Some of our contracts with our customers contain escrow arrangements
with a third party escrow agent which provide these companies with access to our
source code, and other intellectual property upon the occurrence of specified
events. This access could enable these companies to use our intellectual
property and source code creating a risk of disclosure or other inappropriate
use. Our third-party development organization located in Minsk, Belarus and New
Jersey has access to our source code and other intellectual property rights.
Despite our contractual protections, this access could enable them to use our
intellectual property and source code to

36
<PAGE> 41

wrongfully develop and manufacture competing products, which would adversely
affect our performance and ability to compete. In addition, we cannot be certain
that others will not independently develop substantially equivalent intellectual
property, gain access to our trade secrets or intellectual property, or disclose
our intellectual property or trade secrets. Furthermore, the laws of many
foreign countries do not protect our intellectual property to the same extent as
the laws of the United States. From time to time, we may desire or be required
to renew or to obtain licenses from others to enable us to develop and market
commercially viable products effectively. There can be no assurances that any
necessary licenses will be available on reasonable terms, if at all.

From time to time, third parties may assert claims or initiate litigation
against us or our technology partners alleging that our existing or future
products infringe their proprietary rights. We could be increasingly subject to
infringement claims as the number of products and competitors in the market for
our technology grows and the functionality of products overlaps. In addition, we
may in the future initiate claims or litigation against third parties for
infringement of our proprietary rights to determine the scope and validity of
our proprietary rights. Any claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel or require us to develop non-infringing technology or enter
into royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all.

EMPLOYEES

At November 30, 1999, we had a total of 350 employees, of which 87 were in
research and development, 73 were in sales and marketing, 58 were in finance and
administration, and 132 were in professional services and support. None of our
employees is represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.

FACILITIES

Our corporate headquarters are located in Waltham, Massachusetts and occupy
approximately 29,500 square feet. Our lease for this facility expires on
December 31, 2004. In addition, we have two facilities located in Minnesota. Our
facility in Mankato, Minnesota currently occupies approximately 63,250 square
feet. Our lease for this facility expires on December 1, 2008. In connection
with the relocation of our corporate headquarters in fiscal 1999, we will take
actions to reduce the lease commitment by 50% as of December 1, 2000 and
terminate the lease as of December 1, 2003. We are currently operating under two
separate leases in Bloomington, Minnesota. Both of these suites are in the same
building. One occupies approximately 12,100 square feet and our lease for this
facility expires on January 31, 2002. The other suite occupies approximately
2,500 square feet and our lease for this facility expires on March 31, 2002. We
believe these existing facilities will be adequate to meet our needs for the
next 12 months. If our growth continues, we may need larger facilities after
that time. Suitable additional facilities may not be available as needed on
commercially reasonable terms. We also lease sales offices in Chicago, Illinois;
Bloomfield Hills, Michigan; Oakland, California; Sewickly, Pennsylvania;
Chesterfield, Missouri; Hoofddorp, The Netherlands; Duesseldorf, Germany; Fleet,
England; Paris, France; Stockholm, Sweden and Tokyo, Japan.

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.

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<PAGE> 42

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors and their ages as of November 30,
1999, are as follows:

<TABLE>
<CAPTION>
AGE POSITION
--- --------
<S> <C> <C>
Klaus P. Besier........................... 48 Chairman, President, Chief Executive Officer and
Director
Ilya G. Gorelik........................... 38 Senior Vice President of Product Strategy and
Development
Edwin B. Lange............................ 43 Senior Vice President of North American Sales
Graham S. Williams........................ 44 Senior Vice President and Managing Director of
Europe and Asia
Paul K. McDermott......................... 38 Chief Financial Officer and Vice President of
Finance and Administration
Steven J. Waters.......................... 31 Vice President of Marketing
Thomas F. Carretta........................ 41 General Counsel and Secretary
Paul R. Butare............................ 48 Director
J. Michael Cline.......................... 40 Director
William O. Grabe.......................... 61 Director
Gerhard Schulmeyer........................ 61 Director
Vernon Lawrence Weber..................... 45 Director
</TABLE>

Klaus P. Besier has served as chairman of our board of directors since
October 1999 and has served as our president, chief executive officer and a
director since June 1997. Before joining FirePond, from February 1996 to May
1997, Mr. Besier was chairman, president and chief executive officer of Primix
Solutions, Inc., an internet-enabled software company. From 1994 to 1996, Mr.
Besier was the chief executive officer of SAP America, Inc., a subsidiary of SAP
AG, a leading provider of business application software. From 1992 to 1993, he
was the president of SAP America, Inc. From 1991 to 1992, Mr. Besier was vice
president of sales of SAP America, Inc. From 1977 to 1990, Mr. Besier held
various senior management positions including general manager and corporate vice
president with various affiliates of Hoechst Celanese, a specialty chemicals
company. Mr. Besier is also a director of Intelligroup, a global professional
services firm.

Ilya G. Gorelik has served as our senior vice president of product strategy
and development since October 1998. Before joining FirePond, from 1989 to 1998
Mr. Gorelik held various senior management positions with Parametric Technology
Corporation, most recently as senior vice president of product engineering, and
chief technology officer. Parametric Technology Corporation is a leading
software supplier for the mechanical design automation market.

Edwin B. Lange has served as our senior vice president of North American
sales since September 1999. Before joining FirePond, from 1993 to 1999, Mr.
Lange held various senior management positions with SAP America, Inc., most
recently senior vice president and general manager of the discrete manufacturing
sector. From 1990 to 1993 he was a sales director at Andersen Consulting.

Graham S. Williams has served as our senior vice president and managing
director of Europe and Asia since June 1998. Before joining FirePond, from 1996
to June 1998, Mr. Williams was president and chief executive officer of
SuperNova, an application and component development tool firm. From 1993 to
1996, Mr. Williams was vice president, European operations and vice president,
European and Asia Pacific operations for Compuware Corp/Uniface International, a
provider of enterprise and client/server systems. From 1992 to 1993 he was the
vice president and managing director, Europe of Seer Technologies, a provider of
integrated CASE systems.

Paul K. McDermott has served as our chief financial officer since January
1999. Before joining FirePond, from 1995 to 1999, Mr. McDermott was chief
financial officer, treasurer, and secretary of ServiceWare, Inc.,

38
<PAGE> 43

an Internet software company specializing in knowledge management. From 1990 to
1995, he held various positions in finance, including controller, with Legent
Corporation, a supplier of software and services for distributed enterprise
computing.

Steven J. Waters has served as our vice president of marketing since
September of 1997. Before joining FirePond, from 1993 to 1997, he held various
marketing positions at Trilogy Software, Inc., a sales technology company,
including director of sales and marketing from 1996 to 1997. Before Trilogy, Mr.
Waters worked in the national high-technology investment banking group of Bear,
Stearns & Co., Inc.

Thomas F. Carretta has served as our general counsel since May 1998. He was
elected to serve in the additional capacity of secretary in November 1998.
Before joining FirePond, from 1988 to 1998, Mr. Carretta was general counsel for
Comtrol Corporation and affiliated companies.

Paul R. Butare has been a director of FirePond since July 1999. Mr. Butare
is the chairman and chief executive officer of Richter Systems International
Inc., a leader in global supply chain enterprise solutions. Before joining
Richter, Mr. Butare served as executive vice president for Policy Management
Systems Corporation, a developer of insurance industry software, which he joined
in 1984, and president of CYBERTEK, a life insurance financial systems and
services company of Policy Management Systems.

J. Michael Cline has been a director of FirePond since May 1997. Mr. Cline
is the managing partner of Accretive Technology Partners. From 1989 to 1999, Mr.
Cline was a managing member of General Atlantic Partners, LLC, or its
predecessor, a private equity firm that invests globally in information
technology companies. Before joining General Atlantic, Mr. Cline helped found
AMC, a software company subsequently sold to Legent Corporation. Before founding
AMC, Mr. Cline was an associate at McKinsey and Company. Mr. Cline is a director
of Brio Technology and Manugistics as well as several other private information
technology companies.

William O. Grabe has been a director of FirePond since May 1997. Mr. Grabe
is a managing member of General Atlantic Partners, LLC, a private equity firm
that invests globally in information technology companies, and has been with
General Atlantic since April 1992. Before joining General Atlantic, Mr. Grabe
was corporate vice president and general manager, marketing & services for IBM
US. He is also a director of Baan Company, N.V., LHS Group, Inc., Compuware
Corporation, Gartner Group Inc., Exact Holdings N.V., Meta4, TDS AG and several
other private software and services companies.

Gerhard Schulmeyer has been a director of FirePond since November 1999. Mr.
Schulmeyer is president and chief executive officer of Siemens Corporation in
the United States of America, having been president and chief executive officer
of Siemens Nixdorf Informationssysteme AG and chairman of its managing board
since 1994. Before joining Siemens Nixdorf, Mr. Schulmeyer was executive vice
president and a member of the executive committee of Asea Brown Boveri Ltd. as
well as president and chief executive officer of ABB Inc., U.S.A. From 1980 to
1989, he held various senior positions with Motorola Inc., culminating with that
of executive vice president, deputy to the chief executive officer, responsible
for European business. He is a member of the boards of Korn Ferry International,
Ingram Micro, Inc., Alcan Aluminum Ltd., Allied Zurich p.l.c., Zurich Financial
Services and Arthur D. Little, Inc.

Vernon Lawrence Weber has been a director of FirePond since January 2000.
Mr. Weber is the chairman and chief executive officer of Weber Public Relations
Worldwide, a leading public relations firm. Mr. Weber founded The Weber Group in
1987. The Interpublic Group of Companies purchased The Weber Group in 1996 and
appointed Mr. Weber chairman and chief executive officer of Weber Public
Relations Worldwide. Mr. Weber is a director of Technology Review, MIT's
magazine of innovation. He is also a director of several other private
technology companies.

Following this offering, the board of directors will consist of five
directors divided into three classes, with each class serving for a term of
three years. At each annual meeting of stockholders, directors will be elected
by the holders of common stock to succeed the directors whose terms are
expiring. The members of the board of directors are currently classified as
follows:

- Mr. Cline and Mr. Schulmeyer are class I directors whose terms will
expire in 2001;

- Mr. Grabe and Mr. Weber are class II directors whose terms will expire in
2002; and

- Mr. Besier and Mr. Butare are class III directors whose terms will expire
in 2003.

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<PAGE> 44

BOARD COMMITTEES

The board of directors has a compensation committee composed of Messrs.
Butare and Cline, which makes recommendations concerning salaries and incentive
compensation for our employees and administers our stock option plans. The board
of directors also has an audit committee composed of Messrs. Cline and Grabe,
which recommends the engagement of our outside auditors and reviews our
accounting controls, the results and scope of the audit and other services
provided by our outside auditors. The board of directors may establish, from
time to time, other committees to facilitate the management of our business.

DIRECTOR COMPENSATION

Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable and necessary expenses
incurred in connection with attendance at meetings of the board of directors or
its committees. Members of the board who are not employees receive stock options
under our 1999 director plan. Our directors are also eligible to participate in
our 1997 stock option plan and 1999 stock option and grant plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of our executive officers serves on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of our board of directors or compensation committee.

EXECUTIVE COMPENSATION

The following table presents the fiscal 1999 compensation earned for
services rendered to us by our current chief executive officer and each of our
four other most highly compensated executive officers whose salary and bonus
compensation for fiscal 1999 exceeded $100,000, collectively referred to below
as the named executive officers.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
ANNUAL COMPENSATION ------------
-------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME & PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#)
- ------------------------- --------- -------- --------------- ------------
<S> <C> <C> <C> <C>
Klaus P. Besier............................. $200,000 $ -- $ -- --
Chairman, President and Chief Executive
Officer
Graham S. Williams.......................... 213,850 8,910 19,740(1) 100,000
Senior Vice President and Managing
Director of Europe and Asia
Ilya G. Gorelik............................. 175,000 -- -- 133,334
Senior Vice President of Product Strategy
and Development
Paul K. McDermott........................... 132,060 25,000 36,674(2) 340,001
Chief Financial Officer and Vice President
of Finance and Administration
Steven J. Waters............................ 156,766 -- 41,429(2) 133,334
Vice President of Marketing
</TABLE>

- ---------------
(1) Represents a car allowance of $1,645 per month paid on behalf of Mr.
Williams.

(2) Represents amounts paid to the executive officer as reimbursement for
relocation expenses.

40
<PAGE> 45

The following table presents information about stock options granted during
fiscal 1999 to the named executive officers. The percent of total options
granted to employees in the last fiscal year is based on options to purchase an
aggregate of 3,338,522 shares granted to officers and employees during fiscal
1999. The amounts shown as potential realizable value illustrate what might be
realized upon exercise immediately before expiration of the option term using
the 0%, 5% and 10% appreciation rates above the exercise price established in
regulations of the SEC, compounded annually. The potential realizable value is
not intended to predict future appreciation of the price of our common stock and
do not give effect to any actual appreciation after the date of grant.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED
NUMBER OF SHARES % OF TOTAL ANNUAL RATES OF STOCK PRICE
UNDERLYING OPTIONS GRANTED TO EXERCISE APPRECIATION FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 0%($) 5%($) 10%($)
- ---- ---------------- ------------------ -------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Klaus P. Besier...... -- -- -- -- $ -- $ -- $ --
Graham S. Williams... 100,000(1) 3.0% $4.46 6/1/09 155,500 533,466 1,113,339
Ilya G. Gorelik...... 133,334(2) 4.0 4.46 6/16/09 207,334 711,291 1,484,460
Paul K. McDermott.... 283,334(1) 8.5 3.95 1/11/09 -- 702,949 1,781,410
56,667(1) 1.7 7.22 10/27/09 107,951 432,965 931,602
Steven J. Waters..... 100,000(1) 3.0 3.95 11/1/08 -- 248,099 628,731
33,334(3) 1.0 4.46 6/16/09 51,834 177,825 371,121
</TABLE>

- ------------

(1) 25% of the underlying shares vest on each anniversary of the date of grant
so long as the holder remains as an employee.

(2) Vest upon the occurrence of preestablished performance goals related to the
development of our new product, the FirePond Application Suite.

(3) 100% of the underlying shares vest immediately upon grant.

The following table presents information concerning the number and value of
unexercised options to purchase common stock held by the named executive
officers. The named executive officers did not exercise any stock options during
fiscal 1999. The values of the unexercised in-the-money options have been
calculated on the basis of the fair market value at October 31, 1999 of $9.12
per share, as determined by the board of directors.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END(#) AT FY-END($)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Klaus P. Besier........................... 986,163 938,839 $5,103,394 $4,858,492
Graham S. Williams........................ 54,167 262,500 280,314 1,307,438
Ilya G. Gorelik........................... 241,667 325,000 1,182,627 1,681,875
Paul K. McDermott......................... -- 340,000 -- 1,574,204
Steven J. Waters.......................... 75,000 158,334 371,125 819,378
</TABLE>

1999 STOCK OPTION AND GRANT PLAN

Our 1999 stock option and grant plan was adopted by our board of directors
in September 1999 and received stockholder approval in January 2000. The 1999
stock option and grant plan permits us to grant incentive stock options,
non-qualified stock options and restricted and unrestricted stock. These grants
may be

41
<PAGE> 46

made to our officers, employees, directors, consultants, advisors and key
persons. The 1999 stock option and grant plan allows for the issuance of
3,000,000 shares of common stock. Of the shares reserved for issuance under the
1999 stock option plan, 2,468,083 shares remain available for future issuance as
of January 31, 2000.

The 1999 stock option and grant plan is administered by the board of
directors or a committee designated by the board of directors. Subject to the
provisions of the 1999 stock option and grant plan, the board of directors or
the committee may select the individuals eligible to receive awards, determine
the terms and conditions of the awards granted, accelerate the vesting schedule
of any award and generally administer and interpret the plan.

