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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 0-29251

FIREPOND, INC.

(952) 229-2300

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

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

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of the Form 10-K.     o

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

          The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $19,033,100 as of April 30, 2002, the last business day of the Registrant’s most recently completed second fiscal quarter, based on the closing price of the Common Stock as reported on the Nasdaq Stock Market for that date. There were 3,684,983 shares of the Registrant’s Common Stock issued and outstanding on January 23, 2003.

Documents Incorporated by Reference

          Portions of the Registrant’s definitive proxy statement, which is expected to be filed not later than 120 days after the Registrant’s fiscal year ended October 31, 2002, to be delivered in connection with the Registrant’s Annual Meeting of Stockholders, are incorporated by reference into Part III of this Form 10-K.

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PART I

Special Note Regarding Forward-Looking Information

      Certain statements contained in this Annual Report on Form 10-K, including information with respect to our future business plans, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “plans,” “expects,” “intends” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by such forward-looking statements. These factors include those set forth in the section titled “Factors that May Affect Future Results and Market Price of our Common Stock.”

      Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this Annual Report on Form 10-K. Firepond undertakes no obligation to release publicly any updates to the forward-looking statements included herein after the date of this document.

Item 1.     Business

Company Overview

      In business since 1983, Firepond considers itself to be a pioneer in software solutions that help companies with complex products convert more leads into accurate orders. Companies with complex products may achieve a measurable and meaningful return on investment in Firepond technology by reducing their total cost of sales, whether they sell through a direct sales force, an indirect channel network or via the web. We consider the sales process for complex goods to be a business process that has yet to be fully optimized by an enterprise software solution.

      Firepond’s SalesPerformer product line guides sales people, channel partners and customers through the entire “lead-to-order” business process. Sold as a complete system, or as incremental modules that address specific business needs, SalesPerformer delivers lead management, needs analysis, product and pricing configuration, quote and proposal generation and order management. Companies that manufacture complex goods or maintain complex distribution networks may realize a high return on investment in Firepond software by improving order accuracy, shortening their sales cycles and reducing the expensive engineering resources required to configure a product that best meets their customer’s requirements. For insurers, Firepond’s “prospect-to-customer” system is designed to accelerate sales cycles, cut administrative costs, improve broker loyalty, and simplify the renewals process.

      Firepond also offers an online customer assistance solution. Marketed as Firepond’s eServicePerformer, this product line leverages advanced intelligence engines and natural language processing technology to manage a company’s online customer interaction channels, with an emphasis on email response management.

Industry Background

      Large companies with complex products typically require a lengthy, consultative sales process to convert a lead into an order. For manufacturers, this process often involves numerous meetings between sales and engineering, manufacturing, finance, or other departments before a product recommendation can be made or before a quote can be delivered. This complex, iterative approach is often both time consuming and error prone – driving costs into the sales process and eroding both profit margins and competitiveness.

      Removing complexity from the sales process, however, is no simple task. Complexity can be determined by the range of different product features or by the number of different possible option combinations. Complexity can also be determined by the range of different pricing factors, such as discounts, rebates, taxes, or other special pricing calculations. Complexity can also be determined by the range of channels that make up a company’s distribution network, such as the web, a direct field sales force, resellers, distributors, or

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      We have distinguished ourselves within the broad category of sales configuration software by focusing primarily on solving specific problems for customers in our target markets, such as the sale of complex products. For example, Firepond’s SalesPerformer can reduce a company’s total cost of sales by delivering solutions that improve the productivity and effectiveness of sales people, and sales channels (including the web). In fact, Gartner Group, a leading industry analyst firm, in a recent report, identified four areas directly addressed by Firepond’s SalesPerformer product line — product configuration, price configuration, quote generation, and proposal generation — as software applications that deliver a high return on investment to manufacturing companies.

Firepond Solutions and Business Benefits

      Firepond’s mission is to be the leading provider of enterprise software systems that helps companies with complex products convert more leads into accurate orders. To this end, Firepond’s SalesPerformer system focuses on improving the effectiveness of the sales person or channel partner throughout the sales cycle. The application can also be delivered over the web, enabling a more effective and meaningful self-service online buying experience. In regards to online customer assistance, Firepond’s eServicePerformer enables an enterprise to enhance its customers’ online interactions and more intelligently manage both direct (e.g. email) and indirect (e.g. web self-service) customer interaction channels.

