Form 10-Q

FIRSTWAVE TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

June 30, 2005

1. Description of Business and Basis of Presentation

Description of the Company

Headquartered in Atlanta, Georgia, Firstwave Technologies, Inc. (“Firstwave” or “the Company”) is a provider of strategic CRM solutions specifically designed for the High Technology industry. Firstwave’s solutions provide companies with fit-to-purpose features that are designed to optimize how companies win, maintain and grow customer and organizational relationships while improving the overall customer experience. Firstwave’s corporate and product mission reflects our customer-first commitment: To develop and integrate the best software solutions to manage customer interactions and information. Firstwave supports several product lines: Firstwave CRM (includes eCRM and v.10 products), Firstwave Technology and TakeControl.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the consolidated financial statements contained in the Company’s Form 10-K for the period ended December 31, 2004. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements have been included.

The consolidated balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements for the Company at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

On June 3, 2005, Firstwave Technologies, Inc. (the “Company”) entered into a Stock Purchase Agreement (the “Agreement”) with AllAboutTickets LLC (the “Buyer”) doing business as First Sports International. Pursuant to the Agreement, effective May 1, 2005, the Company sold to Buyer all of the issued share capital of Firstwave Technologies UK, Ltd., a subsidiary of the Company, located at The Pavillion, 1 Atwell Place, Thames Ditton, Surrey, England, KT7 ONF (the “Target”). The Company has also entered into a License Agreement (the “License Agreement”) with Buyer and Target, dated June 3, 2005, pursuant to which it granted to Buyer a non-exclusive, non-transferable, non-assignable, limited worldwide and revocable license to use, modify, recompile, reproduce, distribute and maintain the object code version of certain portions of its software and the Source Code materials relating to that software for use only in the “sports industry,” as defined in the License Agreement. Both the Stock Purchase Agreement and the License Agreement were filed with the Securities and Exchange Commission as Exhibits to Form 8-K on June 9, 2005. This sale of the Company’s UK Subsidiary has been treated as a discontinued operation in the accompanying unaudited consolidated financial statements.

The consolidated financial statements include the accounts of Firstwave Technologies, Inc. and its wholly owned subsidiary, Connect-Care, Inc., and, where appropriate, its former subsidiary, Firstwave Technologies UK, Ltd., up until the effective date (May 1, 2005) of its sale. All intercompany transactions and balances have been eliminated in consolidation.

2. Use of Estimates and Critical Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Examples of estimates that require management’s judgment include revenue recognition, accounts receivable reserve, valuation of long-lived assets and intangible assets, and goodwill. Management bases its estimates on historical experience and on other various factors that are believed to be reasonable under the circumstances. All accounting estimates and the basis for these estimates are discussed among the Company’s senior management and members of the Audit Committee. Actual results could differ from those estimates.

Critical Accounting Policies

The Company believes that the following accounting policies are critical to understanding the consolidated financial statements:

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· Revenue Recognition

· Capitalization of Software Development Costs

· Intangible Assets

3. Summary of Significant Accounting Policies

Revenue recognition

The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, and related interpretations.

Revenue from software product sales (other than ticketing and fan memberships described below) is recognized upon shipment of the product when the Company has a signed contract, the fees are fixed and determinable, no significant obligations remain and collection of the resulting receivable is probable. The Company accrues for estimated warranty costs at the time it recognizes revenue.

The Company’s products are licensed on a per-user model, except for hosting services. In accordance with Paragraph 8 of SOP 97-2, license revenues under the per-user model are recognized under the Company’s revenue recognition polices when revenue recognition criteria are met. Hosting services are priced as a monthly or yearly fixed amount based upon number of users, and are recognized ratably by month over the period of service. Hosting services revenues are consolidated into services revenues on the Company’s financial statements.

The Company has agreements with customers, whereby it will recognize revenue at a future date. This type of agreement is mostly found in the Company’s prior Sports business, where the Company recognized revenue based on a per-ticket or per-fan membership basis after the actual event occurred. The amount the Company would receive per ticket or membership was variable, but was pre-determined in the terms of the agreements. Although tickets may have been sold in advance of the event, the Company would recognize these revenues after the event occurred. Ticketing revenue is consolidated into software revenues on the Company’s financial statements.

Services revenue is recognized as services are performed. Our software product is able to function independently in a customer’s environment without additional services. Our training, implementation, and customization services are optional services to our customers and are not necessary for the functioning of the software product. Our software is offered as a stand-alone product. It can be implemented with minimal services. The essential functionality of the software, such as database support and maintenance, preparation of marketing campaigns, and standard workflow, is functional and can be utilized by the customer upon installation as intended by the customer. At a customer’s request, the software can also be implemented with additional services, such as data conversion and workflow modifications, which are not significant to the functionality of the software, but rather tailor features to most effectively function in the customer’s environment.

The revenue for the customization or implementation services is recognized as the services are provided and earned. Revenue is allocated to software and services based on vendor specific objective evidence of fair values. Because the software is a stand-alone product that can be used for the customer’s purpose upon installation, and because any services performed have insignificant effect on the functionality of the software, services revenues are accounted for separately from Software Revenues in accordance with Paragraph 69 of SOP 97-2. The Company has not recorded any unbilled receivables related to implementation and customization service revenues, and the Company has accounted for any implementation and customization service revenues that have been billed as the services were performed, in accordance with Paragraphs 65 and 66 of SOP 97-2.