The exercise price of options granted under the 1999 stock option and grant
plan is determined by the board of directors or the committee. Under present
law, however, incentive stock options may not be granted at an exercise price
less than the fair market value of the common stock on the date of grant, or
less than 110% of the fair market value in the case of incentive stock options
granted to persons holding more than 10% of the voting power of our stock.
Non-qualified stock options may be granted at prices which are less than the
fair market value of the underlying shares on the date granted. Options are
typically subject to vesting schedules, terminate ten years from the date of
grant and may be exercised for specified periods after the termination of the
holder's employment or other service relationship with us. Upon the exercise of
options, the option exercise price must be paid in full by one of the following
means:

- cash;

- by certified or bank check;

- by another instrument acceptable to the board of directors or the
committee; or

- in the sole discretion of the board of directors or the committee, by
delivery of shares of common stock that have been owned by the holder
free of restrictions for at least six months.

The exercise price may also be delivered to us by a broker under irrevocable
instructions to the broker selling the underlying shares from the holder.

The purchase price, vesting dates and requirements of restricted stock
awards are determined by the board of directors or the committee. The board of
directors or the committee may place conditions on the restricted stock awards,
such as continued employment or the achievement of performance goals or
objectives in a grant document. Restricted stock may not be sold, assigned,
transferred or pledged except as specifically provided in the grant document. If
a restricted stock award recipient's employment or other relationship with us
terminates or other events specified in the grant document occur, we have the
right to repurchase some or all of the shares of stock subject to the award at
the purchase price of the stock.

When we become a publicly held corporation and are subject to Section
162(m) of the Internal Revenue Code, no person may be granted options under the
1999 stock option and grant plan covering more than 1,000,000 shares of common
stock in any calendar year.

In the event of any merger, reorganization or sale in which:

- the outstanding awards issued under the 1999 stock option and grant plan
are generally not assumed by the surviving entity, or

- equivalent substitute awards are not issued by the surviving entity, then

all of the outstanding awards issued under the 1999 stock option and grant plan
that are not then vested will become fully vested and exercisable upon the
closing of the transaction.

Upon a merger, reorganization or sale, all awards issued under the 1999
stock option and grant plan will terminate upon closing of the transaction. All
participants under the 1999 stock option and grant plan will be permitted to
exercise, for a period of 15 days before any termination of the 1999 stock
option and grant plan, all awards held by them which are then exercisable or
will become exercisable upon the closing of the transaction.

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<PAGE> 47

1999 DIRECTOR PLAN

Our 1999 director plan was adopted by our board of directors in September
1999 and received stockholder approval in December 1999. A total of 500,000
shares of common stock have been authorized for issuance under the 1999 director
plan. Of the shares reserved for issuance under the 1999 director plan, 266,666
shares remain available for future issuance as of January 31, 2000.

The 1999 director plan is administered by our compensation committee. The
term of the 1999 director plan is ten years, unless sooner terminated by vote of
the board of directors. Under the 1999 director plan, each non-employee director
who is or becomes a member of the board of directors is automatically granted on
September 9, 1999 or, if not a director on that date, the date first elected to
the board of directors, an option to purchase 50,000 shares of our common stock.
In addition, provided that the director continues to serve as a member of the
board of directors, each continuing non-employee director will be automatically
granted on the date of our annual stockholders meeting an option to purchase
12,500 shares of our common stock.

Options granted under the 1999 director plan are subject to the following
terms:

- the exercise price will be equal to the fair market value of the common
stock on the date of grant;

- 25% of the options in each grant will become exercisable on each of the
first, second, third and fourth anniversaries of the date of grant and
will have a term of ten years from the date of grant;

- unexercisable options terminate when the director ceases to be a director
for any reason other than death or permanent disability;

- exercisable options may be exercised at any time during the option term;
and

- in the event of a change in control transaction in which a director is
not retained as a director of the surviving corporation, options granted
to that director will become 100% vested and exercisable in full.

The term of the 1999 director plan is ten years, unless sooner terminated by
vote of the board of directors.

1997 STOCK OPTION PLAN

Our board of directors and stockholders adopted the 1997 stock option plan
in May 1997. The 1997 stock option plan permits us to grant incentive stock
options, non-qualified stock options, stock appreciation rights, restricted
stock and deferred stock awards to our officers, employees, directors,
consultants, and advisors. The 1997 stock option plan allows for the issuance of
9,396,815 shares of common stock. Of the shares reserved for issuance under the
1997 stock option plan, 59 shares remain available for future issuance as of
January 31, 2000.

The 1997 stock option plan may be administered by the board of directors or
a committee designated by the board of directors. Subject to the provisions of
the 1997 stock option plan, the board of directors or the committee may select
the individuals eligible to receive awards, determine the terms and conditions
of the awards granted, accelerate the vesting schedule of any award and
generally administer and interpret the 1997 stock option plan.

The exercise price of options granted under the 1997 stock option plan is
determined by the board of directors or the committee. Under present law,
incentive stock options may not be granted at an exercise price less than the
fair market value of the common stock on the date of grant, or less than 110% of
the fair market value in the case of incentive stock options granted to persons
holding more than 10% of the voting power of our stock. Non-qualified stock
options may be granted at prices which are less than the fair market value of
the underlying shares on the date granted. Options are typically subject to
vesting schedules, terminate ten years from the date of grant and may be
exercised for specified periods after the termination of

43
<PAGE> 48

the holder's employment or other service relationship with us. Upon the exercise
of options, the option exercise price must be paid in full by one of the
following means:

- cash;

- by certified or bank check;

- by another instrument acceptable to the board of directors or the
committee; or

- in the sole discretion of the board of directors or the committee, by
delivery of shares of common stock that have been owned by the holder
free of restrictions for at least six months.

The purchase price, and vesting dates and requirements of restricted stock
awards are determined by the board of directors or the committee. The board of
directors or the committee may place conditions on the restricted stock awards,
such as continued employment or the achievement of performance goals or
objectives in a grant document. Restricted stock may not be sold, assigned,
transferred or pledged except as specifically provided in the grant document. If
a restricted stock award recipient's employment or other relationship with us
terminates or other events specified in the grant document occur, we have the
right to repurchase some or all of the shares of stock subject to the award at
the purchase price of the stock.

When we become subject to Section 162(m) of the Internal Revenue Code, no
person may be granted options under the 1997 stock option plan covering more
than 1,750,000 shares of common stock in any calendar year.

On November 8, 1999, Mr. Besier received stock options under the 1997 stock
option plan to purchase 1,500,000 shares of our common stock at an exercise
price of $9.90 per share. The options vest monthly over four years and will be
fully vested on November 8, 2003.

EMPLOYMENT AGREEMENTS

Mr. Besier's employment agreement, dated April 2, 1998, provides for an
initial annual salary of $200,000 and an annual bonus of up to $150,000 based on
FirePond's achievement, during the applicable fiscal year, of performance goals
agreed upon by Mr. Besier and our board of directors before the beginning of
each fiscal year. The agreement also provides that he will be eligible to earn
an additional bonus of up to $100,000 if FirePond achieves or surpasses
performance targets in excess of the performance goals. Mr. Besier received
stock options under our 1997 stock option plan to purchase 1,417,960 shares of
our common stock at an exercise price of approximately $3.95 per share. These
options vest monthly commencing on August 7, 1997 and shall be fully vested on
July 7, 2001. Upon the occurrence of specified liquidity events, such as a
merger or acquisition of FirePond, 80% of the then unvested options will become
vested at the time of the event, increasing to 100% if there shall be a
reduction in the scope of Mr. Besier's employment responsibilities in connection
with the liquidity event. Mr. Besier was also granted registration rights for
all shares of our common stock which he acquires.

In the event of Mr. Besier's death during the term of his employment, his
legal representative will receive Mr. Besier's annual salary for 12 months, an
amount equal to his most recent annual bonus, payable in quarterly installments,
and 75% of Mr. Besier's options to purchase shares of our common stock shall
become fully vested and exercisable, with the remaining 25% percent terminating.
If Mr. Besier is terminated without cause, or he voluntarily resigns for good
reason, he shall receive severance payments equal to his annual salary payable
in equal monthly installments for a period of 12 months and the term of his
vested options shall be extended until the earlier of three months following the
termination, the effectiveness of specified liquidity events, or nine months
after an initial public offering.

Mr. Williams' offer letter, dated May 11, 1998, provides for an initial
annual salary of $213,850 commencing on June 1, 1998 and an annual bonus of up
to 50% of his annual salary based on our performance and individual performance
objectives. Mr. Williams received stock options to purchase 216,667 shares of
our common stock at an exercise price of approximately $3.95 per share under the
1997 stock option plan. These options vest annually over four years commencing
on June 1, 1998. Upon the occurrence of a change of control event, 50% of the
then unvested options will become immediately vested and exercisable.

44
<PAGE> 49

Mr. Gorelik's offer letter, dated October 21, 1998, provides for an initial
annual salary of $175,000 commencing on October 2, 1998 and an annual bonus of
up to 50% of his annual salary based on our performance and individual
performance objectives. Mr. Gorelik received stock options to purchase 433,334
shares of our common stock at an exercise price of approximately $3.95 per share
under the 1997 stock option plan. These options vest annually over four years
commencing on October 2, 1998. Upon the occurrence of a change of control event,
if Mr. Gorelik is not retained as an employee of the surviving company, with
responsibilities similar to his responsibilities with FirePond, 80% of the then
unvested options will become immediately vested and exercisable.

Mr. McDermott's offer letter, dated December 11, 1998, provides for an
initial annual salary of $160,000 commencing on January 4, 1999, an initial
bonus of $25,000 and an annual bonus of up to $50,000 based on our performance
and individual performance objectives. Mr. McDermott received stock options to
purchase 283,334 shares of our common stock at an exercise price of
approximately $3.95 per share under the 1997 stock option plan. These options
vest annually over four years commencing on January 4, 1999. In addition, Mr.
McDermott was granted an additional stock option to purchase 56,667 shares of
our common stock on similar terms, upon the achievement of performance
objectives before this initial public offering. Upon the occurrence of a change
of control event, if Mr. McDermott is not retained as an employee of the
surviving company, with responsibilities similar to his responsibilities with
FirePond, 80% of the unvested portion of these options will become immediately
vested and exercisable.

Mr. Waters' offer letter, dated September 5, 1997, provides for an initial
annual salary of $120,000 commencing on September 10, 1997. Mr. Waters received
stock options to purchase 16,667 shares of our common stock at an exercise price
of approximately $3.95 per share under the 1997 stock option plan. These options
vest annually over four years commencing on September 16, 1997. In addition, Mr.
Waters received a cash payment of $50,000 and stock options to purchase 33,334
shares of our common stock in substitution for commissions Mr. Waters would have
received from his previous employer.

LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS

Our certificate of incorporation contains a provision permitted by Delaware
law that generally eliminates the personal liability of directors to FirePond or
our stockholders for monetary damages for breaches of their fiduciary duty,
including breaches involving negligence or gross negligence in business
combinations, unless the director has:

- breached his duty of loyalty;

- failed to act in good faith;

- engaged in intentional misconduct or a knowing violation of law;

- paid a dividend or approved a stock repurchase in violation of the
Delaware General Corporation Law; or

- obtained an improper personal benefit.

This provision does not alter a director's liability under the federal
securities laws or to parties other than FirePond or our stockholders and does
not affect the availability of equitable remedies, such as an injunction or
rescission, for breach of fiduciary duty.

Our by-laws provide that directors and officers shall be, and in the
discretion of the board of directors, non-officer employees may be, indemnified
by us to the fullest extent authorized by Delaware law, as it now exists or may
in the future be amended, against all expenses and liabilities reasonably
incurred in connection with service for or on our behalf. The by-laws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
later acquired under any by-law, agreement or vote of stockholders. We also have
directors' and officers' insurance against potential liabilities.

We have been advised that in the opinion of the SEC, although
indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers or controlling persons of FirePond as
described above, this indemnification is against public policy as expressed in
the Securities Act and may be unenforceable.
45
<PAGE> 50

RELATED PARTY TRANSACTIONS

PRIVATE PLACEMENT TRANSACTIONS

We have issued preferred stock in private placement transactions as
follows. The tables below gives effect to a five-for-one stock split which
occurred in July 1997 and affected only the series A convertible participating
preferred stock.

<TABLE>
<CAPTION>
NUMBER OF PRICE PER AGGREGATE
DATE OF ISSUANCE SERIES SHARES SHARE CONSIDERATION
- ---------------- ------ --------- --------- -------------
<S> <C> <C> <C> <C>
May 1997........................... Series A Convertible 4,188,880 $ 2.63 $11,000,000(1)
Participating Preferred
July 1997.......................... Series C Convertible 570,342 2.63 1,500,000
Participating Preferred
October 1997....................... Series D Convertible 100,000 100.00 10,000,000
Participating Preferred
April 1998......................... Series E Convertible 7,604,563 2.63 20,000,000(2)
Participating Preferred
February 1999...................... Series F Convertible 6,734,008 2.97 20,000,000(3)
Preferred
February 1999...................... Series G Convertible 7,604,563 2.63 20,000,000(4)
Participating Preferred
</TABLE>

- ------------
(1) Warrants to purchase 190,438 shares of series B preferred stock, at an
exercise price of $19.69 per share, were issued to the purchasers of our
series A preferred stock in connection with the sale of series A preferred
stock. The aggregate consideration received for these warrants was $1,000.

(2) The aggregate consideration received for the series E preferred stock
consisted of the exchange of all of the outstanding shares of series D
preferred stock and the payment of an additional $10,000,000.

(3) Warrants to purchase 673,401 shares of series F preferred stock, at an
exercise price of $3.56 per share, were issued to the purchasers of our
series F preferred stock in connection with the sale of our series F
preferred stock. The aggregate consideration received for the warrants was
$1,000.

(4) The aggregate consideration received for the series G preferred stock
consisted only of the exchange of all of the outstanding shares of series E
preferred stock.

The following table summarizes the shares of our preferred stock purchased
by our named executive officers, directors and 5% stockholders, and persons and
entities associated with them.

<TABLE>
<CAPTION>
SERIES A SERIES D SERIES E SERIES G
CONVERTIBLE CONVERTIBLE CONVERTIBLE SERIES F CONVERTIBLE
PARTICIPATING PARTICIPATING PARTICIPATING CONVERTIBLE PARTICIPATING
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK STOCK STOCK
- -------- ------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Entities associated with
General Atlantic Partners,
LLC......................... 4,188,880 100,000 7,604,563 841,751 7,604,563
Entities associated with
Technology Crossover
Ventures...................... -- -- -- 4,208,755 --
Entities associated with
Lehman Brothers............. -- -- -- 1,683,502 --
</TABLE>

In connection with the sale of our series F preferred stock, we agreed to
use our reasonable best efforts to cause the underwriter of our initial public
offering to offer to sell to the series F preferred stockholders 7.5% of the
shares sold to the public in the offering. The shares are to be allocated among
the series F preferred stockholders on a pro rata basis based upon the number of
series F shares held. Entities associated with General Atlantic Partners, LLC,
Technology Crossover Ventures and Lehman Brothers are the series F preferred
stockholders.

46
<PAGE> 51

On September 30, 1999, we sold 33,334 shares of common stock to Edwin B.
Lange, our senior vice president of North American sales, for an aggregate
purchase price of $148,500.

On November 12, 1999, we borrowed $6.0 million of subordinated indebtedness
from an outside investor, and entities associated with General Atlantic
Partners, LLC and Technology Crossover Ventures, existing stockholders of
FirePond. The indebtedness bears interest at 12.0% and is due upon the earlier
of the closing of this offering or November 11, 2000. If we have not closed an
initial public offering of our stock by May 11, 2000 or if we enter into a sale
transaction before May 11, 2000, the subordinated indebtedness is convertible
into shares of our preferred stock having rights equivalent to our existing
series F preferred stock at a rate of $2.97 per share. FirePond 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. In connection with this offering,
the 30,000 warrants issued to the entities associated with General Atlantic
Partners were amended to increase the exercise price to the public offering
price.

