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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the Quarter Ended April 30, 2003

OR

Commission File Number 0-29251

FIREPOND, INC.

(952) 229-2300

     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.

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

     As of June 12, 2003 there were 3,671,983 shares of the Registrant’s Common Stock outstanding.

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FIREPOND, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED April 30, 2003

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FIREPOND, INC. AND SUBSIDIARIES

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

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

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

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

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

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

1.     Nature of Business and Basis of Presentation

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

     The Company is subject to a number of risks similar to those of other companies of similar size in its industry, including recurring losses, rapid technological changes, competition, customer concentration, integration of acquisitions, management of international activities and dependence on key individuals.

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

     The accompanying condensed consolidated financial statements for the three and six months ended April 30, 2003 and 2002 are unaudited and have been prepared on a basis consistent with the October 31, 2002 audited financial statements and include normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the results of these periods. The Company has combined its product-related revenue and custom development services reporting into one segment. Management determined that the custom development services segment was insufficient in size to warrant separately viewing and managing the engagements and resources. Prior year financials have been reclassified to include custom development services in product-related revenue. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended October 31, 2002 included in the Company’s Form 10-K. The results of operations for the three and six months ended April 30, 2003 are not necessarily indicative of results to be expected for the entire year or any other period.

2.     Recent Accounting Pronouncements

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

     In December 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation expands the disclosures to be made by a guarantor in its annual and interim financial statements about its obligations under certain guarantees. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. As required by the interpretation, the Company adopted the disclosure requirements for the quarter ended January 31, 2003. In connection with the sale of its products in the ordinary course of business, the Company often makes representations affirming that its products do not infringe on the intellectual property rights of others and agrees to indemnify customers against third-party claims for such infringement. Also, the Company’s amended and restated by-laws provide for indemnification by the Company of its directors, officers and certain non-officer employees under certain circumstances against expenses, including attorneys fees, judgments, fines and amounts paid in settlement, reasonably incurred in connection with the defense or settlement of any threatened, pending or completed legal proceeding in which any such person is involved by reason of the fact that such person is or was a director, officer or employee of the Company if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to criminal actions or proceedings, if such person had no reasonable cause to believe his or her conduct was unlawful. The Company has not been required to make any material payments under such provisions.

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

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

     In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146) which nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This accounting standard requires that liabilities associated with exit or disposal activities be recognized and measured at fair value when incurred, as opposed to at the date an entity commits to the exit or disposal plans. The Company has adopted this standard for its fiscal 2003 restructuring activities.

3.     Accrued Liabilities

     Accrued liabilities consist of the following:

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

4.     Comprehensive Loss

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

5.     Stockholders’ Equity

(a)  Stock Options and Warrants

     The Company granted stock options to employees and directors in July 2001 in conjunction with a stock option exchange program that required the recognition of stock-based compensation expense. As of April 30, 2003, a total of approximately 322,600 options to purchase shares of the Company’s common stock were subject to variable accounting as a result of the stock option exchange program. As of April 30, 2003, the Company recorded no deferred compensation associated with these options because the fair market value of the Company’s common stock was below the option price.

     The Company also granted stock options to non-employees and issued warrants to certain customers and strategic business partners that require the recognition of stock-based compensation expense. Stock-based compensation relating to these grants represents the fair market value as computed using the Black-Scholes option pricing model. As of April 30, 2003, the deferred compensation balance associated with these grants was approximately $8,000.

(b)  Pro Forma Stock-Based Compensation

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

     The Company has computed the pro forma disclosures required under SFAS No. 148 for options granted during the three and six months ended April 30, 2003 and 2002 using the Black-Scholes option pricing model prescribed by SFAS No. 148. The weighted average assumptions used were as follows:

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

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

(c)  Loans Receivable

     On November 28, 2000, the Company’s Board of Directors approved a loan facility to Klaus P. Besier, the Company’s Chairman, Chief Executive Officer and President, allowing borrowings up to $3,000,000 bearing interest at the applicable federal rate in effect during the term of the note. On January 9, 2001, the Company’s Board of Directors approved an increase in the loan facility to $4,000,000. Originally, the outstanding principal together with unpaid interest was due and payable on the earlier of October 31, 2001, an event of default, or an event of maturity, as defined. On December 11, 2001, the Company’s Board of Directors amended the facility to extend the maturity to May 1, 2006. Due to the modification of the facility, all amounts outstanding have been reclassified as a component of stockholders’ equity. The promissory note is secured by a pledge of 50,000 shares of the Company’s common stock, valued at $159,000 at April 30, 2003, and is generally not a recourse obligation of the borrower, with specified exceptions. As of April 30, 2003, the amount outstanding was approximately $4,000,000.