The Company has arrangements with customers that provide for the delivery of multiple elements, including software licenses and services. The Company allocates and recognizes revenue related to each of the multiple elements based on vendor specific objective evidence of the fair value of each element and when there are no undelivered elements essential to the functionality of the delivered element. Vendor specific objective evidence is based on standard pricing for each of the elements in our multiple element arrangements. Revenue associated with the various elements of multiple element arrangements is based on such vendor specific objective evidence as the price charged for each element is the same as when the element would be sold separately from any other element. Standard pricing does not vary by customer or by duration, or by requirements of the arrangement.

International revenues were primarily generated by Firstwave UK, prior to the sale of the UK Subsidiary, and independent distributors who offer licenses of the Company's non-sports products in specific geographic areas. Under the terms of the Company's international distributor agreements, international distributors collect license fees and maintenance revenues on behalf of the Company, and remit 50% to 60% of standard license fees and maintenance revenues they produce. Pursuant to EITF 99-19, the Company recognizes these distributor sales at the gross license amount because the Company retains title to the products, holds the risk and rewards of ownership, such as risk of loss for collection, and responsibility for providing the product to the customer. The Company is responsible for establishing and maintaining the pricing of the product and performs any source code changes to the product. The independent distributors are considered agents of the Company and work on a commission basis. The

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commissions paid are reflected as a selling expense in the Company’s financial statements. The maintenance fees generated by distributor revenues are reflected as maintenance revenues, with the amount retained by distributors shown as a cost of maintenance revenue. Revenues from non-monetary exchanges are recorded at the fair value of the products and services provided or received, whichever is more clearly evident. There were no non-monetary transactions in the second quarter of 2005.

Maintenance revenue is recognized on a pro rata basis over the term of the maintenance agreements. Advanced billings for services and maintenance contracts are recorded as deferred revenue on the Company's balance sheet, with revenue recognized as the services are performed and on a pro-rata basis over the term of the maintenance agreements.

The Company provides an allowance for doubtful accounts based on management’s estimate of receivables that will be uncollectible. The estimate is based on historical charge-off activity and current account status. Accounts Receivable are stated at invoiced amounts.

Prior to the sale of the UK Subsidiary, the Company’s US accounting management oversaw reporting procedures in the United Kingdom and monitored their transactions on a timely basis. The US management reviewed transactions and sales contracts as such transactions and sales occurred to ensure that revenues were recognized under the Company’s revenue recognition policy and that expenses and other transactions are reported in accordance with accounting principles generally accepted in the United States. Management of the UK subsidiary reported directly to US management, with US management substantially involved in all aspects of UK operations. As such, US management had established procedures to insure that international revenues were recognized properly and on a timely basis.

Software development costs

Capitalized software development costs consist principally of salaries, contract services, and certain other expenses related to development and modifications of software products capitalized in accordance with the provisions of SFAS 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Capitalization of such costs begins only upon establishment of technological feasibility as defined in SFAS 86 and ends when the resulting product is available for sale. The Company evaluates the establishment of technological feasibility based on the existence of a working model of the software product. Capitalized costs may include costs related to product enhancements resulting in new features and increased functionality as well as writing the code in a new programming language. In this case, as the version enhancements are built on an already detailed design under an existing source code, technological feasibility is established early for each version. All costs incurred to establish the technological feasibility of software products are classified as research and development and are expensed as incurred.

The Company evaluates the realizability of unamortized capitalized software costs at each balance sheet date. Software development costs which are capitalized are subsequently reported at the lower of unamortized cost or net realizable value. If the unamortized capitalized software cost exceeds the net realizable value of the asset, the amount would be written off accordingly. The net realizable value of the capitalized software development costs is the estimated future gross revenues of the software product reduced by the estimated future costs of completing and disposing of that product. Amortization of capitalized software costs is provided at the greater of the ratio of current product revenue to the total of current and anticipated product revenue or on a straight-line basis over the estimated economic life of the software, which is not more than three years. It is possible that those estimates of anticipated product revenues, the remaining estimated economic life of the product, or both could be reduced due to changing technologies. The amortization of software development costs is presented as a cost of software revenue in the Company’s financial statements.

Goodwill and other intangibles

In accordance with SFAS 142 “Goodwill and Other Intangible Assets,” intangible assets with indefinite useful lives must be tested periodically for impairment. Examples of matters requiring management’s judgment regarding the existence of impairment of an intangible asset, and the resulting fair value, would include management’s assessment of adverse changes in legal factors, market conditions, loss of key personnel or the sale of a significant portion of a reporting unit. If the fair value of the intangible asset is determined to be less than the carrying value, the Company would record an impairment loss. SFAS 142 prescribes a two-phase approach for impairment testing of goodwill. The first phase screens for impairment, while the second phase (if necessary) measures the impairment.

During the second quarter of 2005, the Company completed the sale of its UK Subsidiary, Firstwave Technologies UK Ltd. We allocated $488,187 of goodwill to this component that was sold. The resulting amount of goodwill was then evaluated at the end of the second quarter of 2005, and it was determined there was no impairment of recorded goodwill.

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Concentration of credit risk

The Company is subject to credit risk primarily due to its trade receivables and its note receivable. The Company has credit risk due to the high concentration of trade receivables through certain customers. The customer accounts receivable that represented more than 10% of total accounts receivable are shown below.

	Dec 31,		Jun 30,
	2004		2005
Argos, Ltd		13.8%		0.0%
CapGemini UK		12.6%		0.0%
Sungard HTE, Inc.		15.0%		6.3%
Manhattan Associates		1.6%		18.2%
Northrop Grumman		0.2%		10.0%

Significant Customers

The table below identifies customers who contributed more than 10% of total revenue from continuing operations for each period shown.