PAYMENTS TO STOCKHOLDERS

In connection with the sales of our preferred stock, we agreed to make
payments to some of our stockholders upon consummation of this offering as
follows:

- an aggregate amount of $10,000,000 to holders of our shares of common
stock outstanding on May 20, 1997, other than those shares held by
entities associated with General Atlantic Partners, LLC;

- an aggregate amount of $15,000,000 to holders of our series A preferred
stock;

- an aggregate amount of $750,000 to holders of our series C preferred
stock; and

- an aggregate of up to $20,000,000 to holders of our series G preferred
stock.

These amounts are payable in cash, or, at our option, a number of shares of
our common stock determined by dividing the amount payable by $12.00. Our board
of directors has elected to make these payments in 3,812,532 shares of common
stock upon consummation of this offering. At the initial public offering price
of $22.00 per share, the value of the stock dividend will total approximately
$83,876,000.

REGISTRATION RIGHTS AGREEMENTS

After this offering holders of 28,918,308 shares of our common stock and
preferred stock have registration rights for their shares of common stock,
including shares of common stock issuable upon conversion of their preferred
stock.

47
<PAGE> 52

PRINCIPAL STOCKHOLDERS

The following table presents information about the beneficial ownership of
common stock as of January 31, 2000 and as adjusted to reflect the sale of the
common stock offered by this prospectus, by:

- all persons who own beneficially 5% or more of our common stock;

- each of the named executive officers;

- each of our directors; and

- all directors and executive officers as a group.

Unless otherwise indicated, each of the stockholders has sole voting and
investment power for the shares of common stock listed opposite its name below,
subject to community property laws, where applicable. Beneficial ownership is
determined under the rules of the Securities and Exchange Commission. Percentage
of beneficial ownership is based on:

- 27,751,713 shares outstanding as of January 31, 2000; and

- 32,751,713 shares outstanding after completion of this offering.

All options exercisable within 60 days of January 31, 2000 are reported as
currently exercisable. The shares issuable under these options are treated as if
outstanding for computing the percentage ownership of the person holding these
options but are not treated as if outstanding for the purposes of computing the
percentage ownership of any other person.

The data below gives effect to the issuance of:

- 3,812,532 shares of common stock as priority payments to some of our
existing stockholders upon consummation of this offering; and

- 506,071 shares of common stock issuable upon the exercise of warrants to
purchase series F preferred stock upon consummation of this offering.

In addition, the table below assumes that the underwriters do not exercise their
over-allotment option.

The address of the entities associated with General Atlantic Partners, LLC
is General Atlantic Partners, LLC, 3 Pickwick Plaza, Greenwich, Connecticut
06830. The address of the entities associated with Technology Crossover Ventures
is Technology Crossover Ventures, 575 High Street, Suite 400, Palo Alto,
California 94301. The address of Jerome D. Johnson is 2409 Northridge Drive,
North Mankato, Minnesota 56003.

<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED
NUMBER OF SHARES ---------------------------
BENEFICIALLY BEFORE THE AFTER THE
OWNED OFFERING OFFERING
---------------- ------------ ------------
<S> <C> <C> <C>

Entities associated with General Atlantic
Partners, LLC (1)................................ 17,290,161 60.9% 51.8%
Entities associated with Technology Crossover
Ventures (2)..................................... 3,479,238 12.5 10.6
Jerome D. Johnson (3).............................. 2,942,896 10.6 9.0
Klaus P. Besier (4)................................ 1,344,252 4.6 3.9
Ilya G. Gorelik (5)................................ 257,192 less than 1% less than 1%
Graham S. Williams (6)............................. 57,303 less than 1% less than 1%
Paul K. McDermott (7).............................. 70,833 less than 1% less than 1%
Steven J. Waters (8)............................... 100,000 less than 1% less than 1%
Paul R. Butare..................................... -- -- --
J. Michael Cline................................... -- -- --
William O. Grabe (9)............................... 17,290,161 60.9 51.8
Gerhard Schulmeyer................................. -- -- --
All executive officers and directors as a group (10
persons) (10).................................... 19,243,852 63.6 54.6
</TABLE>

48
<PAGE> 53

- ------------
(1) Consists of:

- 2,614,398 shares held by GAP Coinvestment Partners, L.P. and includes
96,837 shares underlying warrants exercisable within 60 days of January
31, 2000;

- 119,272 shares held by GAP Coinvestment Partners II L.P.;

- 11,157,797 shares held by General Atlantic Partners 40, L.P. and includes
537,957 shares underlying warrants exercisable within 60 days of January
31, 2000;

- 2,822,118 shares held by General Atlantic Partners 46, L.P.; and

- 576,576 shares held by General Atlantic Partners 52, L.P.

GAP Coinvestment Partners, L.P., GAP Coinvestment Partners II, L.P.,
General Atlantic Partners 40, L.P., General Atlantic Partners 46, L.P. and
General Atlantic Partners 52, L.P. are part of an affiliated group of
investment partnerships referred to, collectively, as entities associated
with General Atlantic Partners, LLC.

(2) Consists of:

- 25,271 shares held by TCV III (GP);

- 120,032 shares held by TCV III, L.P.;

- 3,190,295 shares held by TCV III (Q), L.P.; and

- 143,640 shares held by TCV III Strategic Partners, L.P.

TCV III (GP), TCV III, L.P., TCV III(Q), L.P. and TCV III Strategic
Partners L.P. are referred to, collectively, as entities associated with
Technology Crossover Ventures. Technology Crossover Management III, L.L.C.
is the general partner of each of the entities associated with Technology
Crossover Ventures.

(3) Includes 83,334 shares which may be sold if the underwriters exercise their
over-allotment option.

(4) Includes 1,313,242 shares underlying options granted to Mr. Besier
exercisable within 60 days of January 31, 2000.

(5) Includes 241,667 shares underlying options granted to Mr. Gorelik
exercisable within 60 days of January 31, 2000.

(6) Includes 54,166 shares underlying options granted to Mr. Williams
exercisable within 60 days of January 31, 2000.

(7) Includes 70,833 shares underlying options granted to Mr. McDermott
exercisable within 60 days of January 31, 2000.

(8) Includes 100,000 shares underlying options granted to Mr. Waters
exercisable within 60 days of January 31, 2000.

(9) Represents shares described in note (1) above, beneficially owned by
entities associated with General Atlantic Partners, LLC. Mr. Grabe
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest in GAP Coinvestment Partners, L.P. and GAP Coinvestment
Partners II, L.P.

(10) Includes 2,504,702 shares underlying options granted to the executive
officers exercisable within 60 days of January 31, 2000.

49
<PAGE> 54

DESCRIPTION OF CAPITAL STOCK

Immediately following the offering, our authorized capital stock will
consist of 100,000,000 shares of common stock of which 32,751,713 will be issued
and outstanding; and 5,000,000 shares of undesignated preferred stock issuable
in one or more series to be designated by our board of directors, of which no
shares will be issued and outstanding.

As of January 31, 2000, there were outstanding:

- 10,129,875 shares of common stock held by approximately 93 stockholders
of record;

- 19,097,793 shares of preferred stock, convertible into 13,303,235 shares
of common stock upon completion of this offering;

- warrants to purchase 190,438 shares of series B preferred stock,
convertible into 634,794 shares of common stock upon completion of this
offering;

- warrants to purchase 673,401 shares of series F preferred stock,
convertible into 506,071 shares of common stock upon completion of this
offering;

- warrants to purchase 901,234 shares of common stock; and

- options to purchase an aggregate of 10,047,234 shares of common stock.

These outstanding shares do not include the 3,812,532 shares of common stock to
be issued as priority payments to some of our existing stockholders upon
consummation of this offering.

COMMON STOCK

The holders of common stock have one vote per share. Holders of common
stock are not entitled to vote cumulatively for the election of directors.
Generally, all matters to be voted on by stockholders must be approved by a
majority, or, in the case of election of directors, by a plurality, subject to
any voting rights granted to holders of any then outstanding preferred stock.
Except as otherwise provided by law, amendments to our certificate of
incorporation, which will be effective upon consummation of the offering, must
be approved by a majority of the voting power of the common stock.

Holders of common stock share ratably in any dividends declared by the
board of directors, subject to the preferential rights of any preferred stock
then outstanding. Dividends consisting of shares of common stock may be paid to
holders of shares of common stock. If we merge or consolidate with another
company and, as a result, shares of our common stock convert into or are
exchanged for cash or shares of stock or other securities or property of another
company, then all holders of common stock will be entitled to receive the same
kind and amount of consideration for each share of common stock they hold.

On our liquidation, dissolution or winding up, all holders of common stock
are entitled to share ratably in any assets available for distribution to the
holders of shares of common stock. No shares of common stock are subject to
redemption or have preemptive rights to purchase additional shares of common
stock.

PREFERRED STOCK

Our certificate of incorporation provides that shares of preferred stock
may be issued from time to time in one or more series.

Our board of directors has the authority to determine any of the following
for each series:

- The distinctive serial designation and the number of shares constituting
a series;

- The amount of dividends to be paid on the shares of a series, whether
dividends shall be cumulative and, if so, from which date or dates, and
other rights, if any, related to dividends;

- The voting rights and powers, full or limited, if any, of the shares of a
series;

- Whether the shares of a series shall be redeemable and, if so, the price
or prices at which, and the terms and conditions on which, the shares may
be redeemed;

50
<PAGE> 55

- The amount or amounts payable upon the shares of a series and any
preferences applicable in the event of our voluntary or involuntary
liquidation, dissolution or winding up;

- Whether the shares of a series shall be entitled to the benefit of a
sinking or retirement fund for redemption of the shares, and if so, the
amount of the fund and the manner of its application, including the price
or prices at which the shares may be redeemed or purchased;

- Whether the shares of a series shall be convertible into, or exchangeable
for, shares of any other class or classes or of any other series of the
same or any other class or classes of our stock, and the terms and
conditions of a conversion or exchange;

- The consideration for which the shares of a series shall be issued;

- Whether the shares of a series which are redeemed or converted shall have
the status of authorized but unissued shares of undesignated preferred
stock, or a series, and whether the shares may be reissued as shares of
the same or any other class or series of stock; and

- Any other powers, preferences, rights, qualifications, limitations and
restrictions as the board of directors or any authorized committee may
determine advisable.

Our board of directors may, without stockholder approval, issue preferred
stock with voting and other rights that could adversely affect the voting power
and other rights of the holders of the common stock and could have anti-takeover
effects. The ability of our board of directors to issue preferred stock without
stockholder approval could have the effect of delaying, deferring or preventing
a change of control or the removal of our existing management. We have no
present plans to issue any shares of preferred stock.

WARRANTS

As of January 31, 2000, there were outstanding:

- warrants to purchase up to 190,438 shares of series B preferred stock at
an exercise price of $19.69 per share that were issued to General
Atlantic, which will be automatically converted upon the closing of this
offering into a warrant to purchase 634,794 shares of common stock at an
exercise price of $5.91 per share;

- warrants to purchase up to 673,401 shares of series F preferred stock at
an exercise price of $3.56 per share that were issued to the purchasers
of series F preferred stock;

- a warrant to purchase up to 200,000 shares of common stock at an exercise
price of approximately $3.95 per share that was issued to a vendor;

- warrants to purchase an aggregate of up to 341,233 shares of common stock
at a weighted average exercise price of $7.63 per share that were issued
to strategic partners and customers; and

- warrants to purchase 360,000 shares of common stock with an exercise
price of $5.25 per share that were issued to lenders in November 1999. In
connection with this offering, 30,000 of these warrants, which were
issued to entities associated with General Atlantic Partners, were
amended to increase the exercise price to the public offering price.

We plan to issue additional warrants to purchase up to 500,000 shares of
our common stock over the next 12 months in connection with future sales of our
products as well as to our present and future strategic partners.

51
<PAGE> 56

REGISTRATION RIGHTS

Under the terms of our registration rights agreement, after the closing of
this offering, some of our shareholders may demand that we file a registration
statement for the registration of all or any portion of their shares, subject to
minimum thresholds, under the Securities Act. We are not required to effect more
than a total of two of these demand registrations per year. Upon completion of
this offering, holders of an aggregate of 28,618,308 shares will be party to the
registration rights agreement. At any time after we become eligible to file a
registration statement on Form S-3, these stockholders may require us to file up
to two registration statements on Form S-3 in any given 12-month period under
the Securities Act covering their shares of common stock.

In addition, after the closing of this offering, these and another
stockholder holding an aggregate of 300,000 shares will be entitled to
registration rights in connection with any registration by us of securities for
our own account or the account of other stockholders. If we propose to register
any shares of common stock under the Securities Act, we are required to give
those stockholders notice of the registration and to include their shares in the
registration statement.

The registration rights of these stockholders, subject to some limitations,
will terminate when the shares held by them may be sold under Rule 144 under the
Securities Act. We are generally required to bear all of the expenses of all
registrations, except underwriting discounts and commissions. We also have
agreed to indemnify those stockholders under the terms of the registration
rights agreement.

AMENDMENT OF THE CERTIFICATE OF INCORPORATION

Any amendment to our certificate of incorporation must first be approved by
a majority of the board of directors and then approved by a majority of the
total votes eligible to be cast by holders of voting stock related to the
amendment.

DELAWARE ANTI-TAKEOVER LAW AND OUR CHARTER AND BY-LAW PROVISIONS

Statutory Business Combination Provision. Following the offering, we will
be subject to Section 203 of the Delaware General Corporation Law, which
prohibits a publicly held Delaware corporation from consummating a business
combination with an interested stockholder for a period of three years after the
date that person became an interested stockholder unless:

- before that person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;

- upon the closing of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares held
by directors who are also officers of the corporation and shares held by
employee stock plans; or

- following the transaction in which that person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of 66.67% of the outstanding
voting stock of the corporation not owned by the interested stockholder.

The term interested stockholder is generally defined as a person who,
together with affiliates and associates, owns, or, within the prior three years,
owned 15% or more of a corporation's outstanding voting stock. The term business
combination includes mergers, asset sales and other similar transactions
resulting in a financial benefit to an interested stockholder. Section 203 makes
it more difficult for an interested stockholder to effect various business
combinations with a corporation for a three-year period. A Delaware corporation
may opt out of Section 203 with an express provision in its original certificate
of incorporation or an express provision in its certificate of incorporation or
by-laws resulting from an amendment approved by holders of at least a majority
of the outstanding voting stock. Neither our certificate of incorporation nor
our by-laws contains any provision electing to opt out of Section 203.

52
<PAGE> 57

Charter and By-law Provisions. Our certificate of incorporation provides
that any action required or permitted to be taken by our stockholders at an
annual or special meeting of stockholders may only be taken if it is properly
brought before the meeting and may not be taken by written action in lieu of a
meeting. Our by-laws provide that a special meeting of stockholders may be
called only by the president or the board of directors unless otherwise required
by law. Our by-laws provide that only those matters included in the notice of
the special meeting may be considered or acted upon at that special meeting
unless otherwise provided by law. In addition, our by-laws include advance
notice and informational requirements and time limitations on any director
nomination or any new proposal which a stockholder wishes to make at an annual
meeting of stockholders.

Ability to Adopt Stockholder Rights Plan. The board of directors may in
the future resolve to issue shares of preferred stock or rights to acquire
shares of preferred stock to implement a stockholder rights plan. A stockholder
rights plan typically creates voting or other impediments that would discourage
persons seeking to gain control of FirePond by means of a merger, tender offer
or proxy contest if the board of directors determines that a change in control
is not in the best interests of our stockholders. The board of directors has no
present intention of adopting a stockholder rights plan and is not aware of any
attempt to obtain control of FirePond.

TRADING ON THE NASDAQ NATIONAL MARKET SYSTEM

The shares being sold in the offering have been approved for quotation on
the Nasdaq National Market under the symbol FIRE.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock will be EquiServe.

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<PAGE> 58

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of shares of our common stock in the
public market could adversely affect prevailing market prices. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of contractual and legal restrictions on resale, as
described below, sales of substantial amounts of common stock in the public
market after the restrictions lapse could adversely affect the prevailing market
price.

NUMBER OF SHARES

After this offering, 32,751,713 shares of common stock will be outstanding,
assuming the issuance of an aggregate of 5,000,000 shares of common stock. The
number of shares outstanding after this offering is based on the number of
shares outstanding as of January 31, 2000 and assumes no exercise of outstanding
options. The 5,000,000 shares sold in this offering will be freely tradable
without restriction under the Securities Act.