      Today, we offer our product lines through a mix of direct and indirect sales channels in major markets worldwide. At a strategic level, Firepond’s software solutions may deliver a concrete return on investment by reducing a company’s total cost of sales and service. Our software solutions may provide a number of key benefits, including:

	•	Lowering Total Cost of Sales: Selling complex products typically requires the participation of many different parts of an organization without distracting from their primary roles including sales, engineering, manufacturing, finance, legal, and marketing. Firepond’s SalesPerformer empowers sales representatives with relevant and timely information from each department, such as design specifications from engineering, production constraints from manufacturing, discount authorization from finance, terms and conditions from legal, and product collateral from marketing.
	•	Reducing Order Errors: Using configuration technology, complex product recommendations are more likely to result in the right products to handle the right application. By reducing the complexity of the sales process and eliminating the potential for “human” error, Firepond’s SalesPerformer system assists companies in ensuring that customers are asked the proper questions to reach a correct recommendation/configuration. In addition, the rules within the Firepond configuration engine verify that products requested by salespeople, channel partners or customers can be manufactured and delivered, before an order is placed. In addition, quotation errors can be reduced when sales representatives are armed with correctly configured pricing information, authorized discounts, appropriate currency conversion rates and necessary tax considerations.
	•	Accelerating Sales Cycles: By applying an intelligent and logical process flow from the time a lead is received to the moment a valid order is placed, Firepond’s solutions are designed to optimize the sales process and increase the speed at which a sale can be executed. Quick turnaround in product recommendations, pricing, proposals and financing allows sales representatives to manage more simultaneous opportunities and close them faster. Eliminating the time necessary to contact the factory or engineering resources significantly reduces the time it takes for a customer to reach a “buy” decision. Customer satisfaction, in turn, increases as their questions and hesitations are immediately addressed. Further, Firepond’s SalesPerformer helps manufacturers distribute new product and pricing information in real-time. This high degree of responsiveness helps foster a strong and lasting customer-supplier relationship that is a distinct competitive advantage for us.

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	•	Unifying the Sales Process: Many large companies today deliver their products to market through multiple sales channels, including a field sales force, channel distribution partners, and even via the web. Firepond’s SalesPerformer system ensures consistency of product and pricing information across multiple channels, enhancing a company’s channel management capabilities and protecting its brand reputation. For example, a customer-facing Web interface provides a self-service solution for selling to current customers via the Web, or can be used to generate desired configurations that can be directed to channel partners. This allows repeat customers to obtain the products they need without pulling sales’ attention from new relationships. The same experience can be presented to the customer directly using Firepond’s SalesPerformer system deployed in a mobile environment on a laptop, for example, during a sales person’s visit to a prospect. Or, a customer can again receive the same experience when visiting a dealership and interacting with a salesperson connected to the Firepond system over an intranet.

Market Strategy

      Overall, our business strategy is to be the leading provider of intelligence-driven software systems that solve the most difficult aspects of customer acquisition and retention and quantifiably improve sales and service effectiveness. To achieve this goal, key elements of our strategy include:

	•	Market and sell our products and services to our “sweet spot” vertical market segments. We currently offer our SalesPerformer Suite of guided selling solutions to targeted vertical market segments, primarily discrete manufacturing (including high technology, transportation, construction machinery, agricultural equipment, and others) and health insurance. Also, we offer our eServicePerformer Suite of guided service solutions to a broader spectrum of enterprises across a number of vertical industries including financial services, telecommunications, transportation, travel/hospitality, and high technology. Firepond has targeted and will continue to target companies within these selected vertical industries with complex products, services or channel relationships as well as organizations with a distributed and connected customer base or dealer/broker network. 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.
	•	Offer packaging flexibility to strategically penetrate our target markets. Firepond offers a variety of packaging options for SalesPerformer and eServicePerformer, to achieve flexibility in aligning our technology with companies in different stages of executing their business strategies. For example, customers that have already made a significant investment in applications for enterprise resource planning, supply chain management, customer relationship management, or others, can extend the value of their existing infrastructure through an investment in Firepond technology. As such, selected components of each product line are available as individual packaged solutions tailored to specific sales or service channel needs, or specific vertical industry segments. Conversely, companies seeking an enterprise platform for integrated sales configuration may license SalesPerformer or eServicePerformer in their entirety. With each of these product lines, additional functional and technology components are available as options, such as integration capabilities with third party 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 will continue to package our product offerings in a fashion designed to remove sales barriers and create recurring revenue streams.
	•	Continue to develop and implement leading-edge products. We will continue to seek to provide products that deliver the most robust functionality and that provide our customers the greatest return on their investment. To this end, we have assembled a world-class engineering organization and continue to invest in research and development activities. In addition, we have tremendous depth in our domain expertise from a professional services standpoint. Although we will plan to work with systems integrator partners more in fiscal 2003, we will continue to maintain our own professional services organization and leverage the domain expertise of these individuals to help us successfully, and more rapidly, implement our software solutions.