	For the Three Months Ended
	Jun 30,		Jun 30,
	2004		2005
Electronic Data Systems, Ltd.		12.1%		7.2%

For a more detailed description of the information presented in the table above, see the discussion under the heading “Results of Operations” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Stock-based compensation

Effective for 2002, the Company adopted SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,” which did not have a material impact on the consolidated financial statements. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations and to elect the disclosure option of SFAS 123, "Accounting for Stock-Based Compensation.” Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock.

The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation." The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee awards (in thousands, except per share data):

	For the Three Months Ended						For the Six Months Ended
	June 30, 2004			June 30, 2005			June 30, 2004			June 30, 2005
Net loss applicable to common
shareholders, as reported	$	(200	)	$	(213	)	$	(1,387	)	$	(1,034	)

Stock based employee compensation, net of related
tax effects under the fair value based method		522			522			694			542

Net loss applicable to common
shareholders, as adjusted	$	(722	)	$	(735	)	$	(2,081	)	$	(1,576	)
Loss per share:
Basic - as reported	$	(0.07	)	$	(0.08	)	$	(0.52	)	$	(0.38	)
Basic - as adjusted	$	(0.27	)	$	(0.27	)	$	(0.78	)	$	(0.58	)

Diluted - as reported	$	(0.07	)	$	(0.08	)	$	(0.52	)	$	(0.38	)
Diluted - as adjusted	$	(0.27	)	$	(0.27	)	$	(0.78	)	$	(0.58	)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the quarters ended June 30, 2004 and June 30, 2005, respectively: dividend yield of 0% for both quarters; expected volatility of 130% and 126%, and risk-free interest rate of 3.72% and 3.87%. For the six month period ended June 30, 2004 and June 30, 2005, respectively, the assumptions used were dividend yield of 0% for both years, average expected volatility of 132% and 127%, and average risk-free interest rate of 3.36% and 3.88%.

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There was no reduction in pro forma stock-based employee compensation from the quarter ended June 30, 2004 to the quarter ended June 30, 2005, and for the six months ended June 30, there was a decrease from $694,000 in 2004 to $542,000 in 2005. The year to date decrease of $152,000 was the result of cancellations of stock options due to staff resignations of certain long-term employees, offset by the acceleration of vesting of all outstanding options.

There is no tax benefit included in the pro forma stock-based employee compensation expense determined under the fair-value-based method for the three and six month periods ended June 30, 2004 and June 30, 2005, as the Company established a full valuation allowance for its net deferred tax assets.

In the second quarter of 2005, the Board of Directors of the Company voted to immediately vest all outstanding unvested options held by employees and directors of the Company. We believe that the Company would have had to record significant non-monetary compensation expense once SFAS 123(R) is adopted in 2006. This adoption of SFAS 123(R) would have had a material impact on the Company’s financial performance, commencing in 2006, which can now be avoided by the Company’s decision.

Basic and diluted net loss per common share

Basic net loss per common share is based on the weighted average number of shares of common stock outstanding during the period. Stock options and convertible preferred stock are included in the diluted earnings per share calculation when they are not antidilutive. Net loss applicable to common shareholders includes a charge for dividends related to the Company’s outstanding preferred stock.

Shown below is a reconciliation of the numerators and denominators of the basic and diluted loss per share computations. (in thousands, except per share data):

	For the Three Months Ended								For the Six Months Ended
	June 30, 2005								June 30, 2005
	Income			Shares		Per Share			Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount			(Numerator)			(Denominator)		Amount
Net loss	$	(142	)						$	(892	)
Less: Preferred Stock Dividends		(71	)							(142	)

Basic EPS
Loss applicable to common shareholders	$	(213	)		2,710	$	(0.08	)	$	(1,034	)		2,698	$	(0.38	)

Effect of Dilutive Securities (1)
Warrants					19								19
Convertible Preferred Stock		71			898					142			898
Stock Options					242								242
		71			1,159					142			1,159
Diluted EPS
Loss applicable to common shareholders	$	(213	)		2,710	$	(0.08	)	$	(1,034	)		2,698	$	(0.38	)

	For the Three Months Ended								For the Six Months Ended
	June 30, 2004								June 30, 2004
	Income			Shares		Per Share			Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount			(Numerator)			(Denominator)		Amount
Net loss	$	(142	)						$	(1,274	)
Less: Preferred Stock Dividends		(58	)							(113	)

Basic EPS
Loss applicable to common shareholders	$	(200	)		2,682	$	(0.07	)	$	(1,387	)		2,676	$	(0.52	)

Effect of Dilutive Securities (1)
Warrants					19								19
Convertible Preferred Stock		58			703					113			684
Stock Options					18								24
		58			740					113			727
Diluted EPS
Loss applicable to common shareholders	$	(200	)		2,682	$	(0.07	)	$	(1,387	)		2,676	$	(0.52	)

(1) Not included because anti-dilutive

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Foreign currency translation

The financial statements of the Company's former international subsidiary are translated into U.S. dollars at current exchange rates, except for revenues and expenses, which are translated at average exchange rates during each reporting period. Currency transaction gains or losses are included in the results of discontinued operations in the Company’s financial statements (See Note 4). Net exchange gains or losses resulting from the translation of assets and liabilities of the UK subsidiary are included as a component of accumulated other comprehensive loss in shareholders' equity.

Impairment of long-lived assets

The Company evaluates impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss would be recognized. Measurement of an impairment loss for long-lived assets would be based on the fair value of the asset.