The remaining 27,751,713 shares of common stock held by existing
stockholders are restricted shares or are subject to the contractual
restrictions described below. Restricted shares may be sold in the public market
only if registered or if they qualify for an exception from registration under
Rules 144, 144(k) or 701 under the Securities Act, which are summarized below.
Of these restricted shares,

- 4,486,242 shares will be available for resale in the public market in
reliance on Rule 144(k) immediately following this offering, of which
4,552,074 shares are subject to lock-up agreements described below;

- 23,133,747 shares will be available for resale in the public market in
reliance on Rule 144 beginning 90 days following this offering, of which
23,124,346 shares are subject to lock-up agreements; and

- 78,660 shares become eligible for resale in the public market at various
dates beginning 90 days following this offering, 61,466 of which shares
are subject to lock-up agreements.

LOCK-UP AGREEMENTS

Each of our executive officers and directors, and other stockholders who
will own in the aggregate 26,671,173 shares of common stock after the offering,
have entered into lock-up agreements generally providing that they will not:

- offer to sell, contract to sell or transfer any of the shares of common
stock or any securities convertible into, or exercisable or exchangeable
for, common stock owned by them; or

- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock, for a period of 180 days after the date of this prospectus,
without the prior written consent of FleetBoston Robertson Stephens Inc.

FleetBoston Robertson Stephens Inc. may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. When determining whether or not to release shares from the
lock-up agreements, FleetBoston Robertson Stephens Inc. will consider the
stockholder's reasons for requesting the release, the number of shares for which
the release is being requested and market conditions at the time. Following the
expiration of the 180 day lock-up period, additional shares of common stock will
be available for sale in the public market subject to compliance with Rule 144
or Rule 701.

We have agreed not to sell or dispose of any shares of common stock during
the 180-day period following the date of this prospectus, except we may issue,
and grant options to purchase, shares of common stock under our stock option
plans.

RULE 144

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:

- 1% of the number of shares of our common stock then outstanding, which
will equal approximately 327,517 shares immediately after this offering;
or

54
<PAGE> 59

- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 concerning that sale.

Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about
FirePond.

RULE 144(k)

Under Rule 144(k) as currently in effect, a person who has not been one of
our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, Rule 144(k) shares may be sold immediately upon the
completion of this offering.

RULE 701

In general, our employees, officers, directors and consultants who
purchased shares of our common stock in connection with written compensatory
benefit plans or written contracts relating to the compensation of the
purchaser, may rely on Rule 701 to resell those shares. The Securities and
Exchange Commission has indicated that Rule 701 will apply to stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Exchange Act, along with the shares acquired upon exercises of those
options, including exercises after the date of this offering. Securities issued
in reliance on Rule 701 are restricted securities and beginning 90 days after
the date of this prospectus:

- may be sold by persons other than affiliates subject only to the manner
of sale provisions of Rule 144; and

- may be sold by affiliates under Rule 144 without complying with its
one-year minimum holding requirement.

STOCK OPTIONS

At January 31, 2000:

- we had reserved an aggregate of 9,282,042 shares of common stock for
issuance under the 1997 stock option plan, and options to purchase
9,281,983 shares were outstanding under the 1997 stock option plan;

- we had reserved an aggregate of 3,000,000 shares of common stock for
issuance under the 1999 stock option and grant plan, and options to
purchase 531,917 were outstanding under the 1999 stock option and grant
plan; and

- we had reserved an aggregate of 500,000 shares of common stock for
issuance under the 1999 director plan, and options to purchase 233,334
shares were outstanding under the 1999 director plan.

As soon as practicable following the offering, we intend to file a registration
statement under the Securities Act to register shares of common stock reserved
for issuance under our stock option plans. This registration statement will
automatically become effective immediately upon filing. Any shares issued upon
the exercise of stock options will be eligible for immediate public sale,
subject to the lock-up agreements noted above.

REGISTRATION RIGHTS

Following the offering, some of our stockholders will have rights to
require us to register their shares of common stock under the Securities Act,
and they will have rights to participate in any future registration of
securities by us.

55
<PAGE> 60

UNDERWRITING

The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Dain Rauscher Incorporated, SG Cowen
Securities Corporation and E*OFFERING Corp., have each agreed with us, subject
to the terms and conditions of the underwriting agreement, to purchase from us
the number of shares of common stock listed opposite their names below. The
underwriters are committed to purchase and pay for all of the shares if any are
purchased.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ----------
<S> <C>

FleetBoston Robertson Stephens Inc. ........................ 2,450,000
Dain Rauscher Incorporated.................................. 1,102,500
SG Cowen Securities Corporation............................. 1,102,500
E*OFFERING Corp. ........................................... 245,000
Fidelity Capital Markets Company............................ 100,000
---------
Total.................................................. 5,000,000
=========
</TABLE>

We have been advised that the underwriters propose to offer the shares of
common stock to the public at the public offering price located on the cover
page of this prospectus and to dealers at that price less a concession of not in
excess of $.92 per share, of which $.10 may be reallowed to other dealers. After
the initial public offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No reduction in
this price will change the amount of proceeds to be received by us as indicated
on the cover page of this prospectus.

The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed 6% of the total number of shares offered.

Over-Allotment Option. We and one of our stockholders, Jerome D. Johnson,
have granted to the underwriters an option, exercisable during the 30-day period
after the date of this prospectus, to purchase up to 750,000 additional shares
of common stock at the same price per share as we will receive for the 5,000,000
shares that the underwriters have agreed to purchase. If the underwriters
exercise the option in full, we will sell 666,666 additional shares and the
selling stockholder will sell 83,334 additional shares. If the underwriters
exercise this option only in part, the option shares will be sold first by the
selling stockholder, and we will sell only if, and to the extent, the
underwriters exercise the option to purchase more than 83,334 shares. To the
extent that the underwriters exercise this option, each of the underwriters will
have a commitment to purchase approximately the same percentage of additional
shares that the number of shares of common stock to be purchased by it shown in
the above table represents as a percentage of the 5,000,000 shares offered by
this prospectus. If purchased, the additional shares will be sold by the
underwriters on the same terms as those on which the 5,000,000 shares are being
sold. We and the selling stockholder will be obligated, under this option, to
sell shares to the extent the option is exercised. The underwriters may exercise
the option only to cover over-allotments made in connection with the sale of the
5,000,000 shares of common stock offered by this prospectus.

The following table shows the per share and total underwriting discounts
and commissions to be paid by us to the underwriters. This information is
presented assuming either no exercise or full exercise by the underwriters of
their over-allotment option.

<TABLE>
<CAPTION>
PER WITHOUT OVER-ALLOTMENT WITH OVER-ALLOTMENT
SHARE OPTION OPTION
------ ---------------------- -------------------
<S> <C> <C> <C>

Public offering price........................ $22.00 $110,000,000 $126,500,000
Underwriting discounts and commissions....... $ 1.54 7,700,000 8,855,000
Proceeds, before expenses, to us............. $20.46 102,300,000 117,645,000
</TABLE>

The expenses of the offering payable by us are estimated at $1,550,000.
FleetBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on February 9, 2000.

56
<PAGE> 61

Indemnity. The underwriting agreement contains covenants of indemnity
among the underwriters, us and the selling stockholder against civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
underwriting agreement.

Lock-Up Agreements. Each of our executive officers, directors and most of
our other stockholders of record have agreed with the representatives, for a
period of 180 days after the date of this prospectus, not to offer to sell,
contract to sell or transfer any:

- shares of common stock;

- options or warrants to purchase any shares of common stock; or

- any securities convertible into or exchangeable for shares of common
stock.

However, FleetBoston Robertson Stephens Inc. may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject to
lock-up agreements. There are no agreements between the representatives and any
of our stockholders providing consent by the representatives to the sale of
shares before the expiration of the 180-day lock-up period.

We have agreed that during the lock-up period we will not, without the
prior written consent of FleetBoston Robertson Stephens Inc., consent to the
disposition of any shares held by shareholders subject to lock-up agreements
before the expiration of the lock-up period, or issue, sell, contract to sell,
or dispose of, any shares of common stock, any options or warrants to purchase
any shares of common stock or any securities convertible into, exercisable for
or exchangeable for shares of common stock. However, the following are examples
of exceptions to this agreement:

- our sale of shares in this offering;

- the issuance of our common stock upon the exercise of outstanding options
or warrants; and

- the issuance of options under existing stock option and incentive plans,
provided that those options do not vest before the expiration of the
lock-up period.

Internet Distribution. E*OFFERING Corp. is the exclusive Internet
underwriter for this offering. E*OFFERING Corp. has agreed to allocate a portion
of the shares that it purchases to E*TRADE Securities, Inc. E*OFFERING Corp. and
E*TRADE will allocate shares to their customers based on usual and customary
industry practices. A prospectus in electronic format will be made available on
Internet sites maintained by E*OFFERING Corp. and E*TRADE. Other than the
prospectus in electronic format, the information on these Internet sites is not
part of this prospectus or the registration statement of which the prospectus
forms a part.

Directed Shares. We have requested that the underwriters reserve up to 6%
of the shares of common stock for sale at the initial public offering price to
directors, officers, employees and other persons designated by us.

Qualified Independent Underwriter. Entities associated with General
Atlantic Partners L.L.C. own approximately 61% of our common stock before this
offering. General Atlantic Partners 61, L.P. and GAP Coinvestment Partners II,
L.P., two partnerships affiliated with General Atlantic, purchased convertible
preferred stock of E*OFFERING Corp. in January 2000 and own approximately 34% of
the outstanding stock of E*OFFERING Corp, a representative of the underwriters.
Under the rules of the National Association of Securities Dealers, Inc., we may
be considered to be an affiliate of E*OFFERING Corp, who is an NASD member.
Consequently, this offering is being conducted according to Rule 2720 of the
NASD which requires that, if an NASD member is an underwriter of an affiliate's
shares, the initial public offering price of the shares cannot be more than the
price recommended by a qualified independent underwriter meeting the standards
described in the NASD rules. FleetBoston Robertson Stephens Inc. will serve as a
qualified independent underwriter for this offering and will recommend a public
offering price for our shares in compliance with Rule 2720. As a qualified
independent underwriter, FleetBoston Robertson Stephens Inc. has performed due
diligence investigations and reviewed and participated in the preparation of
this prospectus and the registration statement.
57
<PAGE> 62

Underwriter Compensation. In November 1999, General Atlantic Partners 59,
L.P. and GAP Coinvestment Partners II, L.P., two entities associated with
General Atlantic, received warrants to purchase an aggregate of 30,000 shares of
our common stock at an exercise price of $5.25 per share. Under the rules of the
NASD, the receipt of these warrants is considered underwriting compensation.
Therefore, the terms of these warrants have been amended to comply with the NASD
rules relating to underwriting compensation. The amendments include

- provisions to increase the exercise price of the warrants to the public
offering price,

- restrictions on the sale or transfer of the warrants, or shares received
upon exercise of the warrants, for a period of one year from the date of
this offering, and

- limitations on registration rights relating to the shares underlying the
warrants.

Listing. The shares being sold in the offering have been approved for
quotation on the Nasdaq National Market under the symbol FIRE.

No Prior Public Market. Before this offering, there has been no public
market for our common stock. Consequently, the initial public offering price for
the common stock offered by this prospectus was determined through negotiations
between us and the representatives. Among the factors considered in these
negotiations were prevailing market conditions, our financial information,
market valuations of other companies that we and the representatives believe to
be comparable to us, estimates of our business potential and the present state
of our development.

Stabilization. The representatives have advised us that, under Regulation
M under the Securities Exchange Act of 1934, some persons participating in this
offering may engage in transactions that may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. These transaction may include
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, as described below:

- A stabilizing bid is a bid for or the purchase of common stock on behalf
of the underwriters for the purpose of fixing or maintaining the price of
the common stock.

- A syndicate covering transaction is the bid for or the purchase of common
stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with this offering; a short position
results when an underwriter sells more shares than it has committed to
purchase.

- A penalty bid is an arrangement permitting the representatives to reclaim
the selling concession otherwise accruing to an underwriter or syndicate
member in connection with this offering if the common stock originally
sold by that underwriter or syndicate member is purchased by the
representatives in a syndicate covering transaction and has therefore not
been effectively placed by that underwriter or syndicate member.

These transactions may be effected on the Nasdaq National Market or through
other means such as privately negotiated transactions. If commenced, these
transactions may be discontinued at any time.

LEGAL MATTERS

The validity of the shares of common stock offered by this prospectus will
be passed upon for FirePond by McDermott, Will & Emery, Boston, Massachusetts.
Various legal matters related to the sale of the common stock offered by this
prospectus will be passed upon for the underwriters by Hale and Dorr LLP,
Boston, Massachusetts.

58
<PAGE> 63

EXPERTS

The consolidated balance sheets as of October 31, 1998 and 1999 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended October 31, 1999
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report appearing in this prospectus and elsewhere in the
registration statement, and is included in reliance upon the authority of the
firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 for the
registration of the common stock offered by this prospectus. This prospectus,
which forms a part of the registration statement, does not contain all the
information included in the registration statement, parts of which have been
omitted as permitted by the SEC rules and regulations. For further information
about us and our common stock, you should refer to the registration statement.
Statements contained in this prospectus about any contract or other document are
not necessarily complete. Statements made about any contract or document are
summaries of all material information about the documents summarized, but are
not complete descriptions of all terms. If we filed any of those documents as
exhibits to the registration statement, you may read the document itself for a
complete description of its terms.

The registration statement can be inspected and copied at the Securities
and Exchange Commission's following locations:

<TABLE>
<S> <C> <C>
Public Reference Room Office New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. Seven World Trade Center Citicorp Center
Washington, D.C. 20549 Suite 1300 500 West Madison Street
New York, NY 10048 Chicago, IL 60661-2511
</TABLE>

Copies of all or any portion of the registration statement can be obtained from
the public reference section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. In addition, the registration statement is
publicly available through the SEC's site on the Internet's world wide web,
located at http://www.sec.gov.

We will also file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may obtain copies of the documents that
we file electronically with the SEC through the SEC's website located at
http://www.sec.gov. You can also request copies of these documents, for a
copying fee, by writing to the SEC.