     In addition in prior years, the Company issued notes to two former officers of the Company totaling $270,000 and to a former employee of the Company in the amount of $125,000. During the quarter ended January 31, 2003, management determined that the remaining loan to the former officer and the loan to the former employee were uncollectible, resulting in a $230,000 charge to stock-based compensation for the difference between the value of the shares securing each note and the $275,000 loan receivable balance. During the quarter ended January 31, 2002, in connection with the termination of one of the former officer’s employment with the Company, the Company acquired the shares valued at approximately $7,000 securing the note from the officer in satisfaction of $120,000 due under the note. As a result, $113,000 was charged to stock-based compensation during the quarter ended January 31, 2002.

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

(d)  Net Loss Per Share

     Net loss per share is computed based on the guidance of SFAS No. 128, Earnings per Share. SFAS No. 128 requires companies to report both basic loss per share, which is computed by dividing the net loss by the weighted average number of common shares outstanding, and diluted loss per share, which is computed by dividing the net loss by the weighted average number of common shares outstanding plus the weighted average dilutive potential common shares outstanding using the treasury stock method. As a result of the losses incurred by the Company for the three and six months ended April 30, 2003 and 2002, all potential common shares were antidilutive and were excluded from the diluted net loss per share calculations. The calculation of weighted average shares outstanding for the three and six months ended April 30, 2002 excludes contingently issuable shares of 12,432 representing shares issued but held in escrow in connection with the acquisition of Signature Software.

     As of April 30, 2003 and 2002, common stock options and warrants outstanding which were not included in the calculation of diluted net loss per share since their inclusion would be antidilutive were 772,100 and 843,200, respectively.

6.     Segment Reporting

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

     Revenue from the United States and Japan, contributed approximately 74% and 12% of revenue, respectively, for the three months ended April 30, 2003 and revenue from the United States, the United Kingdom, Sweden and Japan contributed approximately 49%, 16%, 14%, and 13% of revenue, respectively for the three months ended April 30, 2002. Revenue from the United States and Japan contributed approximately 74% and 14% of revenue, respectively, for the six months ended April 30, 2003 and revenue from the United States, the United Kingdom, Sweden, and Switzerland contributed approximately 44%, 17%, 12% and 10% of our revenue, respectively for the six months ended April 30, 2002.

7.     Brightware Acquisition

     On February 15, 2001, pursuant to an Agreement and Plan of Merger between the Company and Brightware, Inc. (Brightware), the Company acquired 100% of the issued and outstanding capital stock of Brightware, a supplier of eCustomer assistance software. As a result of the identification and valuation of intangibles acquired, the Company allocated approximately $4,900,000 to developed technology and know-how. Developed technology was being amortized over a period of three years. During the quarter ended January 31, 2002, the Company lowered its estimates of the expected cash flows from the Brightware product line and determined that developed technology and know-how was significantly impaired. As such, in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company recorded a $3,120,000 charge to write-off the impaired portion of developed technology and know-how leaving a balance of approximately $215,000 as of January 31, 2002, to be amortized over a two year period. The circumstances leading to the impairment related directly to the Company’s strategic decision to focus on its core value proposition in the “lead-to-order” market with its SalesPerformer product because of the continued global slowdown in information technology spending and the Company’s need to focus its resources to reach profitability. As a result of the change in strategic direction, the Company lowered the Brightware revenue forecasts, operating profits and cash flows, resulting in the impairment charge of the developed technology and know-how. As of April 30, 2003, accumulated amortization of developed technology and know-how was $129,000. The amortization expense for the six months ended April 30, 2003 and 2002 was $52,000 and $434,000.