Segment reporting

Management believes that the Company has only a single segment consisting of software sales with related services and support. The information presented in the consolidated statement of operations reflects the revenues and costs associated with this segment that management uses to make operating decisions and assess performance.

4. Discontinued Operations

On June 3, 2005, Firstwave Technologies, Inc. (the “Company”) entered into a Stock Purchase Agreement (the “Agreement”) with AllAboutTickets LLC (the “Buyer”) doing business as First Sports International. The Company sold its UK Subsidiary to re-focus on the high technology market and to direct its efforts away from the Sports business that was concentrated in the UK market. Pursuant to the Agreement, effective May 1, 2005, the Company sold to Buyer all of the issued share capital of Firstwave Technologies UK, Ltd., a subsidiary of the Company, located at The Pavillion, 1 Atwell Place, Thames Ditton, Surrey, England, KT7 ONF (the “Target”). The Company has also entered into a License Agreement (the “License Agreement”) with Buyer, dated June 3, 2005, pursuant to which it granted to Buyer a non-exclusive, non-transferable, non-assignable, limited worldwide and revocable license to use, modify, recompile, reproduce, distribute and maintain the object code version of certain portions of its software and the Source Code materials relating to that software for use only in the “sports industry,” as defined in the License Agreement. Both the Stock Purchase Agreement and the License Agreement were filed with the Securities and Exchange Commission under Form 8-K on June 9, 2005.

The total price was $2,214,000, of which $256,000 in cash was received at closing, $1,620,000 is due under a non-interest bearing Promissory Note that calls for payments to be made over a maximum of three years, and $338,000 is due as software revenues are achieved by the Buyer and which will reimburse the Company for certain prepaid royalties.

The promissory note in the amount of $1,620,000 is payable in five installments. The short-term portion of the note is $370,000, is payable prior to June 30, 2006, and has been classified as a current asset on the Balance Sheet. The long-term portion of the note is $1,250,000, is payable in installments, and is classified as a non-current asset on the Balance Sheet. Under the License Agreement, Buyer will pay quarterly royalty amounts to the Company if such royalty amounts exceed the quarterly payments due under the Promissory Note, and such amounts will be applied to the uncollected balance of the note receivable. In accordance with APB 21,”Interest on Receivables and Payables,” imputed interest was calculated at 8%, resulting in an unamortized discount at May 31, 2005 totaling $233,000 and recorded as a direct reduction from the face amount of the note. In June of 2005, $6,000 was amortized, resulting in a balance of $227,000 in imputed interest as of June 30, 2005.

The sale of the UK subsidiary included $79,000 of total assets, consisting of accounts receivable, prepaid assets, furniture and equipment. The total liabilities sold were $67,000, consisting of accounts payable, taxes payable, benefits payable and deferred revenue. Net income/(loss) from discontinued operations was ($130,000) for the first six months of 2005 and $307,000 for the first six months of 2004. Total revenues from discontinued operations were $342,000 and $1,637,000 for the first six months of 2005 and 2004, respectively.

As a result of the sale of the UK Subsidiary, the Company recognized a pre-tax gain of $327,000 in the second quarter of 2005, which is combined and reported as income/(loss) from discontinued operations in the Consolidated Income Statements.

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5. Goodwill and Intangibles

The Company has $686,000 of Intangible Assets and $1,121,000 of Goodwill as a result of acquisitions in 1998 and 2003.

During the second quarter of 2005, the Company completed the sale of its UK Subsidiary, Firstwave Technologies UK Ltd. We allocated $488,187 of goodwill to this component that was sold. The resulting amount of goodwill was then evaluated at the end of the second quarter of 2005 and it was determined there was no impairment of recorded goodwill.

The weighted average amortization period for the intangible assets with definite lives is six years. There are no significant residual values in the intangible assets. The Company began amortization of the above-mentioned intangible assets relating to the acquisitions effective April 1, 2003, recording $57,000 in amortization expense in the second quarter of 2005 and $114,000 in the six months ended June 30, 2005.

The following table presents details of intangible assets with definite lives (in thousands):

	December 31, 2004				June 30, 2005
	Gross carrying		Accumulated		Gross carrying		Accumulated
	amount		amortization		amount		amortization
Amortizable intangible assets
Connect-Care Technology	$	300	$	175	$	300	$	225
Connect-Care Customer Relationships		900		225		900		289
Total	$	1,200	$	400	$	1,200	$	514

Aggregrate Amortization Expense
For the six months ended June 30, 2005	$	114

For year ended December 31, 2005	$	229
For year ended December 31, 2006	$	154
For year ended December 31, 2007	$	129
For year ended December 31, 2008	$	129
For year ended December 31, 2009	$	129
For year ended December 31, 2010	$	30

6. Borrowings

At June 30, 2005, the Company had no borrowings. At June 30, 2004, the Company had $500,000 in borrowings, and had paid $13,000 in interest expense for the six months ended June 30, 2004. The Company repaid its $500,000 of borrowings on December 30, 2004.

7. Related Party Transactions

The former President and COO of the Company, who resigned from the Company on March 22, 2005, was paid dividends of $675 in the second quarter of 2005 and $1,350 for the six months ended June 30, 2005 related to his $30,000 investment in Series D Convertible Preferred Stock from June of 2004, which former President and COO of the Company is also the Chairman of the Buyer of the UK Subsidiary. The Chairman and CEO of the Company earned $50,625 in the second quarter and $101,250 for the six months ended June 30, 2005 for dividends related to his $2,250,000 investment in Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, and Series C Convertible Preferred Stock.