59
<PAGE> 64

(This page intentionally left blank)
<PAGE> 65

FIREPOND, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2

Consolidated Balance Sheets as of October 31, 1998 and
1999...................................................... F-3

Consolidated Statements of Operations for the Fiscal Years
Ended October 31, 1997, 1998 and 1999..................... F-4

Consolidated Statements of Stockholders' Equity (Deficit)
for the Fiscal Years Ended October 31, 1997, 1998 and
1999...................................................... F-5

Consolidated Statements of Cash Flows for the Fiscal Years
Ended October 31, 1997, 1998 and 1999..................... F-7

Notes to Consolidated Financial Statements.................. F-8
</TABLE>

F-1
<PAGE> 66

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
FirePond, Inc.:

We have audited the accompanying consolidated balance sheets of FirePond,
Inc. (a Delaware corporation) and subsidiaries as of October 31, 1998 and 1999,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended October
31, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
FirePond, Inc. and subsidiaries as of October 31, 1998 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended October 31, 1999, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Boston, Massachusetts
December 10, 1999 (except with respect to the
matters discussed in notes 9(b) and 14, as to
which the date is January 4, 2000)

F-2
<PAGE> 67

FIREPOND, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
OCTOBER 31, 1999
OCTOBER 31, ----------------
-------------------- PRO FORMA
1998 1999 (NOTE 2(B))
-------- -------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,324 $ 2,120 $ 2,120
Accounts receivable, net of allowance for doubtful
accounts of $290 in 1998 and $410 in 1999............... 6,214 9,910 9,910
Unbilled services......................................... 845 1,191 1,191
Prepaid expenses and other current assets................. 405 1,265 1,265
-------- -------- ---------
9,788 14,486 14,486
Property and equipment, net................................. 8,443 6,048 6,048
Restricted cash............................................. -- 550 550
Other assets................................................ 555 576 576
-------- -------- ---------
$ 18,786 $ 21,660 $ 21,660
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit............................................ -- $ 6,740 $ 6,740
Current portion of long-term debt......................... 4,769 1,313 1,313
Accounts payable.......................................... 1,832 3,833 3,833
Accrued liabilities....................................... 4,813 5,700 5,700
Deferred revenue.......................................... 4,614 8,280 8,280
-------- -------- ---------
16,028 25,866 25,866
Long-term debt, less current portion........................ 1,727 702 702
Restructuring accrual, less current portion................. -- 446 446
Commitments and contingencies (note 8)
Stockholders' equity (deficit):
Preferred stock, $0.01 par value --
Authorized -- 50,000,000 shares;
Issued and outstanding -- 12,363,785 shares in 1998,
19,097,793 shares in 1999 and no shares on a pro forma
basis, liquidation preference of $71,500,000 as of
October 31, 1999...................................... 124 191 --
Common stock, $0.01 par value --
Authorized -- 100,000,000 shares;
Issued and outstanding -- 10,004,315 shares in 1998,
10,072,817 shares in 1999 and 27,469,142 shares on a
pro forma basis....................................... 100 101 275
Additional paid-in capital................................ 33,745 62,380 62,397
Accumulated deficit....................................... (32,938) (61,793) (61,793)
Deferred compensation..................................... -- (5,893) (5,893)
Cumulative translation adjustment......................... -- (327) (327)
Subscription receivables.................................. -- (13) (13)
-------- -------- ---------
Total stockholders' equity (deficit).................... 1,031 (5,354) (5,354)
-------- -------- ---------
$ 18,786 $ 21,660 $ 21,660
======== ======== =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 68

FIREPOND, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
--------------------------------------------
1997 1998 1999
---------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Product-related revenues:
License(1)........................................... $ 416 $ 1,888 $ 9,777
Services and maintenance............................. -- 4,972 8,604
-------- -------- --------
Total product-related revenues..................... 416 6,860 18,381
Custom development services............................. 27,747 22,142 15,904
-------- -------- --------
Total revenues..................................... 28,163 29,002 34,285
-------- -------- --------
Cost of revenues:
License................................................. 178 192 238
Product-related services and maintenance(2)............. -- 3,061 5,677
Custom development services............................. 31,365 8,397 10,636
-------- -------- --------
Total cost of revenues............................. 31,543 11,650 16,551
-------- -------- --------
Gross profit (loss)....................................... (3,380) 17,352 17,734
Operating expenses:
Sales and marketing(2).................................. 8,080 13,680 23,609
Research and development(2)............................. 3,634 8,199 9,641
General and administrative(2)........................... 3,188 3,516 7,084
Stock-based compensation................................ 450 672 2,597
Restructuring charge.................................... 6,712 -- 3,027
-------- -------- --------
Total operating expenses........................... 22,064 26,067 45,958
-------- -------- --------
Loss from operations...................................... (25,444) (8,715) (28,224)
Interest expense.......................................... (1,536) (616) (850)
Other income (expense), net............................... (55) 290 219
-------- -------- --------
Net loss.................................................. $(27,035) $ (9,041) $(28,855)
======== ======== ========
Net loss per share (note 3(a)):
Basic and diluted net loss per share.................... $ (2.62) $ (0.91) $ (2.88)
======== ======== ========
Basic and diluted weighted average common shares
outstanding.......................................... 10,319 9,925 10,024
======== ======== ========
Pro forma net loss per share (unaudited) (note 3(b)):
Pro forma net loss per share............................ $ (1.12)
========
Pro forma basic and diluted weighted average common
shares outstanding................................... 25,799
========
</TABLE>

- ---------------
(1) Includes related-party revenues of $350 in fiscal 1997, see note 11(a).

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

<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cost of revenues....................................... $ -- $ -- $ 40
Operating expenses:
Sales and marketing.................................. -- -- 1,327
Research and development............................. -- -- 913
General and administrative........................... 450 672 317
---- ---- ------
Total stock-based compensation......................... $450 $672 $2,597
==== ==== ======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 69

FIREPOND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- ----------------------
$0.01 ADDITIONAL
PAR $0.01 PAR MEMBERSHIP PAID-IN
SHARES VALUE SHARES VALUE UNITS CAPITAL
----------- ------ ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1996 -- Combined....... -- $ -- 10,362,870 $103 112,278 $1,365
Issuance of series A preferred stock....... 4,188,880 42 -- -- -- 9,321
Issuance of warrants to purchase series B
preferred stock.......................... -- -- -- -- -- 1
Issuance of series C preferred stock....... 570,342 6 -- -- -- 1,494
Issuance of series D preferred stock....... 100,000 1 -- -- -- 9,988
Issuance of common stock................... -- -- 69,167 1 -- 149
Repurchase and retirement of common
stock.................................... -- -- (172,633) (2) -- (146)
Elimination of subsidiaries, net of
issuances................................ -- -- (353,617) (3) (112,278) 3
Payments by stockholders................... -- -- -- -- -- --
Exchange of stockholder receivable for
consulting services...................... -- -- -- -- -- --
Distributions to stockholders.............. -- -- -- -- -- --
Stock-based compensation expense........... -- -- -- -- -- 600
Net loss................................... -- -- -- -- -- --
Comprehensive loss for the year ended
October 31, 1997.........................
----------- ----- ---------- ---- -------- ------

RETAINED TOTAL
EARNINGS CUMULATIVE STOCKHOLDERS'
(ACCUMULATED DEFERRED TRANSLATION SUBSCRIPTION EQUITY
DEFICIT) COMPENSATION ADJUSTMENT RECEIVABLES (DEFICIT)
------------ ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1996 -- Combined....... $ 3,305 $ -- $ -- $(573) $ 4,200
Issuance of series A preferred stock....... -- -- -- -- 9,363
Issuance of warrants to purchase series B
preferred stock.......................... -- -- -- -- 1
Issuance of series C preferred stock....... -- -- -- -- 1,500
Issuance of series D preferred stock....... -- -- -- -- 9,989
Issuance of common stock................... -- -- -- -- 150
Repurchase and retirement of common
stock.................................... -- -- -- -- (148)
Elimination of subsidiaries, net of
issuances................................ -- -- -- -- --
Payments by stockholders................... -- -- -- 361 361
Exchange of stockholder receivable for
consulting services...................... -- -- -- 200 200
Distributions to stockholders.............. (167) -- -- -- (167)
Stock-based compensation expense........... -- -- -- -- 600
Net loss................................... (27,035) -- -- -- (27,035)
Comprehensive loss for the year ended
October 31, 1997.........................
-------- ----- ----- ----- --------

COMPREHENSIVE
INCOME (LOSS)
-------------
<S> <C>
Balance, October 31, 1996 -- Combined.......
Issuance of series A preferred stock.......
Issuance of warrants to purchase series B
preferred stock..........................
Issuance of series C preferred stock.......
Issuance of series D preferred stock.......
Issuance of common stock...................
Repurchase and retirement of common
stock....................................
Elimination of subsidiaries, net of
issuances................................
Payments by stockholders...................
Exchange of stockholder receivable for
consulting services......................
Distributions to stockholders..............
Stock-based compensation expense...........
Net loss................................... $(27,035)
--------
Comprehensive loss for the year ended
October 31, 1997......................... $(27,035)
========
</TABLE>

F-5
<PAGE> 70

FIREPOND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK
-------------------- COMMON STOCK
$0.01 ---------------------- ADDITIONAL
PAR $0.01 PAR MEMBERSHIP PAID-IN
SHARES VALUE SHARES VALUE UNITS CAPITAL
----------- ------ ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1997 -- Consolidated... 4,859,222 49 9,905,787 99 -- 22,775
Exercise of common stock options........... -- -- 20,067 -- -- 79
Issuance of common stock................... -- -- 86,061 1 -- 339
Repurchase and retirement of common
stock.................................... -- -- (7,600) -- -- (30)
Stock-based compensation expense........... -- -- -- -- -- 672
Series D preferred stock exchanged for
series E preferred stock................. 3,702,281 37 -- -- -- (37)
Issuance of series E preferred stock....... 3,802,282 38 -- -- -- 9,947
Payments by stockholders................... -- -- -- -- -- --
Net loss................................... -- -- -- -- -- --
Comprehensive loss for the year ended
October 31, 1998.........................
----------- ----- ---------- ---- -------- --------
Balance, October 31, 1998 -- Consolidated... 12,363,785 124 10,004,315 100 -- 33,745
Exercise of common stock options........... -- -- 35,169 -- -- 139
Issuance of common stock................... -- -- 33,333 1 -- 278
Issuance of warrants to purchase common
stock to a customer...................... -- -- -- -- -- 106
Issuance of series F preferred stock....... 6,734,008 67 -- -- -- 19,774
Issuance of warrants to purchase series F
preferred stock.......................... -- -- -- -- -- 1
Cost of exchanging series E for series G
preferred stock.......................... -- -- -- -- -- (23)
Deferred stock-based compensation.......... -- -- -- -- -- 8,360
Stock-based compensation expense........... -- -- -- -- -- --
Cumulative translation adjustment.......... -- -- -- -- -- --
Net loss................................... -- -- -- -- -- --
Comprehensive loss for the year ended
October 31, 1999.........................
----------- ----- ---------- ---- -------- --------
Balance, October 31, 1999 -- Consolidated... 19,097,793 191 10,072,817 101 -- 62,380
Conversion of preferred stock into common
stock (unaudited)........................ (19,097,793) (191) 13,334,643 134 -- 57
Issuance of common stock in settlement of
priority payments (unaudited)............ -- -- 3,812,532 38 -- (38)
Exercise of Series F preferred stock
warrant and conversion into common stock
(unaudited).............................. -- -- 249,150 2 -- (2)
----------- ----- ---------- ---- -------- --------
Pro forma balance, October 31, 1999
(unaudited)................................ -- $ -- 27,469,142 $275 -- $ 62,397
=========== ===== ========== ==== ======== ========

Balance, October 31, 1997 -- Consolidated... (23,897) -- -- (12) (986)
Exercise of common stock options........... -- -- -- -- 79
Issuance of common stock................... -- -- -- -- 340
Repurchase and retirement of common
stock.................................... -- -- -- -- (30)
Stock-based compensation expense........... -- -- -- -- 672
Series D preferred stock exchanged for
series E preferred stock................. -- -- -- -- --
Issuance of series E preferred stock....... -- -- -- -- 9,985
Payments by stockholders................... -- -- -- 12 12
Net loss................................... (9,041) -- -- -- (9,041)
Comprehensive loss for the year ended
October 31, 1998.........................
--------- ------- ----- ----- --------
Balance, October 31, 1998 -- Consolidated... (32,938) -- -- -- 1,031
Exercise of common stock options........... -- -- -- (13) 126
Issuance of common stock................... -- (130) -- -- 149
Issuance of warrants to purchase common
stock to a customer...................... -- -- -- -- 106
Issuance of series F preferred stock....... -- -- -- -- 19,841
Issuance of warrants to purchase series F
preferred stock.......................... -- -- -- -- 1
Cost of exchanging series E for series G
preferred stock.......................... -- -- -- -- (23)
Deferred stock-based compensation.......... -- (8,360) -- -- --
Stock-based compensation expense........... -- 2,597 -- -- 2,597
Cumulative translation adjustment.......... -- -- (327) -- (327)
Net loss................................... (28,855) -- -- -- (28,855)
Comprehensive loss for the year ended
October 31, 1999.........................
--------- ------- ----- ----- --------
Balance, October 31, 1999 -- Consolidated... (61,793) (5,893) (327) (13) (5,354)
Conversion of preferred stock into common
stock (unaudited)........................ -- -- -- -- --
Issuance of common stock in settlement of
priority payments (unaudited)............ -- -- -- -- --
Exercise of Series F preferred stock
warrant and conversion into common stock
(unaudited).............................. -- -- -- -- --
--------- ------- ----- ----- --------
Pro forma balance, October 31, 1999
(unaudited)................................ $ (61,793) $(5,893) $(327) $ (13) $ (5,354)
========= ======= ===== ===== ========

COMPREHENSIVE
INCOME (LOSS)
-------------
<S> <C>
Balance, October 31, 1997 -- Consolidated...
Exercise of common stock options...........
Issuance of common stock...................
Repurchase and retirement of common
stock....................................
Stock-based compensation expense...........
Series D preferred stock exchanged for
series E preferred stock.................
Issuance of series E preferred stock.......
Payments by stockholders...................
Net loss................................... $ (9,041)
--------
Comprehensive loss for the year ended
October 31, 1998......................... $ (9,041)
========
Balance, October 31, 1998 -- Consolidated...
Exercise of common stock options...........
Issuance of common stock...................
Issuance of warrants to purchase common
stock to a customer......................
Issuance of series F preferred stock.......
Issuance of warrants to purchase series F
preferred stock..........................
Cost of exchanging series E for series G
preferred stock..........................
Deferred stock-based compensation..........
Stock-based compensation expense...........
Cumulative translation adjustment.......... $ (327)
Net loss................................... (28,855)
--------
Comprehensive loss for the year ended
October 31, 1999......................... $(29,182)
========
Balance, October 31, 1999 -- Consolidated...
Conversion of preferred stock into common
stock (unaudited)........................
Issuance of common stock in settlement of
priority payments (unaudited)............
Exercise of Series F preferred stock
warrant and conversion into common stock
(unaudited)..............................
Pro forma balance, October 31, 1999
(unaudited)................................
</TABLE>

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

F-6
<PAGE> 71

FIREPOND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(27,035) $ (9,041) $(28,855)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash restructuring charges........................... 3,984 -- 1,532
Write-off of capitalized software development costs..... 3,959 -- --
Issuance of warrants to a customer...................... -- -- 106
Exchange of stockholder receivable for consulting
services............................................... 200 -- --
Stock-based compensation expense........................ 450 672 2,597
Loss on disposal of property and equipment.............. 557 259 49
Depreciation and amortization........................... 3,419 2,282 2,851
Changes in assets and liabilities:
Accounts receivables.................................. (171) (1,699) (4,024)
Unbilled services..................................... 361 1,927 (346)
Prepaid expenses and other current assets............. (236) (57) (860)
Accounts payable...................................... (352) 138 2,001
Accrued liabilities................................... 8,832 (4,943) 1,334
Deferred revenue...................................... 2,327 2,294 3,666
Billings in excess of costs........................... 717 (2,305) --
-------- -------- --------
Net cash used in operating activities.............. (2,988) (10,473) (19,949)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (3,606) (1,470) (3,916)
Proceeds from sale of property and equipment.............. -- -- 2,557
Additions to trademarks and patents....................... (101) -- --
Additions to capitalized computer software development
costs................................................... (2,648) -- --
Increase in restricted cash............................... -- -- (550)
Increase in investments and deposits...................... (235) (16) (236)
-------- -------- --------
Net cash used in investing activities.............. (6,590) (1,486) (2,145)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (payments) on line of credit............... (877) (2,790) 6,740
Payments on long-term debt................................ (4,248) (3,460) (4,959)
Proceeds from long-term debt.............................. 3,351 -- --
Proceeds from sale of preferred stock and warrants........ 20,853 9,985 19,842
Proceeds from common stock issuance....................... 150 419 288
Costs associated with exchange of preferred stock......... -- -- (23)
Distributions to stockholders............................. (167) -- --
Common stock repurchased.................................. (148) (30) --
Decrease (increase) in subscription receivables........... 361 12 (13)
-------- -------- --------
Net cash provided by financing activities.......... 19,275 4,136 21,875
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... -- -- 15
Net increase (decrease) in cash and cash equivalents........ 9,697 (7,823) (204)
Cash and cash equivalents, beginning of year................ 450 10,147 2,324
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 10,147 $ 2,324 $ 2,120
======== ======== ========
Supplemental cash flow information:
Interest paid............................................. $ 1,552 $ 777 $ 695
======== ======== ========
Noncash investing and financing activities:
Series D preferred stock exchanged for series E preferred
stock................................................... $ -- $ 9,989 $ --
======== ======== ========
Series E preferred stock exchanged for series G preferred
stock................................................... -- -- 19,974
======== ======== ========
Equipment acquired under capital lease obligations........ -- 179 477
======== ======== ========
</TABLE>

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

F-7
<PAGE> 72

FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

FirePond, Inc. and its wholly owned subsidiaries, collectively known as the
Company, is a leading 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.