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	•	Work with partners to extend our footprint. Our partner program is focused on developing four types of relationships: (1) strategic implementation relationships focused on co-selling; (2) complementary software relationships focused on pre-built integration and co-selling; (3) complementary technology relationships focused on hardware and platform standards; and (4) indirect distribution channels. Our goal is for these alliances to help extend our market coverage from both a sales and implementation perspective, provide us with new business leads, and allow us to provide our customers with a broader solution. We will seek to strengthen our relationship with partners that support our global strategy and partners that work with our key clients.
	•	Maintain our international presence. During fiscal 2002, we leveraged our investment in our global infrastructure to target leading businesses worldwide. We believe that our international presence is an asset and a competitive differentiator and are committed to maintaining our presence in the geographies in which we currently operate. In addition, we plan to use new customers and existing and new partner relationships to complement our infrastructure and grow market share in international markets.

Firepond Products and Technology

      Firepond’s SalesPerformer provides a comprehensive spectrum of interactive selling functionality to help companies rapidly and cost-effectively acquire customers across web, direct and indirect sales channels. SalesPerformer simplifies the traditionally complex sale by streamlining and accelerating the sales cycle — from customer profiling and opportunity management to needs analysis and product recommendations to accurate price configuration and order management. Critical customer and transaction information is captured and made available for real-time analysis. Information in other enterprise systems feeds SalesPerformer applications in real-time so all channels are selling consistently to every customer. SalesPerformer is supported by a single configuration engine to simplify system maintenance and lower the total cost of system ownership.

      Firepond’s eServicePerformer helps ensure that Internet activities translate into profitable sales and exceptional customer satisfaction and retention, without increasing customer service staff. eServicePerformer is designed to provide customers with knowledgeable, responsive help, regardless of the online interaction channel. Driven by intelligence engines and automation technologies, Firepond’s eServicePerformer assists in preserving the quality of customer service operations by helping companies replicate best practices across a variety of interactions, and replicate knowledge across multiple online interaction channels.

      The table below provides a list of each component within our two complementary product lines and a brief description of the features of each such component.

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      Firepond announced major upgrades to SalesPerformer, Insurance SalesPerformer, and eServicePerformer in fiscal 2002. Firepond’s SalesPerformer was originally announced in December 2000 while eServicePerformer became available in February 2001, after Firepond completed its acquisition of Brightware, Inc. Prior to December 2000, our product line consisted of the Firepond Application Suite, including Firepond Commerce, Firepond Sales, Firepond Sales Manager, and Firepond Business Rule Engine.

      Although our SalesPerformer and eServicePerformer products include patented technology, Firepond is committed to the use of industry standard application development technology, such as J2EE, and to application server platform independence to give customers greater deployment flexibility. In addition, Firepond is a member of Web Services Interoperability Organization (WS-I) and intends to deliver a web services interface to its SalesPerformer sales configuration base system.

      Firepond has developed a set of advanced inference engines called “solvers.” Solvers, in effect, are pre-defined rule types that can be selected and applied to any configuration problem. As an alternative to companies trying to solve a configuration problem with one or two rule types (which can result in slow rule evaluation and difficult maintenance), SalesPerformer’s configuration engine provides a wide range of solver types that address the different types of representations that can be found in a configuration problem. These solvers act upon the customer-defined data model, creating attributes in the data structures that help SalesPerformer interpret the data based on user selections. SalesPerformer solvers are loaded dynamically based on the behavior represented in the data model. Solver examples include the following:

      Each solver addresses a different type of configuration problem. These solvers create attributes in the data model that define how the data will be interpreted when users make selections at run-time. In effect, this interpretation of the data relationships and constraints is the application of the “rules” that configure orders, make product recommendations, and generate price quotes.