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8. Impact of Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) will require companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its financial statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting and disclosure related to the income tax and cash flow effects resulting from share-based payment arrangements. SFAS No. 123(R) is effective as of the first annual reporting period beginning after December 15, 2005. The Company is currently evaluating the impact that the adoption of SFAS No. 123(R) will have on its financial position, results of operations and cash flows. The cumulative effect of adoption, if any, will be measured and recognized in the statement of operations on the date of adoption.

In April 2005, the Securities and Exchange Commission’s Office of the Chief Accountant and its Division of Corporation Finance has released Staff Accounting Bulletin (SAB) No. 107 to provide guidance regarding the application of FASB Statement No. 123 (revised 2004), “Share-Based Payment”, Statement No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SAB 107 provides interpretive guidance related to the interaction between Statement No. 123(R) and certain SEC rules and regulations, as well as the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also reminds public companies of the importance of including disclosures within filings made with the SEC relating to the accounting for share-based payment transactions, particularly during the transition to the Statement No. 123(R).

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Financial Statements and Notes thereto of the Company presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. This Report contains forward-looking statements that reflect management’s expectations, estimates, and projections for future periods based on information (financial and otherwise) available to management as of the end of the period covered by this Quarterly Report. These statements may be identified by the use of forward-looking words such as “may”, “will”, “believe”, “anticipate”, “estimate”, “expect”, “projects”, or “intends”. Actual events and results may differ from the results anticipated by the forward-looking statements. Factors that might cause such differences include, but are not limited to, those items discussed under the caption "Certain Factors Affecting Forward-Looking Statements" presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and other factors discussed in the Company’s press releases and other Reports filed with the Securities and Exchange Commission.

Overview

Headquartered in Atlanta, Georgia, Firstwave Technologies, Inc. (“Firstwave” or “the Company”) is a provider of strategic CRM solutions specifically designed for the High Technology industry. Firstwave’s solutions provide companies with fit-to-purpose features that are designed to optimize how companies win, maintain and grow customer and organizational relationships while improving the overall customer experience. Firstwave’s corporate and product mission reflects our customer-first commitment: To develop and integrate the best software solutions to manage customer interactions and information. Firstwave supports several products: Firstwave CRM, Firstwave Technology and TakeControl.

Results of Continuing Operations

On June 3, 2005, Firstwave Technologies, Inc. (the “Company”) entered into a Stock Purchase Agreement (the “Agreement”) with AllAboutTickets LLC (the “Buyer”) doing business as First Sports International. Pursuant to the Agreement, effective May 1, 2005, the Company sold to Buyer all of the issued share capital of Firstwave Technologies UK, Ltd., a subsidiary of the Company. The Company sold its UK Subsidiary to re-focus on the high technology market and to direct its efforts away from the Sports business that was concentrated in the UK market. The Company has no further commitments or contingencies with respect to the UK Subsidiary. We believe that by concentrating on the high technology market to increase prospects for our solutions in our pipeline with targeted companies and on companies looking to license our technology for use in their solutions offerings, we may begin to increase our revenue stream. This Management’s Discussion and Analysis of Financial Condition compares the Company’s results from continuing operations.

Total revenues decreased 5.4% from $838,000 in the second quarter of 2004 to $793,000 in the second quarter of 2005 primarily due to decreased maintenance revenues. For the six months ended June 30, 2005, total revenues decreased 29.9% from $2,389,000 in 2004 to $1,674,000 in 2005 due to decreases in software, services and maintenance revenue.

Software revenues increased 26.4% from $72,000 in the second quarter of 2004 to $91,000 in the second quarter of 2005. For the six months ended June 30, 2005, software revenue decreased 45.3% from $316,000 in 2004 to $173,000 in 2005. During the first quarter of 2004, we recognized two large software license agreements with Manhattan Associates, Inc. and SmartMail, LLC. Our software revenues remain significantly dependent upon the size and timing of closing of license agreements.

Services revenues increased 50.0% from $118,000 in the second quarter of 2004 to $177,000 in the second quarter of 2005, primarily as a result of renewed focus on selling to existing non-sports CRM customers. For the six months ended June 30, 2005, services revenues decreased 49.1% from $740,000 in 2004 to $377,000 in 2005. This decrease was primarily due to a decrease in services engagements. Our services revenues are subject to fluctuations based on variations in the length of and number of active service engagements in a given quarter.

Maintenance revenues decreased 21.1% from $641,000 during the second quarter of 2004 to $506,000 in the second quarter of 2005. For the six months ended June 30, 2005, maintenance decreased 16.9% from $1,305,000 in 2004 to $1,085,000 in 2005. Maintenance revenues are the result of renewal agreements from previous software license sales as well as new license agreements. The decreases were primarily due to reduced new software licenses and non-renewals of maintenance agreements.

Cost of software revenues decreased 33.6% from $318,000 in the second quarter of 2004 to $211,000 in the second quarter of 2005 and for the six months ended June 30, 2005, decreased 39.9% from $690,000 in 2004 to $415,000 in 2005. Cost of software revenues includes amortization of capitalized software costs, costs of third party software, media costs, and documentation materials. The decrease is primarily due to a decrease in amortization expense related to the write-off of two product lines in the fourth quarter of 2004, resulting in lower amortization expense in 2005. Cost of software as a percentage of software revenues decreased from 441.7% in the second quarter of 2004 to 231.9% in the second quarter of 2005, primarily due to the decrease in software revenues and a decrease in amortization expense in costs of revenues.