(a) Liquidity

On November 12, 1999, the Company issued subordinated notes payable
totaling $6,000,000 to an outside investor and several existing stockholders of
the Company. The subordinated notes bear interest at 12.0% per year and are due
upon the earlier of the closing of the Company's proposed initial public
offering or November 11, 2000. If an initial public offering is 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, are convertible into
shares of the Company's preferred stock having rights equivalent of FirePond
Inc.'s existing series F preferred stock at a rate of $2.97 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 has 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 will record the warrants as a discount totaling $1,904,000 against the
carrying value of the subordinated notes payable. The discount will be amortized
to interest expense over the term of the subordinated notes payable.

During September 1999, the Company modified its line of credit to provide
for additional borrowing availability, see note 6.

The Company continues to incur losses from operations and had an
accumulated deficit of $61,793,000 and a working capital deficit of $11,380,000
at October 31, 1999. As a result of its significant research and development,
customer support, and selling and marketing efforts, the Company has required
substantial working capital to fund its operations. To date, the Company has
financed its operations principally through its equity offerings. Management
believes that under its current business plan, funds available from borrowing
arrangements are sufficient to fund its operations and capital requirements
through at least October 31, 2000. Any substantial inability to achieve the
current business plan could have a material adverse impact on the Company's
financial position, liquidity, or results of operations and may require the
Company to reduce expenditures to enable it to continue operations through
October 2000.

(b) Change in Control

In May 1997, investment funds associated with General Atlantic Partners, or
GAP, acquired a majority interest in the Company through acquisition of shares
from the Company and shares directly from several stockholders. In addition, the
Company granted warrants to purchase preferred stock from the Company and
options to purchase common stock from several stockholders to these investment
funds. In October 1997, April 1998 and February 1999, these investment funds
acquired an additional equity interest in the Company through the purchase of
preferred stock, see note 9.

F-8
<PAGE> 73
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of Consolidation and Presentation

The financial statements include the accounts of FirePond, Inc. and its
subsidiaries. In connection with the GAP investment in May 1997, FirePond, Inc.
acquired all of the outstanding stock of five related entities in a
stock-for-stock exchange. The value of the shares issued in the exchange was
equivalent to the net book value for each of the related entities. Because
FirePond, Inc. and three of the five related entities were under common
ownership before the stock-for-stock exchange, the combination of these entities
has been accounted for at historical cost in a manner similar to a pooling of
interests. While the two remaining related entities were managed by and were an
integral part of FirePond, Inc., they had dissimilar ownership interests. As a
result, the Company has recorded the acquisition of these two related entities
under the purchase method of accounting. The financial statements for FirePond,
Inc. and these two related entities are presented on a combined basis before the
May 1997 stock-for-stock exchange. All periods presented are reported on a
consolidated basis. All significant intercompany balances and transactions have
been eliminated in the accompanying financial statements.

(b) Unaudited Pro Forma Presentation

The unaudited pro forma consolidated balance sheet as of October 31, 1999
reflects the following: (1) the issuance of 249,150 shares of common stock
issuable upon the exercise of warrants to purchase 673,401 shares of series F
preferred stock on a post-split, cashless exercise basis, (2) the issuance of
12,731,863 shares of common stock from the conversion of all outstanding shares
of convertible preferred stock that will occur automatically upon the closing of
the Company's proposed initial public offering, (3) the issuance of 3,812,532
shares of common stock issuable in settlement of priority payments to series A,
series C and series G preferred stockholders, and holders of the Company's
common stock outstanding on May 20, 1997 other than GAP and (4) the issuance of
an additional 602,780 shares of common stock issuable to series F preferred
stockholders based upon their pro rata percentage of the priority payments to
all other shareholders. See note 9(d).

The issuance of shares of common stock as payment of the priority payments
to series A, series C, and series G preferred stockholders and to holders of the
Company's common stock outstanding on May 20, 1997 other than GAP, will be
accounted for as a stock dividend. In the period in which this payment is made,
the Company will record a charge to additional paid-in capital for the value of
the stock dividend. For the period in which the payment is made, the amount of
the net loss attributable to common stockholders used in the computation of net
loss per share will be increased by the value of the stock dividend paid to
preferred stockholders. At the initial public offering price of $22.00 per
share, the value of the stock dividend will total $65,542,000 for the series A,
series C and series G preferred stockholders, and $18,334,000 for the stock
dividend on the shares of our common stock outstanding on May 27, 1997 other
than those shares held by GAP.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

F-9
<PAGE> 74
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(d) 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, which is effective for transactions entered into beginning January 1,
2000. This pronouncement is not expected to materially impact the Company's
revenue recognition practices.

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 perpetual 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 on 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.

The Company generally bills for services on a monthly basis. The Company
generally bills for product license fees upon commencement of the contract,
however, in some situations the Company may delay billing based on the terms of
the contract. The Company has recorded deferred revenue on amounts billed or

F-10
<PAGE> 75
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

collected by the Company before satisfying the above revenue recognition
criteria. Deferred revenue consisted of the following:

<TABLE>
<CAPTION>
OCTOBER 31,
------------------
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Product license............................................. $3,000 $4,404
Product-related services.................................... 212 242
Product-related maintenance................................. 358 1,030
Custom development services................................. 1,044 2,604
------ ------
$4,614 $8,280
====== ======
</TABLE>

Unbilled product license fees for which the Company has not recognized or
deferred revenue totaled $0 at October 31, 1998 and $3,900,000 at October 31,
1999.

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, see note 12.

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. Billings in excess of costs represent the amounts billed under
custom development service agreements in advance of the performance of the work
as of the period-end. The Company bills customers under custom development
contracts upon achieving performance milestones or billing dates, as specified
in the contracts.

(e) Cost of Revenues

Cost of licenses includes the cost of media, product packaging,
documentation and other production costs.

Cost of product-related services and maintenance and cost of custom
development services revenues consist primarily of salaries, related costs for
development, consulting, training and customer support personnel, including cost
of services provided by third-party consultants engaged by the Company and the
amortization of capitalized software development costs, see note 2(i).

(f) 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, 1998 and 1999 consist of
interest-bearing bank deposits.

F-11
<PAGE> 76
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(g) Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation.
The Company provides for depreciation of its property and equipment using the
accelerated and straight-line methods over their estimated useful lives.
Property and equipment, at cost, and their estimated useful lives are as
follows:

<TABLE>
<CAPTION>
OCTOBER 31,
ESTIMATED ------------------
USEFUL LIFE 1998 1999
------------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Computer equipment...................... 2-5 years $ 7,488 $ 7,251
Furniture and fixtures.................. 7 years 905 1,791
Leasehold improvements.................. Life of lease -- 541
Building................................ 30 years 3,624 --
------- -------
12,017 9,583
Accumulated depreciation................ (3,574) (3,535)
------- -------
$ 8,443 $ 6,048
======= =======
</TABLE>

Depreciation expense was $1,748,000 for fiscal 1997, $2,081,000 for fiscal
1998 and $2,590,000 for fiscal 1999.

(h) Other Assets

Other assets consist primarily of patents, which are being amortized using
the straight-line method over an estimated benefit period of ten years.
Accumulated amortization totaled $40,000 as of October 31, 1998 and $64,000 as
of October 31, 1999.

(i) Computer Software Development Costs and Research and Development Expenses

During fiscal 1996 and fiscal 1997, the Company capitalized software
development costs based on the guidance in SFAS No. 86, Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed, and amortized
these costs over a period of 18 to 36 months. Through May 1997, the Company
commenced the capitalization of software development costs when a detailed
program design was completed and continued capitalizing qualified costs until
the program master was complete. During fiscal 1997, in connection with the
Company's change in strategic focus from providing custom development services
to providing more standardized software solutions, the Company reviewed the
software development costs capitalized to date, which principally related to
components of custom development services, and determined that these costs were
not realizable. In connection with its change in strategic focus, the Company
wrote off its capitalized software development costs relating to custom
development components of $3,959,000 as a charge to cost of custom development
services revenues in fiscal 1997. Amortization of capitalized software
development costs charged to cost of custom development services before this
write-off was $1,080,000 for fiscal 1997.

The Company continues to incur software development costs associated with
its licensed products. Since June 1997, the Company determined that
technological feasibility occurs upon the successful development of a working
model, which happens late in the development cycle and close to general release
of the products. Because the development costs incurred between the time
technological feasibility is established and general release of the product are
not material, the Company expenses these costs as incurred. Through May 1997,
the Company capitalized $532,000 of costs related to the development of its
first software product. These costs were amortized over three years.
Amortization of these costs was charged to costs of product licenses and was
$178,000 in fiscal 1997, $177,000 in fiscal 1998 and $177,000 in fiscal 1999.

F-12
<PAGE> 77
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(j) Impairment of Long-Lived Assets

The Company evaluates the carrying value of long-lived assets based on the
guidance in SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. The Company's evaluation considers
nonfinancial data such as changes in the operating environment and business
strategy, competitive information, market trends and operating performance.
Based on this evaluation, the Company recorded a charge of approximately
$3,683,000 related to assets that were impaired as a result of the plan for
restructuring during fiscal 1997, see note 5(a). In addition, the Company
recorded an asset impairment charge of $1,532,000 during fiscal 1999 in
connection with the relocation of the Company's corporate headquarters from
Minnesota to Massachusetts, see note 5(b).

(k) Concentration of Credit Risk

SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet risks and credit
risk concentrations. The Company has no significant off-balance-sheet risks or
credit risk concentrations. Financial instruments that potentially subject the
Company to concentrations of credit risk are principally cash equivalents,
accounts receivable and unbilled services. The Company maintains its cash and
cash equivalents with established financial institutions. Concentration of
credit risk related to accounts receivable and unbilled services is limited to
several customers to whom the Company makes substantial sales. The Company
performs periodic credit evaluations of its customers and has recorded
allowances for estimated losses.

The following table summarizes the number of customers that individually
comprise greater than 10% of total revenue or total accounts receivable and
their aggregate percentage of the Company's total revenues and accounts
receivable.

<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE
REVENUE -----------------------
----------------------- PERCENT OF
PERCENT OF TOTAL
NUMBER OF TOTAL NUMBER OF ACCOUNTS
CUSTOMERS REVENUE CUSTOMERS RECEIVABLE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Fiscal year ended:
October 31, 1997...................... 1 21% 3 42%
October 31, 1998...................... 3 47 3 48
October 31, 1999...................... 2 38 3 42
</TABLE>

(l) Financial Instruments

The estimated fair values of the Company's financial instruments, which
include cash equivalents, accounts receivable, unbilled services, restricted
cash, line of credit and long-term debt, approximate their carrying value.

(m) Stock-Based Compensation

SFAS No. 123, Accounting for Stock-Based Compensation, requires the
measurement of the fair value of employee and director stock options or warrants
to be included in the statement of operations or disclosed in the notes to
financial statements. The Company has determined that it will continue to
account for stock-based compensation for employees and directors under the
Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued
to Employees, and elect the disclosure-only alternative under SFAS No. 123, see
note 9(f ). The Company accounts for options and warrants granted to
non-employees using the fair-value method prescribed by SFAS No. 123 and
Emerging Issues Task Force, or EITF, No. 96-18, Accounting for Equity
Instruments that are Issued to other than Employees for Acquiring, or in
Conjunction with Selling, Goods, or Services.

F-13
<PAGE> 78
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(n) 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.

(o) Foreign Currency Translation

Assets and liabilities of the foreign subsidiaries are translated based on
the guidance in SFAS No. 52, Foreign Currency Translation. Under SFAS No. 52,
assets and liabilities of the Company's foreign operations are translated into
U.S. dollars at current exchange rates, and income and expense items are
translated at average rates of exchange prevailing during the year. Gains and
losses arising from translation are accumulated as a separate component of
stockholders' equity (deficit). Gains and losses arising from transactions
denominated in foreign currencies are included in other income and were not
material for the periods presented.

(p) Comprehensive Income (Loss)

As of November 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130, requires disclosure of all components of
comprehensive income (loss) on an annual and interim basis. Comprehensive income
(loss) is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources.

3. 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 fiscal 1997, fiscal 1998 and fiscal 1999, 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 anticipated 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.

<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------
1997 1998 1999
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Common stock options and warrants........................ 1,683 5,089 7,952
====== ====== ======
Convertible preferred stock.............................. 4,859 12,364 19,098
====== ====== ======
Preferred stock warrants (note 9(d))..................... 190 190 864
====== ====== ======
</TABLE>

F-14
<PAGE> 79
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(b) Pro Forma Net Loss Per Share

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

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
OCTOBER 31,
1999
-----------------
(IN THOUSANDS)
<S> <C>
Pro forma basic and diluted:
Weighted average common shares outstanding used in
computing basic and diluted net loss per share......... 10,024
Weighted average common shares issuable upon the
conversion of preferred stock.......................... 11,792
Weighted average common shares issuable upon settlement of
the priority payments.................................. 3,812
Weighted average common shares issuable upon exercise of
series F preferred stock warrants...................... 171
------
Weighted average common shares outstanding used in
computing pro forma basic and diluted net loss per
share.................................................. 25,799
======
</TABLE>

4. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
OCTOBER 31,
----------------
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Loss contracts reserve...................................... $1,000 $ 500
Current portion of restructuring accrual.................... 304 799
Payroll and related costs................................... 1,101 1,740
Other....................................................... 2,408 2,661
------ ------
$4,813 $5,700
====== ======
</TABLE>

5. RESTRUCTURING CHARGE

(a) Change in Strategic Focus

During fiscal 1997, the Company undertook a plan to change the strategic
focus of the Company from a custom development services company to a software
product company providing more standardized solutions. In addition, the Company
decided to exit several of its business activities, change its management team
and reduce its workforce to be in line with its newly defined business strategy.
In connection with this plan, the Company incurred significant charges
associated with employee severance costs, costs to exit several of its business
activities and asset impairments, see note 5(c). The costs to exit business
activities are related to the Company's investment in a virtual reality lab.
These costs included $813,000 in specialized equipment that was abandoned and
$425,000 in equity investments in a privately-held company assisting with the
project that was considered worthless and was written off. The Company does not
anticipate any future benefit from the costs incurred.

F-15
<PAGE> 80
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The significant components of the restructuring charge were as follows:

<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Employee severance costs.................................... $ 2,729
Costs to exit business activities, including asset
impairments................................................. 1,238
Impairment of property and equipment........................ 2,595
Other costs................................................. 150
-------
$ 6,712
=======
</TABLE>

The employee severance cost component of the restructuring charge was
related to reductions in headcount. Under the plan, the Company terminated seven
sales and marketing, 17 general and administrative and 27 software development
personnel.

The costs to exit business activities component related to the write down
of assets of a virtual reality product line. The Company wrote off $813,000 in
capital equipment, consisting principally of a virtual reality lab. At the
termination of the product line, the Company abandoned the property, as it had
no alternative use. The Company had partnered with a privately-held company to
develop the virtual reality lab. The Company held an equity investment of
$425,000 in this company. When the virtual reality product line was abandoned,
the Company deemed the value of its equity investment worthless and wrote-off
this investment.

The impairment of property and equipment component consisted primarily of
outdated and obsolete computers and related furniture. The Company determined
that this equipment would have no future benefit to the Company. The Company
removed these fixed assets from service and disposed of them upon execution of
the plan without any material proceeds from disposition. The Company ceased
depreciation of the fixed assets concurrent with the establishment of the
restructuring plan.

(b) Corporate Relocation

During fiscal 1999, the Company undertook a plan to relocate its corporate
offices from Mankato, Minnesota to Waltham, Massachusetts. In connection with
this plan, the Company incurred charges associated with asset impairments, idle
lease space and employee severance costs, see note 5(c). The Company does not
anticipate any future benefit from the costs incurred.