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Professional Services and Support

      Firepond offers a range of professional services in major markets worldwide. These services help companies use the packaged software functionality of the SalesPerformer and eServicePerformer product lines 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. When we assist companies in the implementation of our products, or their components, we help them determine how their individual selling strategies can be reflected in our packaged technology.

      We have developed an innovative approach and rigorous methodology for industry-specific implementations. Offered in specific vertical industries, our implementation templates help our customers achieve a rapid and successful deployment of our applications. Our expert professional services team helps customers and third party integrators implement our products. In addition, we have made it a priority to work with partners in order to provide our customers with greater flexibility in their implementation choices. The maturity and stability of our product has enabled us to experience strong success in working with implementation partners.

      Quality training offers the most effective way for customers to derive maximum benefit from their investment. We train users in major markets worldwide and we tailor training materials to the unique requirements of individual customers. We also have training programs for our implementation partners.

      We offer comprehensive support for our SalesPerformer and eServicePerformer product lines to our customers and partners in major markets worldwide. Support services are provided under annual software maintenance contracts. These contracts are renewable at the customer’s option and provide for online access to product documentation and frequently-asked-questions, support by e-mail or telephone to report problems or request technical assistance, and notification of service pack and upgrade availability. Phone support is available on a 24x7 basis for critical issues. Our technical support team also provides data maintenance, enhancement, and end-user support services on a time and materials basis when not covered by our maintenance agreement.

      Our technical support analysts are highly trained and have extensive experience with Firepond. Firepond has support resources in the United States, Europe and Japan.

Customers

      Firepond has targeted, and will continue to target, selected vertical industries with complex products, services or channel relationships as well as organizations with a distributed and connected customer base or dealer/broker network. Target vertical markets for its SalesPerformer product line are discrete manufacturing (including high technology, transportation, construction machinery, agricultural equipment, and others) and health insurance. Selected Firepond SalesPerformer customers include ABB, Amada, Cummins Power Generation, Deere & Company, Freightliner, Hitachi Construction, Honda, Horizon Blue Cross Blue Shield, Renault Trucks, Scania, Siemens Building Technologies, Steelcase International, and Toshiba Machine.

      For our eServicePerformer product line, Firepond targets financial services, telecommunications, transportation, travel/hospitality, and high technology. Selected Firepond eServicePerformer customers include Abbey National, AT&T Wireless, Best Buy, Cendant Mortgage, Royal Sun Alliance, Ticketmaster, and Virgin Mobile, among many others.

      In fiscal 2002, ABB accounted for more than 10% of our total revenue. In fiscal 2001, Freightliner accounted for more than 10% of our total revenue. In fiscal 2000, General Motors and Freightliner each accounted for more than 10% of our total revenue.

Sales and Marketing

      Firepond markets and sells its products through a mix of direct and indirect channels in major markets worldwide. We offer our SalesPerformer product line through a direct sales force, which is located in the United States, Europe, and Japan. Additionally, in Japan, we have successfully cultivated a set of partners to

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      Firepond’s sales team is organized geographically, with a focus for its SalesPerformer product line on discrete manufacturing (including high technology, transportation, construction machinery, agricultural equipment, and others). In North America, we also target health insurance with a vertical solution marketed as Insurance SalesPerformer. Our model is to deliver our eServicePerformer product line to market primarily through third party channel partners worldwide.

      Firepond is continually driving market awareness and developing leads in its target markets through a series of integrated sales and marketing campaigns. 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.

Research and Development

      Our research and development team is responsible for product planning, design and development of functionality within the SalesPerformer and eServicePerformer product lines, general release and quality assurance functions, third party integration and developing templates for target vertical industries. During the fourth quarter of fiscal year 2002, we transitioned the research and development activities for our eServicePerformer product line from our now closed San Rafael, California office to our Minnesota facilities.

      At the beginning of fiscal 2002, we had contracted with two third party offshore companies to provide software development and implementation services on an outsourced basis: EPAM Systems and Elbrus. As of November 1, 2001 EPAM Systems, based in Minsk, Belarus had provided 25 software developers dedicated to our SalesPerformer related projects. Similarly, Elbrus, based in Moscow, Russia, provided 5 software developers dedicated to our eServicePerformer related projects. However, during fiscal 2002, we reduced our use of contract engineers and at the end of fiscal 2002 were using only three EPAM Systems contractors and four other part-time contractors.