Index

Cost of revenues for services decreased 31.5% from $267,000 in the second quarter of 2004 to $183,000 in the second quarter of 2005 and for the six months ended June 30, 2005, decreased 26.4% from $552,000 in 2004 to $406,000 in 2005. The decrease is primarily due to decreases in payroll, resulting from a reduction in the number of services personnel, and payroll related costs, including travel expenses, consistent with decreased services revenues. The cost of revenues for services as a percentage of services revenues decreased from 226.3% in the second quarter of 2004 to 103.4% in the second quarter of 2005.

Cost of revenues for maintenance decreased 21.5% from $93,000 in the second quarter of 2004 to $73,000 in the second quarter of 2005 and for the six months ended June 30, 2005, decreased 28.3% from $212,000 in 2004 to $152,000 in 2005. These decreases are due to decreases in payroll costs associated with a reduction in the number of maintenance personnel. The cost of revenues for maintenance as a percentage of maintenance revenue remained constant at 14.5% in the second quarter of 2004 and 14.4% in the second quarter of 2005.

Sales and marketing expense decreased 58.2% from $426,000 in the second quarter of 2004 to $178,000 in the second quarter of 2005 and for the six months ended June 30, 2005, decreased 64.2% from $954,000 in 2004 to $342,000 in 2005. The decreases are the result of decreases in payroll expenses associated with a reduction in the number of personnel, telemarketing costs, and costs relating to investor relations.

The Company’s product innovation and development expenditures, which includes amounts capitalized, decreased 38.0% from $313,000 in the second quarter of 2004 to $194,000 in the second quarter of 2005 and for the six months ended June 30, 2005, decreased 42.3% from $673,000 in 2004 to $388,000. The decreases are primarily related to decreases in payroll costs associated with staff reductions, and reductions associated with fewer outside contractors. Software development costs capitalized during the three and six months ended June 30, 2004 were $20,000 and $94,000 respectively. There were no development costs capitalized during the second quarter of 2005 or for the six months ended June 30, 2005. A net realizable analysis was performed at June 30, 2005 in accordance SFAS 86. It was determined that the unamortized capitalized software does not exceed its net realizable value; therefore, no impairment loss was recorded.

General and administrative expenses increased 13.7% from $343,000 in the second quarter of 2004 to $390,000 in the second quarter of 2005 and for the six months ended June 30, decreased 10.4% from $866,000 in 2004 to $776,000 in 2005. These changes were primarily due to reduced payroll costs associated with a reduction in personnel and decreased rent, offset by increased professional services and changes to the allowance for doubtful accounts.

Income from discontinued operations was $788,000 for the second quarter of 2004, compared to $298,000 for the second quarter of 2005. For the six months ended June 30, 2004, income from discontinued operations was $307,000 compared to a loss of $130,000 for the six months ended June 30, 2005.

Dividends on preferred stock increased 22.4% from $58,000 in the second quarter of 2004 to $71,000 in the first quarter of 2005 and for the six months ended June 30, dividends increased from $113,000 in 2004 to $142,000 in 2005. These increases were related to the issuance of shares of Series D Convertible Preferred Stock in June of 2004 for a purchase price of $700,000.

The above factors combined to result in a net loss of $213,000 in the second quarter of 2005 compared to a net loss of $200,000 in the second quarter of 2004. Net loss per basic and diluted share was $0.07 for the second quarter of 2004 compared to a net loss of $0.08 per basic and diluted share for the second quarter of 2005. Year to date, the net loss applicable to common shareholders was $1,387,000 for the six months ended June 30, 2004, or $0.52 per basic and diluted share, compared to a net loss of $1,034,000 for the six months ended June 30, 2005, or $0.38 per basic and diluted share. At June 30, 2004, the number of basic weighted average shares outstanding was 2,682,000 compared to 2,710,000 at June 30, 2005.

Balance Sheet

Net accounts receivable decreased 54.5% from $605,000 at December 31, 2004 to $275,000 at June 30, 2005, primarily due to lower software license and services revenues invoiced. Property and equipment decreased 49.6% from $264,000 at December 31, 2004 to $133,000 at June 30, 2005 as a result of the sale of the UK Subsidiary and year-to-date depreciation partially offset by new asset purchases. Capitalized software development decreased 34.9% from $1,095,000 at December 31, 2004 to $713,000 at June 30, 2005 due to year-to-date amortization

Index

expense of $382,000. Intangible assets decreased 14.3% from $800,000 at December 31,2004 to $686,000 at June 30, 2005 due to $114,000 in year-to-date amortization expense.

As a result of the sale of the UK Subsidiary, a note receivable in the amount of $1,620,000 was received. The short-term portion of the note is $370,000, is payable prior to June 30, 2006, and has been classified as a current asset on the Balance Sheet. The long-term portion of the note is $1,250,000, is payable in installments, and is classified as a non-current asset on the Balance Sheet. In accordance with APB 21,”Interest on Receivables and Payables,” imputed interest, which was calculated at 8%, resulted in an unamortized discount at May 31, 2005 totaling $233,000 and recorded as a direct reduction from the face amount of the note. In June of 2005, $6,000 was amortized, resulting in a balance of $227,000 in imputed interest as of June 30, 2005.

Accounts payable decreased 10.3% from $581,000 at December 31, 2004 to $521,000 at June 30, 2005 primarily due to the reduction in expenses. Deferred revenue decreased 25.6% from $1,351,000 at December 31, 2004 to $1,005,000 at June 30, 2005 due to reductions in and the timing of billing for annual maintenance renewals. Accrued employee compensation and benefits decreased 34.0% from $156,000 at December 31, 2005 to $103,000 at June 30, 2005 primarily as a result of staff reductions. Other accrued liabilities decreased 88.6% from $290,000 at December 31, 2004 to $33,000 at June 30, 2005 primarily as a result of the sale of the UK Subsidiary related to elimination of accrued Value Added Tax and employee incentives.