The significant components of the restructuring charge were as follows:

<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Impairment of property and equipment........................ $1,532
Idle lease space............................................ 993
Employee severance costs.................................... 502
------
$3,027
======
</TABLE>

The Company is subject to a ten-year lease arrangement on its Mankato,
Minnesota facility that permits (1) a 50% reduction in the monthly lease
obligation by providing notice one year in advance, and (2) early termination of
the lease agreement at the end of the fifth year by giving notice before the
fourth anniversary of the lease agreement. The Company has determined that
approximately 72% of the office space in Mankato was rendered idle as part of
the relocation plan. The idle lease space cost was determined in anticipation of
the Company exercising its option to reduce the lease obligation within one year
and terminating the remaining lease obligation at the end of the fifth year.
Therefore, the present value of the portion of future lease payments for which
the Company does not anticipate any future benefit has been accrued as of

F-16
<PAGE> 81
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

October 31, 1999. As of October 31, 1999, approximately $367,000 of the
restructuring accrual relates to amounts reserved for idle lease space costs
extending beyond 12 months and, therefore, has been classified as a long-term
obligation in the accompanying consolidated balance sheet.

The impairment of property and equipment component consisted primarily of
excess and obsolete office furniture and computer equipment located in the
Mankato facility. The Company determined that this equipment would have no
future benefit to the Company. The Company has removed these fixed assets from
service and has commenced the process of disposing of this equipment. The
Company does not expect the proceeds from disposition to be significant. The
Company ceased depreciation of the fixed assets concurrent with the
establishment of the restructuring plan.

The employee severance cost component of the restructuring charge was
related to reductions in headcount. Under the plan, the Company terminated 12
general and administrative personnel. In October 1999, the Company's chairman,
who was located in the Mankato office, resigned. As part of his resignation, the
Company agreed to pay severance costs of $402,000. These costs have been
included as part of the severance component of the restructuring reserve.

A summary of the restructuring reserve is as follows:

<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
---------------------------------
1997 1998 1999
------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Restructuring reserve:
Balance, beginning of period........................ $ -- $ 1,583 $ 304
Provision...................................... 6,712 -- 3,027
Asset impairment write-offs.................... (3,833) -- (1,532)
Severance and other payments................... (1,296) (1,279) (552)
------- ------- -------
Balance, end of period............................ $ 1,583 $ 304 $ 1,247
======= ======= =======
</TABLE>

The Company estimates that $799,000 of the restructuring accrual will be
paid in fiscal 2000, $208,000 will be paid in fiscal 2001, $109,000 will be paid
in fiscal 2002, $118,000 will be paid in fiscal 2003, and $13,000 will be paid
in fiscal 2004.

6. FINANCINGS

Effective September 29, 1999, the Company amended its line of credit
agreement with a financial institution to increase the total commitment to
$7,000,000. This additional commitment was reached through the conversion of
$2,000,000 outstanding borrowings on the existing line of credit to a term loan
and establishing a new line of credit. Borrowings under the new line of credit
will be limited to the lesser of $5,000,000 or 80% of qualifying accounts
receivable, as defined. The amended line of credit and term loan matures on
October 31, 2000 and is subject to automatic renewal for successive additional
one-year terms unless cancelled by either party. Interest on the original line
and the amended line is charged at the prime rate, which was 8.25% at October
31, 1999, plus 2.0%, limited to a minimum of 8.0% per year, and is payable
monthly. The Company also pays a fee of 0.5% per year on the unused line of
credit. Substantially all of the Company's tangible and intangible assets are
pledged as collateral against the line of credit. At October 31, 1999,
$4,740,000 was outstanding under the line and the Company had approximately
$37,000 available for future borrowings.

F-17
<PAGE> 82
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Long-term debt obligations consist of the following:

<TABLE>
<CAPTION>
OCTOBER 31,
----------------
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Mortgage notes payable in varying monthly installments,
including interest at 8.0% to 9.0%........................ $2,618 $ --
Notes payable in varying monthly installments, including
interest at 6.0% to 11.0%, through June 2001................ 3,708 1,644
Capital lease obligations payable in varying monthly
installments, including interest at 8.0% to 11.0%, through
August 2004............................................... 170 371
------ ------
6,496 2,015
Less -- current portion..................................... 4,769 1,313
------ ------
$1,727 $ 702
====== ======
</TABLE>

The mortgage notes were due to a municipality, secured by the building,
personally guaranteed by a stockholder of the Company and became due upon a
change in control, which occurred in May 1997. On December 2, 1998, the Company
sold the building which secured the property and repaid the notes, see note 8.

Scheduled annual maturities of long-term debt are as follows as of October
31, 1999:

<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
FOR THE FISCAL YEAR ENDED OCTOBER 31,
2000.................................................... $1,556
2001.................................................. 606
2002.................................................. 48
2003.................................................. 34
2004.................................................. 28
------
2,272
Less -- amounts representing interest................... 257
------
$2,015
======
</TABLE>

7. INCOME TAXES

Before to May 1997, the Company had elected to be treated as an S
corporation under the Internal Revenue Code. As an S corporation, federal and
some state income tax consequences of the Company were passed through to the
individual stockholders and dividend distributions were made to the stockholders
for payments of their individual taxes related to the Company's income.
Therefore, no provision (benefit) for income taxes has been provided in fiscal
1996. In May 1997, the Company was reorganized from an S corporation to a C
corporation and, as such, taxes are payable at the corporate level.

Since conversion to a taxable corporation, income taxes are accounted for
based on the guidance in SFAS No. 109, Accounting for Income Taxes. Under SFAS
No. 109, deferred income tax liabilities and assets are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities using currently enacted tax rates.

F-18
<PAGE> 83
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The income tax provisions, assuming that the Company was subject to income
taxes as a C corporation for the entirety of each period, are as follows:

<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal.................................................... $(9,192) $(3,074) $(5,882)
State taxes, net of federal benefits....................... (1,757) (588) (1,053)
Foreign.................................................... -- -- (3,982)
Other...................................................... 60 216 1,099
Net operating loss not benefited........................... 10,889 3,446 9,818
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>

Deferred income taxes as of October 31, 1998 and 1999 relate to the
following temporary differences:

<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1998 1999
------- --------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss and credit carryforwards................. $ 7,947 $ 17,765
Nondeductible reserves and accruals......................... 1,398 2,722
Depreciation and amortization............................... (147) (1,365)
Valuation allowance......................................... (9,198) (19,122)
------- --------
$ -- $ --
======= ========
</TABLE>

As of October 31, 1999, the Company has available a net operating loss
carryforward of approximately $36,000,000 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 the Company may utilize in any one year in the
event of cumulative changes in ownership over a three-year period in excess of
50%, as defined. The Company has completed several equity financing transactions
since it became a C corporation. The Company has not assessed whether these
equity transactions have resulted in a cumulative ownership change in excess of
50%. The Company's wholly owned foreign subsidiaries have net operating loss
carryforwards of approximately $12 million.

(8) COMMITMENTS AND CONTINGENCIES

(a) Litigation

The Company is engaged in legal proceedings incidental to the normal course
of business. Although the ultimate outcome of these matters cannot be
determined, management believes that the final disposition of these proceedings
will not have a material adverse effect on the consolidated financial position
or the results of operations of the Company.

(b) Leases

The Company leases its office space under operating leases expiring at
various dates through December 2004. Rent expense under these agreements totaled
approximately $406,000 for fiscal 1997, $746,000 in fiscal 1998 and $2,349,000
in fiscal 1999.

F-19
<PAGE> 84
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At October 31, 1999, the minimum future obligations under operating leases
are as follows:

<TABLE>
<CAPTION>
AMOUNT
---------------
(IN THOUSANDS)
<S> <C>
FOR THE FISCAL YEAR ENDED OCTOBER 31,
2000................................................... $ 2,558
2001................................................. 2,402
2002................................................. 2,052
2003................................................. 1,935
2004................................................. 1,861
After 2004........................................... 3,172
-------
$13,980
=======
</TABLE>

On December 2, 1998, the Company sold its office building located in
Mankato, Minnesota, for $2,700,000 and entered into an agreement to lease the
facility back over ten years. The Company recognized an insignificant loss on
the sale. Proceeds from the sale were used to repay the notes payable as
described in note 6.

The Company is obligated to maintain an irrevocable standby letter of
credit of approximately $550,000, which would be payable upon default of the
Company's noncancelable facility lease that was entered into in May 1999. The
letter of credit will be collateralized by cash, which has been classified as
restricted cash in the accompanying consolidated balance sheet as of October 31,
1999.

(9) STOCKHOLDERS' EQUITY (DEFICIT)

(a) Authorized Shares

As of July 31, 1999, the Company has authorized the issuance of 100,000,000
shares of $0.01 par value common stock and 50,000,000 shares of $0.01 par value
convertible preferred stock.

(b) 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. In July 1997, the Company effected a five-for-one
stock split of its common stock. All shares and per share amounts of common
stock for all periods presented have been retroactively adjusted to reflect the
stock splits.

Before the closing of the Company's proposed initial public offering, its
certificate of incorporation will be 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.

F-20
<PAGE> 85
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of October 31, 1999, the Company has reserved the following number of
shares of common stock for the conversion of preferred stock and issuance of
stock options and warrants:

<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Series A preferred stock.................................... 2,792,587
Series B preferred stock.................................... 634,794
Series C preferred stock.................................... 380,228
Series F preferred stock.................................... 4,938,273
Series G preferred stock.................................... 5,069,709
Stock options and warrants.................................. 8,635,737
----------
22,451,328
==========
</TABLE>

In addition, the information above excludes 4,484,057 shares of common
stock that the Company expects to issue for the payment of priority payments to
some of our common stockholders and preferred stockholders, see note 9(d).

(d) Preferred Stock

The following table summarizes the number of shares designated, issued and
outstanding:

<TABLE>
<CAPTION>
OCTOBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Series A convertible preferred stock;
-- 4,188,880 shares designated................................... 4,188,880 4,188,880
Series B convertible preferred stock;
- -- 190,438 shares designated....................................... -- --
Series C convertible preferred stock;
-- 570,342 shares designated..................................... 570,342 570,342
Series D convertible preferred stock;
-- 100,000 shares designated..................................... -- --
Series E convertible preferred stock;
-- 7,604,563 shares designated................................... 7,604,563 --
Series F convertible preferred stock;
-- 7,407,409 shares designated................................... -- 6,734,008
Series G convertible preferred stock;
-- 7,604,563 shares designated................................... -- 7,604,563
---------- ----------
12,363,785 19,097,793
========== ==========
</TABLE>

In May 1997, the Company sold 4,188,880 shares of series A preferred stock
at $2.63 per share. In addition, the Company issued warrants to purchase 190,438
shares of series B preferred stock at an exercise price of $19.69 per share.

In July 1997, the Company sold 570,342 shares of series C preferred stock
at $2.63 per share.

In October 1997, the Company sold 100,000 shares of series D preferred
stock at $100.00 per share.

In April 1998, the Company sold 3,802,282 shares of series E preferred
stock at $2.63 per share. In connection with the series E preferred stock
financing, the Company exchanged 100,000 outstanding shares of series D
preferred stock for 3,802,281 shares of series E preferred stock.

F-21
<PAGE> 86
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In February 1999, the Company sold 6,734,008 shares of series F preferred
stock at $2.97 per share. In addition, the Company issued warrants to purchase
673,401 shares of series F preferred stock at an exercise price of $3.56 per
share. In connection with the series F preferred stock financing, the Company
exchanged 7,604,563 outstanding shares of series E preferred stock for 7,604,563
shares of series G preferred stock.

The rights and preferences of series A, series B, series C, series F and
series G preferred stock are as follows:

Conversion

Each outstanding share of series A, series C, series F and series G
preferred stock is convertible at the option of the holder and shall
automatically be converted into 0.67 shares of common stock upon the closing of
a qualified initial public offering of the Company's common stock, subject to
adjustments. Upon a liquidity event, as defined below, the conversion rate of
series F preferred stock will be adjusted for additional shares equal to their
pro rata percentage of the priority payments, as defined below. Each share of
series B preferred stock is convertible at the option of the holder into 3.33
shares of common stock, subject to adjustments. Based on the initial price range
for the initial public offering, the conversion rate for the outstanding shares
of series F preferred stock would be adjusted to include the issuance of 602,780
additional shares of common stock with a fair value of $7,233,000.

Dividends

Each outstanding share of preferred stock shall be entitled to dividends
when and if declared by the Company's board of directors.

Voting Rights

Each outstanding share of preferred stock is entitled to the number of
votes equal to the number of votes the share would be entitled to if converted
into common stock. Holders of series A preferred stock are entitled to elect one
member to the Company's board of directors as long as GAP and its affiliates own
3% or greater of the number of common shares on a fully diluted basis.

Liquidation

In the event of liquidation, each share of series A, series B, series C,
series F and series G preferred stock shall be entitled to be paid the amount
shown below, per share plus all declared and unpaid dividends before any
payments to common stockholders.

<TABLE>
<CAPTION>
SERIES OF PREFERRED STOCK LIQUIDATION AMOUNT PER SHARE
- ------------------------- ----------------------------
<S> <C>
Series A $ 7.16
Series B 19.69
Series C 2.63
Series F 2.97
Series G 2.63
</TABLE>

If the amount is insufficient to pay all of the liquidation preferences,
then payments will be made to all remaining series of preferred stock based on
the relationship of the series' total liquidation value to the total of the
liquidation values of the preferred stock. As of October 31, 1999, the aggregate
liquidation value of all outstanding shares of preferred stock was $71,500,000.

F-22
<PAGE> 87
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Priority Payments

In the event of a sale of assets, a merger, or an initial public offering,
each a liquidity event, the holders of series A preferred stock shall be
entitled to receive $15,000,000, the holders of series C preferred stock shall
be entitled to receive $750,000, and some of the holders of our common stock
shall be entitled to receive $10,000,000. Holders of series G preferred stock
shall be entitled to a priority payment not to exceed $20,000,000 provided the
liquidity event does not result in a minimum company valuation. The Company does
not expect that the proposed initial public offering will satisfy the minimum
valuation requirements and expects to accrue the maximum priority payment
obligation of $20,000,000. These amounts are 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 has elected to make
these payments in 3,812,532 shares of common stock upon consummation of this
offering.

If the amount available for the priority payments is insufficient, then
payments shall be made based on the relationship of each stockholder group's
total priority payments to the total of all remaining priority payments if each
were paid in full.

At the proposed initial public offering price of $22.00 per share, the
value of the stock dividend to preferred stockholders will total
$65,542,000.

(e) Stock Options

In May 1997, the Company adopted the 1997 stock option plan for the grant
of stock options to key employees, nonemployee directors and consultants. The
Company has reserved 7,896,815 shares of common stock for issuance under this
plan. The exercise price and vesting are determined by the board of directors at
the date of grant. Options generally vest over two to four years and expire ten
years after the date of grant. As of October 31, 1999, 317,282 shares were
available for future issuance under the 1997 plan.

In September 1999, the Company adopted the 1999 director stock option plan
for the grant of stock options to non-employee directors. The Company has
reserved 500,000 shares of common stock for issuance under this plan. As of
October 31, 1999, 366,667 shares were available for future issuance under this
plan.

In August 1997, the Company granted an option to purchase 66,667 shares of
common stock to two individuals as a settlement of a claim. These options are
fully vested and expire in fiscal 2007. The estimated fair value of these
options totaling $150,000 has been included as a component of the restructuring
charge in the accompanying statement of operations for the fiscal 1997. The
Company granted options to purchase 159,579 shares of common stock to
consultants for services performed during fiscal 1998. The estimated fair value
of these options totaling $593,000 has been recorded as stock-based compensation
expense in the accompanying fiscal 1998 consolidated statement of operations.