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

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

     In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets, which establishes financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board (APB) Opinion No. 17, Intangible Assets. The Company early adopted SFAS No. 142 on November 1, 2001, the beginning of its fiscal year 2002. SFAS No. 142 requires that goodwill and intangible assets that have indefinite useful lives not be amortized but, instead, tested at least annually for impairment. Accordingly, the Company reclassified the net book value of assembled workforce to goodwill and ceased amortization of all goodwill on November 1, 2001. Intangible assets that have finite useful lives, consisting of developed technology and know-how, continue to be amortized over their useful lives.

     The standard also requires that goodwill be tested for impairment annually. In the year of adoption, the standard required a transitional goodwill impairment evaluation, which was a two-step process. The first step was a screen for whether there was an indication that goodwill was impaired as of November 1, 2001. To do this, the Company identified its reporting units and determined the carrying value of each by assigning the Company’s assets and liabilities, including existing goodwill, to them as of November 1, 2001. The Company then determined the fair value of each reporting unit by using a combination of present value and multiple of earnings valuation techniques and compared it to the reporting unit’s carrying value. As of January 31, 2002, the Company completed this first step, which indicated that goodwill recorded during the Brightware acquisition was impaired as of November 1, 2001.

     In the second step, the Company compared the implied fair value of the affected reporting unit’s goodwill to its carrying value to measure the amount of impairment. The fair value of goodwill was determined by allocating the reporting unit’s fair value to all of its assets and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, Business Combinations. As of January 31, 2002, the Company completed this second step and measured and recognized a transitional impairment loss of $3,973,000 as a cumulative effect of a change in accounting principle in its statement of operations.

     In accordance with SFAS No. 142, the fair value used to determine the impairment was based on a combination of earnings multiples and discounted cash flow valuation techniques. The circumstances leading to the goodwill impairment related to both a global slowdown in information technology spending as well as a significant decrease in comparable company market valuations. The negative economic trend lowered the Brightware operating profits and cash flows and is evidence that initial growth expectations when Brightware was acquired did not materialize. The decline in comparable company market valuations resulted in reduced earnings multiples.

9.     Restructuring and Other Special Charges

(a)  Fiscal 2003 Restructuring

     During the quarter ended April 30, 2003, the Company undertook plans to restructure its operations as a result of lower than expected revenues due to a delayed recovery in global information technology spending. As such, the Company announced the consolidation of its corporate functions to its headquarters in Minneapolis, Minnesota and a reorganization of its European operations. These measures were taken to reduce global operating expenses to better position the Company to reach profitability in the future and to preserve cash. Overall, the Company terminated 7 general and administrative, 8 sales and marketing, 5 professional services and 1 development employees. The restructuring activity is expected to be completed during the Company’s quarter ended July 31, 2003. The Company estimates this additional restructuring charge to be approximately $400,000 to $600,000, principally for excess facilities.

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

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

     Included in the restructuring charge is a reduction of approximately $241,000 of prior restructuring costs principally due to a lease settlement at more favorable terms than originally estimated.

(b)  Fiscal 2002 Restructuring

     During the quarter ended July 31, 2002, the Company undertook plans to restructure its operations as a result of a prolonged slowdown of global information technology spending, specifically within the enterprise software marketplace. As such, the Company announced a strategic realignment to further enhance its focus on the “lead-to-order” market as well as measures to better align its cost structure with projected revenue and preserve cash. The Company reduced headcount and facilities as well as wrote off excess equipment and terminated and restructured certain contractual relationships. Overall, the Company terminated 19 general and administrative, 19 sales and marketing, 25 professional services and 30 development employees. The restructuring and other special charges for the quarter ended July 31, 2002 totaled $5.9 million.

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

     The facilities related cost component consisted of idle lease space and lease termination fees associated with closing the Company’s Netherlands, United Kingdom and San Rafael, California facilities. The Company’s assumptions considered current market value of similar properties and ability, if any, to sublease the idle space or any other future use.