Liquidity and Capital Resources

As of June 30, 2005, the balance of cash and cash equivalents was $552,000 compared to $1,286,000 at December 31, 2004.

Our future capital requirements will depend on many factors, including our ability to obtain positive cash flows, market acceptance of our products, and the timing and extent of spending to support product development efforts and expansion of sales and marketing. Our future capital needs will be highly dependent upon our ability to control expenses and generate additional software license revenues, and any projections of future cash needs and cash flows are subject to substantial uncertainty. If we are unable to fund expenses from operations or obtain the necessary additional capital, we may be required to reduce the scope of planned product development and sales and marketing efforts, as well as further reduce the size of current staff, all of which could have a material adverse effect on our business, financial condition, and ability to reduce losses or generate profits.

We have no material commitments for capital expenditures. We do not believe that inflation has historically had a material effect on our Company's results of operations.

Discontinued Operations

On June 3, 2005, Firstwave Technologies, Inc. (the “Company”) entered into a Stock Purchase and Sale Agreement (the “Agreement”) with AllAboutTickets LLC (the “Buyer”) doing business as First Sports International. Pursuant to the Agreement, effective May 1, 2005, the Company sold to Buyer all of the issued share capital of Firstwave Technologies UK, Ltd., a subsidiary of the Company, located at The Pavillion, 1 Atwell Place, Thames Ditton, Surrey, England, KT7 ONF (the “Target”). The Company has also entered into a License Agreement (the “License Agreement”) with Buyer and Target, dated June 3, 2005, pursuant to which it granted to Buyer a non-exclusive, non-transferable, non-assignable, limited worldwide and revocable license to use, modify, recompile, reproduce, distribute and maintain the object code version of certain portions of its software and the Source Code materials relating to that software for use only in the “sports industry”, as defined in the License Agreement. Both the Stock Purchase and Sale Agreement and the License Agreement were filed with the Securities and Exchange Commission under Form 8-K on June 9, 2005, and are incorporated herein by reference.

The total purchase price for the sale was $2,214,000, of which $256,000 in cash was paid at closing, $1,620,000 is payable under a non-interest bearing Promissory Note that calls for payments to be made over a maximum of three years, and $338,000 is to be paid as software revenues are achieved to reimburse the Company for certain prepaid royalties.

As a result of the sale of the UK Subsidiary, the Company recognized a pre-tax gain of $327,000 in the second quarter of 2005, which is recorded separately below income/(loss) from discontinued operations in the Consolidated Income Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to market risk exposures of varying correlations and volatilities, including interest rate risk and foreign exchange rate risk. Currently, the Company maintains its cash position in money market funds and other bank accounts. The Company does not currently engage in hedging activities or otherwise use derivatives to alter

Index

the interest characteristics of its financial assets. Although a decrease in interest rates could reduce our interest income, at this time management does not believe a change in interest rates will materially affect the Company's financial position or results of operations.

Item 4. Controls and Procedures

Based on their most recent evaluation, which was completed in consultation with management as of the end of the period covered by the filing of this Form 10-Q, the Company’s Chairman and Chief Executive Officer and Chief Financial Officer believe the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of the date of such evaluation in timely alerting the Company’s management to material information required to be included in this Form 10-Q and other Exchange Act filings.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

Not Applicable

Item 2.

Changes in Securities

Not Applicable

Item 3.

Defaults Upon Senior Securities

Not Applicable

Item 4.

Submission of Matters to a Vote of Security Holders

The Annual Meeting of Shareholders was held on May 31, 2004, in Atlanta, Georgia, at which the following matters were submitted to a vote of the shareholders:

Votes cast for or withheld regarding the election of one (1) Director for a term of one year.

Name of Nominee	Votes For		Votes Withheld		Non-votes
I. Sigmund Mosley, Jr.	2,882,120		107,645		16,667

The nominee for director was elected by a majority.

Votes cast for the approval of the company’s 2005 stock incentive plan increasing the number of shares available by 300,000, from 516,667 to 816,667.

Votes For		Votes Against		Abstain		Non-votes
825,518		262,651		4,632		1,913,630

The requirement to approve this proposal was the affirmative vote of the shareholders having a majority of the voting power of all shares present, in person or by proxy, and voted at the Annual Meeting. Therefore the motion to approve the Company’s 2005 Stock Incentive Plan was adopted.

Ratification of selection of Cherry, Bekaert & Holland, L.L.P. as Company’s independent auditors.

The ratification was adopted by a majority.

Votes For		Votes Against		Abstain
2,996,085		5,728		4,619

Item 5.

Other Information

Not Applicable

Index

Item 6.

Exhibits

Exhibit 31.1 Certification of Periodic Report by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

Exhibit 31.2 Certification of Periodic Report by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

Exhibit 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

SIGNATURES

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


	FIRSTWAVE TECHNOLOGIES, INC.

DATE: August 11, 2005	By:	/s/ Judith A. Vitale
		Judith A. Vitale Chief Financial Officer (Principal Financial Officer)

Georgia	58-1588291
(State of incorporation)	(IRS Employer ID #)

	Page No.