In connection with stock option and stock warrant grants to employees and
nonemployees during the fiscal year ended October 31, 1999, the Company recorded
deferred compensation of $8,360,000, which represents the aggregate difference
between the option exercise price and the fair market value of the common stock
determined for financial reporting purposes for grants to employees and the fair
value of the options for the nonemployees. Under EITF 96-18, the fair value of
the nonemployee grants will be marked to market over the vesting term of the
warrants. The deferred compensation will be recognized as an expense over the
vesting period of the underlying stock options and warrants. The Company
recorded stock-based compensation expense of $2,597,000 in the fiscal year ended
October 31, 1999, related to these options and warrants.

F-23
<PAGE> 88
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Option activity for fiscal 1997, fiscal 1998 and fiscal 1999 was as
follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER EXERCISE
SHARES SHARE PRICE
--------- ------------- --------
<S> <C> <C> <C>
Outstanding, October 31, 1996.................... 66,667 $ 2.10 $2.10
Granted........................................ 1,490,701 3.95 3.95
Exercised...................................... (69,167) 2.10 - 3.95 2.16
Canceled....................................... (5,167) 3.95 3.95
--------- ------------- -----
Outstanding, October 31, 1997.................... 1,483,034 3.95 3.95
Granted........................................ 3,961,213 3.95 3.95
Exercised...................................... (20,067) 3.95 3.95
Canceled....................................... (535,603) 3.95 3.95
--------- ------------- -----
Outstanding, October 31, 1998.................... 4,888,577 3.95 3.95
Granted........................................ 3,717,189 3.95 - 7.22 4.41
Exercised...................................... (35,169) 3.95 3.95
Canceled....................................... (915,476) 3.95 - 4.46 3.98
--------- ------------- -----
Outstanding, October 31, 1999.................... 7,655,121 $3.95 - $7.22 $4.17
========= ============= =====
Exercisable, October 31, 1999.................... 2,547,069 $3.95 - $7.22 $4.02
========= ============= =====
Exercisable, October 31, 1998.................... 804,119 $ 3.95 $3.95
========= ============= =====
Exercisable, October 31, 1997.................... 286,845 $ 3.95 $3.95
========= ============= =====
</TABLE>

During November 1999, the Company has granted options to employees and
non-employees to purchase 1,852,692 shares of common stock at a weighted-average
exercise price of $9.89 per share. The options granted to employees are subject
to vesting over a four-year period and were granted at exercise prices equal to
the fair value of common stock.

The following table summarizes information relating to currently
outstanding and exercisable options as of October 31, 1999.

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------- --------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
- --------------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$3.95 5,158,526 8.0 $3.95 2,195,464 $3.95
4.46 2,326,749 9.7 4.46 348,272 4.46
7.22 169,846 10.0 7.22 3,333 7.22
--------- ---- ----- --------- -----
7,655,121 8.6 $4.17 2,547,069 $4.02
========= ==== ===== ========= =====
</TABLE>

In connection with their May 1997 investment in the Company, the investment
funds affiliated with GAP purchased 5,108,202 shares of common stock directly
from several common stockholders. In addition, these investment funds also
received options to purchase 634,793 shares of common stock at an exercise price
of $5.91 per share from existing stockholders. GAP exercised options to purchase
29,580 shares of common stock from these stockholders. The remaining options to
purchase 605,213 shares of common stock expired in May 1999.

F-24
<PAGE> 89
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(f) Pro Forma Stock-Based Compensation

Under SFAS No. 123, Accounting for Stock-Based Compensation, the Company is
required to disclose the pro forma effects on net income (loss) and net income
(loss) per share as if the Company had elected to use the fair value approach to
account for all of its employee stock-based compensation plans beginning in
fiscal 1997.

The Company has computed the pro forma disclosures required under SFAS No.
123 for options granted during fiscal 1997, fiscal 1998 and fiscal 1999 using
the Black-Scholes option pricing model prescribed by SFAS No. 123. The weighted
average assumptions used were as follows:

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
OCTOBER 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate..................... 5.8%-6.0% 4.2%-5.8% 4.5%-5.8%
Expected dividend yield..................... -- -- --
Expected lives.............................. 5 years 5 years 5 years
Expected volatility......................... 80% 80% 80%
Weighted average grant date fair value...... $2.70 $2.67 $4.75
Weighted average remaining contractual life
of options outstanding.................... 8.6 years 7.6 years 8.6 years
</TABLE>

Had compensation cost for the Company's plan been determined consistent
with the fair value approach enumerated in SFAS No. 123, the Company's pro forma
net income (loss) and net income (loss) per share would have been as follows:

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
OCTOBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss, as reported................................. $(27,035) $ (9,041) $(28,855)
Net loss, pro forma................................... (28,244) (13,214) (37,359)

Diluted net loss per share, as reported............... $ (2.62) $ (0.91) $ (2.88)
Diluted net loss per share, pro forma................. (2.74) (1.33) (3.73)
</TABLE>

The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

(g) Warrants

In connection with the series A preferred stock financing in May 1997, the
Company issued warrants to the investment funds affiliated with GAP to purchase
190,438 shares of series B preferred stock at an exercise price of $19.69 per
share, exercisable in full, through May 2002. The price paid for this warrant
was $1,000. Upon an initial public offering, these warrants will automatically
be converted into warrants to purchase 634,794 shares of common stock at an
exercise price of $5.91 per share.

F-25
<PAGE> 90
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In July 1997, the Company issued a warrant to purchase 200,000 shares of
common stock to a vendor at $3.95 per share, exercisable in full, through 2007.
The warrant was issued in consideration for services to be received from the
vendor. The estimated value of the warrant totaled $450,000 and has been
recorded in stock-based compensation expense in the accompanying statement of
operations for fiscal 1997. In addition, in July 1997, that vendor purchased
190,114 shares of series C preferred stock for $500,000.

In connection with the series F preferred stock financing in February 1999,
the Company sold warrants to purchase 673,401 shares of series F preferred stock
at an exercise price of $3.56 per share. The price paid for this warrant was
$1,000. Upon an initial public offering, these warrants will automatically be
exercised through the voluntary payment of the exercise price by the warrant
holder or through a cashless exercise.

In October 1999, the Company approved the future issuance of warrants to
purchase 500,000 shares of common stock to customers and strategic partners. In
connection with a license arrangement with a customer, the Company issued
fully-vested warrants to purchase an aggregate of 13,333 shares of common stock
under this program at an exercise price of $7.22 per share, exercisable within
12 months. The estimated value of the warrants totaled $106,000 and has been
recorded as a reduction in the amount of future revenue to be recognized
associated with this customer. The Company also issued warrants to a strategic
partner to purchase 83,334 shares of common stock at an exercise price of $7.22
per share, and vest over three years. The estimated value of these warrants
totaled $463,000 at the time of grant. Under EITF 96-18, the fair value of these
warrants will be marked to market over the vesting period.

All of the warrants mentioned above were outstanding as of October 31,
1999.

(h) Stock Purchase Agreement

The Company had an agreement with a stockholder to repurchase 431,833
shares of common stock for $0.86 per share. The agreement provided for equal
monthly purchases over 60 months beginning in July 1993. Under the agreement,
the Company repurchased and retired approximately 86,667 shares of common stock
at a cost of approximately $74,000 in each of fiscal 1994, fiscal 1995 and
fiscal 1996. In fiscal 1997, the Company repurchased and retired the remaining
172,663 shares available under this agreement for approximately $148,000.

(i) Other Common Stock Issuances and Repurchases

During fiscal 1998, the Company sold 86,061 shares of its common stock at
$3.95 per share to a third party and also repurchased 7,600 shares of its
outstanding common stock from a stockholder for $3.95 per share.

In September 1999, the Company sold 33,334 shares of its common stock at
$4.46 per share to an officer of the Company. The Company recorded stock-based
compensation expense of $130,000 to reflect the below fair market value purchase
price.

10. PROFIT-SHARING PLAN

The Company sponsors a defined contribution profit-sharing plan which
conforms to Internal Revenue Service provisions for 401(k) plans. Employees must
be at least 21 years of age to be eligible to participate in the plan.
Participants may contribute up to 15% of their earnings. The Company matches 50%
of the first 2% and 25% of the next 4% of employee contributions and may make
additional contributions as determined by the board of directors. Operations
have been charged for contributions to the plan of approximately $321,000 for
fiscal 1997, $324,000 for fiscal 1998 and $551,000 for fiscal 1999.

F-26
<PAGE> 91
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. RELATED-PARTY TRANSACTIONS

(a) Transactions with Scopus Technology, Inc.

In June 1997, the Company entered into a $650,000 software license and
implementation services agreement with Scopus Technology, Inc., or Scopus, under
which it licensed Scopus' software product. In July 1997, the Company entered
into an agreement with Scopus, under which Scopus licensed the Company's
Signature Plus product for $350,000. Scopus was a related party through GAP. GAP
owned approximately 6% of Scopus and had board of director representation at
Scopus at that time. In addition, in October 1997, the Company entered into an
original equipment manufacturing arrangement with Scopus. The Company also
entered into a development license and obtained a prepaid license fee from
Scopus valued at $250,000 in exchange for outstanding liabilities owed to
Scopus. In fiscal 1998, the Company made the determination that it would not
pursue its arrangements with Scopus and wrote off the remaining book value of
the software license purchased totaling $469,000, net of deferred revenue
related to the prepaid license fee totaling $250,000, for a loss of $219,000.

(b) Transactions with Intelligroup, Inc.

In October 1997 and November 1997, the Company entered into a master
consulting agreement and an implementation partner agreement, with Intelligroup,
Inc. The chief executive officer of the Company is a member of the board of
directors of Intelligroup, Inc.

The Company contracts with a third party, Soft OS, to provide software
development and implementation services on an outsourced basis. Soft OS
subcontracts to have these services provided to us by Effective Programming, a
development organization located in Minsk, Belarus, and EPAM Systems, a related
development organization located in New Jersey. Under this arrangement,
Effective Programming and EPAM Systems provide software developers dedicated to
the Company's projects to develop products and application functionality based
on specifications provided by the Company and to provide implementation services
to the Company's customer's. The agreement with Soft OS expires in February
2002. As of October 31, 1999, approximately 85 employees and contractors of
Effective Programming and EPAM Systems were performing services for the Company.
Effective Programming and EPAM Systems are majority owned by one of the
Company's employees.

For the fiscal year ended October 31, 1999, the Company incurred a total of
$1,920,000 of software development costs under this contract which has been
charged to research and development expenses in the accompanying consolidated
statements of operations. The Company believes that the terms of this agreement
were negotiated on an arms-length basis.

F-27
<PAGE> 92
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. VALUATION AND QUALIFYING ACCOUNTS

A summary of the allowance for doubtful accounts and reserve for loss
contracts is as follows:

<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
--------------------------------
1997 1998 1999
------ ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for doubtful accounts:
Balance, beginning of period......................... $ 221 $ 100 $ 290
Provision for doubtful accounts................. 76 318 120
Write-offs...................................... (197) (128) --
------ ------- ------
Balance, end of period............................. $ 100 $ 290 $ 410
====== ======= ======
Reserve for loss contracts:
Balance, beginning of period....................... $ -- $ 5,238 $1,000
Provision (reduction) for loss contracts
reserve....................................... 5,238 (2,379) --
Payments and/or costs incurred.................. -- (1,859) (500)
------ ------- ------
Balance, end of period............................. $5,238 $ 1,000 $ 500
====== ======= ======
</TABLE>

In fiscal 1998, the Company revised its estimated loss reserve requirements
due to the resolution of contingencies identified in fiscal 1997. As a result,
the Company recorded a reduction of $2,859,000 in the cost of custom development
services in the accompanying consolidated statement of operations in fiscal
1998. In fiscal 1998, the Company also recorded a provision of $480,000 for
estimated losses on other contracts.

13. SEGMENT REPORTING

The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information in the period ended July 31, 1999. SFAS No.
131 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
identified 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
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 consolidated statements of operations and no additional disclosure
is required. The Company does not identify assets and liabilities by segment.
Therefore, identifiable assets, capital expenditures and depreciation and
amortization are not reported by segment.

F-28
<PAGE> 93
FIREPOND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's revenues by geographic destination to any single foreign
country did not exceed 10% of total revenues during any period presented.

14. SUBSEQUENT EVENTS (UNAUDITED)

On November 8, 1999, the board of directors and on January 4, 2000 the
stockholders approved (1) the adoption of the 1999 stock option and grant plan
under which 3,000,000 shares of the Company's common stock have been reserved
for future issuance, (2) the adoption of the 1999 director stock option plan
under which 500,000 additional shares of the Company's common stock have been
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.

F-29
<PAGE> 94

(This page intentionally left blank)

\
<PAGE> 95

[FIREPOND LOGO]

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.

UNTIL FEBRUARY 29, 2000, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WHEN SELLING THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 96

[FIREPOND LOGO]

5,000,000 SHARES

COMMON STOCK

------------------------

INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.

------------------------

ROBERTSON STEPHENS INTERNATIONAL

DAIN RAUSCHER WESSELS
SG COWEN

E*OFFERING
The date of this prospectus is February 4, 2000
<PAGE> 97

UNDERWRITING

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ----------
<S> <C>

FleetBoston Robertson Stephens Inc. and FleetBoston
Robertson Stephens International Limited.................. 2,450,000
Dain Rauscher Incorporated.................................. 1,102,500
SG Cowen Securities Corporation............................. 1,102,500
E*OFFERING Corp. ........................................... 245,000
Fidelity Capital Markets Company............................ 100,000
---------
</TABLE>

The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed 6% of the total number of shares offered.

<TABLE>
<CAPTION>
PER WITHOUT OVER-ALLOTMENT WITH OVER-ALLOTMENT
SHARE OPTION OPTION
------ ---------------------- -------------------
<S> <C> <C> <C>

Assumed public offering price................ $22.00 $110,000,000 $126,500,000
Underwriting discounts and commissions....... $ 1.54 7,700,000 8,855,000
Proceeds, before expenses, to us............. $20.46 102,300,000 117,645,000
</TABLE>

The expenses of the offering payable by us are estimated at $1,550,000.
FleetBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on February 9, 2000.

56
<PAGE> 98

- shares of common stock;

- options or warrants to purchase any shares of common stock; or

- any securities convertible into or exchangeable for shares of common
stock.

- our sale of shares in this offering;

- the issuance of our common stock upon the exercise of outstanding options
or warrants; and

- the issuance of options under existing stock option and incentive plans,
provided that those options do not vest before the expiration of the
lock-up period.

- provisions to increase the exercise price of the warrants to the public
offering price,

- restrictions on the sale or transfer of the warrants, or shares received
upon exercise of the warrants, for a period of one year from the date of
this offering, and

57
<PAGE> 99

- limitations on registration rights relating to the shares underlying the
warrants.

Qualified Independent Underwriter. Under the rules of the National
Association of Securities Dealers, Inc., we may be considered to be an affiliate
of E*OFFERING Corp, who is an NASD member. Therefore, this offering is being
conducted according to Rule 2720 of the NASD which requires that, if an NASD
member is an underwriter of an affiliate's shares, the initial public offering
price of the shares cannot be more than the price recommended by a qualified
independent underwriter meeting the standards described in the NASD rules.
FleetBoston Robertson Stephens Inc. will serve as a qualified independent
underwriter for this offering and will recommend a public offering price for our
shares in compliance with Rule 2720. As a qualified independent underwriter,
FleetBoston Robertson Stephens Inc. has performed due diligence investigations
and reviewed and participated in the preparation of this prospectus and the
registration statement.

Listing. The shares being sold in the offering have been approved for
quotation on the Nasdaq National Market under the symbol FIRE.

- A stabilizing bid is a bid for or the purchase of common stock on behalf
of the underwriters for the purpose of fixing or maintaining the price of
the common stock.

These transactions may be effected on the Nasdaq National Market or through
other means such as privately negotiated transactions. If commenced, these
transactions may be discontinued at any time.

LEGAL MATTERS

58
<PAGE> 100

EXPERTS

WHERE YOU CAN FIND MORE INFORMATION

The registration statement can be inspected and copied at the Securities
and Exchange Commission's following locations:

Public Reference Room Office New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. Seven World Trade Center Citicorp Center
Washington, D.C. 20549 Suite 1300 500 West Madison Street
New York, NY 10048 Chicago, IL 60661-2511
</TABLE>