      Firepond research and development expenses were $9.3 million for fiscal 2002, $18.8 million for fiscal 2001, and $15.3 million for fiscal 2000. We expect to continue to invest in research and development in the future.

Competition

      The markets for sales configuration and email response management systems are intensely competitive, constantly evolving, and subject to rapid technological change. We encounter competition against our SalesPerformer product line from a number of different sources, including in-house technical staffs, traditional customer relationship management vendors, enterprise resource planning vendors, and other vendors of sales configuration point solutions. Of these vendors, our principle competitors include SAP, Oracle, Trilogy, Siebel Systems, and Selectica. 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. However, we believe that the market for sales configuration solutions is still in its formative stage, and that no currently identified competitor represents a dominant presence in this market.

      Regarding our eServicePerformer product line, we consider our primary competition to be other vendors of email management systems, including KANA, eGain, and RightNow Technologies.

      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 that 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.

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      Although we believe we have advantages over our competitors in terms of the functionality and 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 or substantially greater financial, technical, marketing, management, service, support and other resources.

      We believe that the principal competitive factors in our target markets 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.

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 laws, nondisclosure agreements and other protective measures to protect our proprietary rights. We currently hold 14 United States patents and have applied for other patents on our technology in the United States. We also hold various trademarks in the United States and internationally and intend to continue to apply for others. Our end user license agreements are designed to prohibit unauthorized use, copying, disclosure and the creation of derivative works of our software.

      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. Further, on occasion, we have licensed our source code to customers and other partners. This access could enable these companies to use our intellectual property and source code creating a risk of disclosure or other inappropriate use. A third-party development organization located in Minsk, Belarus previously had 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 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. Periodically, we may desire or be required to renew or 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.

      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,

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Employees

      At October 31, 2002, we had a total of 128 employees, of which 34 were in research and development, 21 were in sales and marketing, 21 were in finance and administration, and 52 were in professional services and support. None of our employees is represented by a labor union. We consider our relations with our employees to be good.

Factors that May Affect Future Results and Market Price of our Common Stock

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

A delayed recovery in information technology spending could reduce the sale of our products

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

If the markets for sales configuration and customer service solutions do not expand, we may not be successful

      Our products address a new and emerging market for solutions that optimize the “lead-to-order” process and solutions which address guided customer service. The failure of these markets to expand, or a delay in the expansion of these markets, would seriously harm our business. Our business depends on the successful customer acceptance of our products and we expect that we will continue to depend on revenue from new and enhanced versions of our products. Our business would be harmed if our target customers do not adopt and expand their use of our products.

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

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

      We depend on our direct sales force for a significant portion of our current sales and our growth depends on the ability of our direct sales force to increase sales to a level that will allow us to reach and maintain profitability. Our ability to increase our sales will depend on our ability to train and retain top quality sales people who are able to target prospective customers’ senior management, and who can productively and

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      In addition, in connection with our effort to streamline operations, reduce costs and bring our staffing and infrastructure in line with industry standards, we restructured our organization and reduced our workforce. In connection with the restructurings, during fiscal 2001 we terminated 363 employees and 90 consultants and during fiscal 2002 we terminated 93 employees. We have incurred aggregate costs of $8.5 million in fiscal 2001 and $1.9 million in fiscal 2002 associated with these workforce reductions related to severance and other employee-related costs, and may incur further costs. Our restructuring may also yield unanticipated consequences, such as attrition beyond our planned reduction in workforce and loss of employee morale and decreased performance. Continuity of personnel is an important factor in the successful completion of our business plan and ongoing turnover in our personnel could materially and adversely impact our sales and marketing efforts, current customer implementations, and our development projects. We believe that hiring and retaining qualified individuals at all levels is essential to our success, and there can be no assurance that we will be successful in attracting and retaining the necessary personnel.

Recent material litigation has caused and may continue to cause us to incur substantial costs as well as to divert management’s attention and resources

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

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

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

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

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

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

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

      We have incurred quarterly and annual losses intermittently since we were formed in 1983, and regularly since fiscal 1997. We incurred net losses of $23.7 million in fiscal 2002, $70.3 million for fiscal 2001, and $16.3 million for fiscal 2000. We may continue to incur losses on a quarterly and annual basis and not become profitable. Additionally, we may not grow or generate sufficient revenue to attain profitability.