     The impairment of property and equipment charges consisted of excess computer equipment and furniture and fixtures as well as leasehold write-offs resulting from reductions-in-force and office closures.

(c)  Lease Termination of Idle Space

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

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

(d)  Accrued Restructuring

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

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

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

10.     Commitments and Contingencies

     On October 19, 2001, General Motors Corporation filed a complaint against the Company in the Superior Court of Massachusetts, Middlesex County. The complaint alleges, among other things, a breach of contract under agreements entered into in 1994, as amended; anticipatory repudiation in the spring of 2000 of agreements entered into in 1994, as amended; unjust enrichment; establishment of a constructive trust; rescission and restitution based upon failure of consideration; as well as, extortion and coercion relating to agreements entered into in 1994, as amended; breach of the covenant of good faith and fair dealing; fraud; as well as, violation of Chapter 93A of the General Laws of the Commonwealth of Massachusetts relating to unfair and deceptive trade practices. General Motors’ claims further relate to license agreements, services agreements and a general release entered into with the Company in May 2000. The claims generally allege, among other things, that the Company coerced, extorted or otherwise caused General Motors to enter into the May 2000 agreements under duress. On the Civil Cover Sheet for the Superior Court of Massachusetts, Middlesex County, General Motors claims damages in the amount of $9,000,000, exclusive of fees, costs and multiple damages. The complaint does not demand damages in specific dollar amounts. A Motion for Summary Judgment was filed on behalf of the Company in December 2002. An opposition to the motion was filed on behalf of General Motors and a reply brief was filed on behalf of the Company. The Motion for Summary Judgment was heard before the court on April 29, 2003. The ruling has not yet been issued. While the Company believes the claims against it are without merit and intends to defend the action vigorously, the litigation is in the preliminary stage and the Company cannot predict the outcome with certainty. The Company may incur substantial legal fees and expenses, and the litigation may divert the attention of some of the Company’s key management. The Company’s defense of this litigation, regardless of its outcome, may be costly and time-consuming. Should the outcome of the litigation be adverse to the Company, it could be required to pay significant monetary damages to the plaintiff, which could harm the business.

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

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

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

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Certain statements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that involve risks and uncertainties. Words such as anticipates, expects, intends, plans, believes, seeks, estimates and similar expressions identify such forward-looking statements. The forward-looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Factors that might cause such a difference include, among other things, those set forth under “Overview,” “Liquidity and Capital Resources” and “Risk Factors” included in these sections and those appearing elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements.

Overview

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

     During the quarter ended April 30, 2003, we undertook plans to restructure our operations as a result of lower than expected revenues due to a delayed recovery in global information technology spending. As such, we announced the consolidation of our corporate functions to our headquarters in Minneapolis, Minnesota and a reorganization of our European operations. These measures were taken to reduce global operating expenses to better position us to reach profitability in the future and to preserve cash. Overall, we terminated 7 general and administrative, 8 sales and marketing, 5 professional services and 1 development employees. The restructuring charge for the quarter ended April 30, 2003 was $650,000, which included approximately $241,000 reduction of prior restructuring costs primarily due to the settlement of a lease at more favorable terms than originally estimated. We expect to complete this restructuring activity during the quarter ended July 31, 2003. We estimate the additional restructuring charge to be approximately $400,000 to $600,000, principally for excess facilities.

     During the quarter ended July 31, 2002, we announced a strategic realignment to further enhance our focus on the markets for sales configuration and email response management, as well as measures to better align our costs with economic conditions. In addition, as a result of a prolonged slowdown of global information technology spending, specifically within the enterprise software marketplace, we undertook a plan to restructure our operations. These actions sought to better align our cost structure with projected revenue in the future and preserve cash. We reduced headcount and facilities as well as wrote off excess equipment and terminated and restructured certain contractual relationships. Overall, we terminated 19 general and administrative, 19 sales and marketing, 25 professional services and 30 development employees. The restructuring and other special charges for fiscal 2002 totaled $3.4 million. These actions further contributed to the significant decrease in our expenses in the three and six months ended April 30, 2003 compared to the same periods of the prior year.

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     Results of Operations

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