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheet - December 31, 2004 and June 30, 2005	3

Consolidated Statement of Operations - For the Three and Six Months Ended June 30, 2004 and June 30, 2005	4

Consolidated Statement of Changes in Shareholders' Equity - For the Six Months Ended June 30, 2005	5

Consolidated Statement of Cash Flows - For the Six Months Ended June 30, 2004 and June 30, 2005	6

Notes to Consolidated Financial Statements	7


Item 2. Management's Discussion and Analysis of	15
Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk	17

Item 4. Controls and Procedures	18

Part II. Other Information	18

Item 6. Exhibits	19

FIRSTWAVE TECHNOLOGIES, INC.
Consolidated Balance Sheet
(in thousands)

	Dec 31,		June 30,
	2004		2005
			(Unaudited)
ASSETS

Current assets
Cash and cash equivalents	$	1,286	$	552
Accounts receivable: less allowance for
doubtful accounts of $61 and $38, respectively		605		275
Note receivable, current		0		370
Other prepaid expenses		565		488
Total current assets		2,456		1,685

Property and equipment, net		264		133
Software development costs, net		1,095		713
Intangible assets		800		686
Goodwill		1,658		1,121
Note Receivable		0		1,023
Total assets	$	6,273	$	5,361


LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Accounts payable	$	581	$	521
Deferred revenue		1,351		1,005
Accrued employee compensation and benefits		156		103
Dividends payable		46		63
Other accrued liabilities		290		33
Total current liabilities		2,424		1,725


Shareholders' equity		3,849		3,636
Total liabilities and shareholders' equity	$	6,273	$	5,361

Consolidated Statement of Changes in Shareholders' Equity
(In thousands, except share data)
(unaudited)

For the Six Months Ended June 30, 2005

															Accumulated
															Other
	Common Stock				Preferred Stock				Additional			Compre-			compre-
									paid-in			hensive			hensive			Accumulated
	Shares		Amount		Shares		Amount		capital			loss			loss			Deficit			Total


Balance at December 31, 2004		2,693,993	$	13		34,020	$	3,011	$	25,485					$	(754	)	$	(23,906	)	$	3,849

Exercise of common stock options		4,051								35												35

Issuance of common stock		30,343								32												32

Dividends										(142	)											(142	)

Comprehensive loss
Net loss												$	(892	)					(892	)		(892	)
Foreign currency translation adjustment													754			754						754
Comprehensive loss												$	(138	)


Balance at June 30, 2005		2,728,387	$	13		34,020	$	3,011	$	25,410					$	0		$	(24,798	)	$	3,636

FIRSTWAVE TECHNOLOGIES, INC.
Consolidated Statement of Cash Flows
(in thousands)
(unaudited)


	For the Six Months Ended
	June 30, 2004			June 30, 2005


Cash flows provided by/(used in) operating activities	$	(1,181	)	$	(899	)

Cash flows from investing activities
Software development costs		(94	)		0
Purchases of property and equipment, net		(86	)		(13	)
Sale of UK subsidiary		0			256
Net cash provided by/(used in) investing activities		(180	)		243

Cash flows from financing activities
Proceeds from issuance of common stock		5			37
Proceeds from issuance of preferred stock		680			0
Payment of dividends on preferred stock		(111	)		(125	)
Net cash used in financing activities		574			(88	)


Foreign currency translation adjustment		(56	)		10

Decrease in cash and cash equivalents		(843	)		(734	)
Cash and cash equivalents, beginning of period		2,704			1,286
Cash and cash equivalents, end of period	$	1,861		$	552

Supplemental disclosure of cash flow information
Cash paid for income taxes	$	0		$	0

Cash paid for interest	$	11		$	0


FIRSTWAVE TECHNOLOGIES, INC.
Consolidated Statement of Operations
(in thousands, except per share amounts)
(unaudited)


	For the Three Months Ended						For the Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2004			2005			2004			2005
Net Revenues
Software	$	72		$	91		$	316		$	173
Services		118			177			740			377
Maintenance		641			506			1,305			1,085
Other		7			19			28			39
		838			793			2,389			1,674
Cost and Expenses
Cost of revenues
Software		318			211			690			415
Services		267			183			552			406
Maintenance		93			73			212			152
Other		4			11			18			24
Sales and marketing		426			178			954			342
Product development		313			194			673			388
General and administrative		343			390			866			776
		1,764			1,240			3,965			2,503

Operating loss		(926	)		(447	)		(1,576	)		(829	)

Interest income/(expense), net		(4	)		7			(5	)		67
Loss from continuing operations before taxes		(930	)		(440	)		(1,581	)		(762	)

Income taxes		0			0			0			0
Loss from continuing operations		(930	)		(440	)		(1,581	)		(762	)

Income/(Loss) from discontinued operations		788			(29	)		307			(457	)
Gain on sale of discontinued operations		-			327			-			327
Net Income/(Loss) from discontinued operations		788			298			307			(130	)

Net Loss		(142	)		(142	)		(1,274	)		(892	)

Dividends on preferred stock		(58	)		(71	)		(113	)		(142	)

Net loss applicable to common shareholders	$	(200	)	$	(213	)	$	(1,387	)	$	(1,034	)

Income/(Loss) per common share - Basic and Diluted
Income/(Loss) from continuing operations	$	(0.36	)	$	(0.19	)	$	(0.63	)	$	(0.33	)
Income/(Loss) from discontinued operations		0.29			0.11			0.11			(0.05	)
Net income/(loss) per common share	$	(0.07	)	$	(0.08	)	$	(0.52	)	$	(0.38	)

Weighted average shares - Basic and Diluted		2,682			2,710			2,676			2,698