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

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

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

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

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

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

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

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

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

      In the future, we may acquire additional businesses or product lines or be the target of a potential merger or acquisition. The Brightware acquisition, or any future merger or acquisition of or by us, may not produce the revenue, earnings or business synergies that we anticipated, and an acquired product, service or technology might not perform as expected. Prior to completing a merger or acquisition, however, it is difficult to determine if such benefits can actually be realized. The process of integrating companies into our business or integrating our company into another business may also result in unforeseen difficulties. Unforeseen operating difficulties may absorb significant management attention, which we might otherwise devote to our existing business. Also, the process may require significant financial resources that we might otherwise allocate to other activities, including the ongoing development or expansion of our existing operations. If we pursue a future merger or acquisition, our management could spend a significant amount of time and effort identifying and completing the merger or acquisition. If we make a future acquisition, we could issue equity securities which would dilute current stockholders’ percentage ownership, incur substantial debt, assume contingent liabilities or incur a one-time charge.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Failure to realize planned international revenue could seriously harm our business

      International revenue currently accounts for a significant percentage of our total revenue. We expect international revenue to continue to account for a significant percentage of total revenue in the future and we believe that we must continue to expand our international sales activities to be successful. However, foreign markets for our products may develop more slowly than currently anticipated. International revenue as a percentage of total revenue was 51% in fiscal 2002, 36% for fiscal 2001, and 28% in fiscal 2000. Our failure to realize our planned international sales levels could have a significant negative impact on our business.

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

      We serve our customers from offices throughout the United States, Europe and Japan. Consequently, we are exposed to fluctuations of the dollar against the foreign currencies of those countries in which we have a substantial presence. For each of our foreign subsidiaries, the functional currency is the local currency.

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

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

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

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

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

      Software products as sophisticated as ours may contain undetected errors, or bugs which result in product failures, or may cause our products to fail to meet our customers’ expectations. Our products may be particularly susceptible to bugs or performance degradation because of the evolving nature of Internet technologies and the stress that full deployment of our products over the Internet to thousands of end-users may cause. Product performance problems could result in loss of or delay in revenue, loss of market share, failure to achieve market acceptance, diversion of development resources or injury to our reputation.

Product liability claims related to our customers’ critical business operations could result in substantial costs

      Our products are critical to the business operations of our customers. If one of our products fails, a customer may assert a claim for substantial damages against us, regardless of our responsibility for the failure. Our product liability insurance may not cover claims brought against us. Product liability claims could require us to spend significant time and money in litigation or to pay significant damages. Any product liability claims, whether or not successful, could seriously damage our reputation and our business.

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

      As of December 31, 2002, our executive officers, directors and entities associated with them own approximately 48% of the outstanding shares of our common stock. These stockholders have significant influence over matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. This concentration of ownership could have the effect of delaying or preventing a change in our control or discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material adverse effect on the market price of the common stock or prevent our stockholders from realizing a premium over the market price for their shares of common stock.

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

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

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

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

Item 2.     Properties

      Our corporate headquarters are located in Bloomington, Minnesota and occupy approximately 12,100 square feet. Our lease for this facility expires on January 31, 2005. We reduced our leased space in Mankato, Minnesota to approximately 13,500 square feet with a lease that expires on November 30, 2003. In addition, we renegotiated our lease in Waltham, Massachusetts down from approximately 29,500 square feet to 7,000 square feet with a lease termination date of December 31, 2004. Our remaining occupied international offices include Paris, France and Tokyo, Japan. The lease in Paris, France is for 2,700 square feet and expires in December 2003. The lease in Tokyo, Japan is for 3,500 square feet and expires in June 2003.

Item 3.     Legal Proceedings

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

      Beginning in August, 2001, a number of securities class action complaints were filed in the Southern District of New York seeking an unspecified amount of damages on behalf of an alleged class of persons who purchased shares of our common stock between the date of our initial public offering and December 6, 2000. The complaints name as defendants Firepond and certain of its directors and officers, and FleetBoston Robertson Stephens, and other parties as underwriters of our initial public offering. The plaintiffs allege, among other things, that our prospectus, incorporated in the Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to disclose

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

Item 4.     Submission of Matters to a Vote of Security Holders

      Not applicable

PART II

(a) Common Stock Price Range

      Our common stock is traded on The Nasdaq National Market under the symbol “FIRE”. The following table sets forth, for the periods indicated, the high and low closing price per share of the common stock as reported by The Nasdaq National Market: