**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

** **

**(Markone)**

 

**ý****  Quarterly report pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended September 30,2005**

 

**OR**

 

**o****  Transition report pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**Commission File Number:  0-31151**

 

 

**RADVIEW SOFTWARE LTD.**

(Exact name of registrant as specified in its charter)

 
| **Israel**                      | ** ** | **Not applicable**  |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

**7 New England Executive Park**

**Burlington, MA 01803**

(Address of principal executive offices)

 

##### **Telephone Number (781)238-1111**

(Registrant’s telephone number, including area code)

 

**None**

(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) Yes   ý    No o,and (2) has been subject to such filing requirements for the past 90days:  Yes  ý    No o.

 

Indicate by check mark whether the registrant is an acceleratedfiler (as defined in Rule 12b-2 of the Exchange Act):  Yes  o  No.  ý  .      

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o  No ý

 

As of October 31,2005, there were 20,525,682 shares of the Registrant’s Ordinary Sharesoutstanding, excluding 134,000 Ordinary Shares held by the registrant astreasury shares that are “dormant” shares for purposes of Israeli law.

 

 

----

 

**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

Form 10-Q INDEX

 
|    | **PART I.  FINANCIAL INFORMATION**                                                                                |       |
|---------|------------------------------------------------------------------------------------------------------------------------|------------|
|    |                                                                                                                   |       |
| Item 1. | Condensed  Consolidated Financial Statements:                                                                          |       |
|    |                                                                                                                   |       |
|    | Condensed Consolidated  Balance Sheets as of September 30, 2005 and December 31, 2004                        |       |
|    |                                                                                                                   |       |
|    | Condensed Consolidated  Statements of Operations for the three and nine months ended  September 30, 2005 and 2004 |       |
|    |                                                                                                                   |       |
|    | Condensed Consolidated  Statements of Cash Flows for the nine months ended September 30, 2005  and 2004           |       |
|    |                                                                                                                   |       |
|    | Notes to Condensed  Consolidated Financial Statements                                                                  |       |
|    |                                                                                                                   |       |
| Item 2. | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                            |       |
|    |                                                                                                                   |       |
| Item 3. | Qualitative and Quantitative  Disclosures About Market Risk                                                            |       |
|    |                                                                                                                   |       |
| Item 4. | Controls and Procedures                                                                                                |       |
|    |                                                                                                                   |       |
|    |                                                                                                                   |       |
|    | **PART II. OTHER INFORMATION**                                                                                    | ** ** |
|    |                                                                                                                   |       |
| Item 6. | Exhibits                                                                                                               |       |
|    |                                                                                                                   |       |
|    | Signatures                                                                                                             |       |
|    |                                                                                                                   |       |
|    | Certifications                                                                                                         |       |

 

2

----

 

**PART I- FINANCIAL INFORMATION**

 

**RADVIEWSOFTWARE LTD. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(In thousands, except share data)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                                            | ** ** | **September 30,****2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                            |       |                           |       |                        |       |
| Current Assets:                                                                                                                                                                                                                                                       |       |                           |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                             |       | $                              | 1,212      |                        | $          | 2,163 |   |
| Accounts receivable, net of reserves of $56 at September 30, 2005  and $72 at December 31, 2004                                                                                                                                                             |       | 847                            |       | 605                         |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                             |       | 174                            |       | 375                         |       |
| Total Current Assets                                                                                                                                                                                                                                                  |       | 2,233                          |       | 3,143                       |       |
|                                                                                                                                                                                                                                                                  |       |                           |       |                        |       |
| Property and Equipment, net                                                                                                                                                                                                                                           |       | 167                            |       | 164                         |       |
| Other Assets                                                                                                                                                                                                                                                          |       | 400                            |       | 607                         |       |
|                                                                                                                                                                                                                                                                  |       |                           |       |                        |       |
| Total Assets                                                                                                                                                                                                                                                          |       | $                              | 2,800      |                        | $          | 3,914 |   |
|                                                                                                                                                                                                                                                                  |       |                           |       |                        |       |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIT**                                                                                                                                                                                                                        |       |                           |       |                        |       |
| Current Liabilities:                                                                                                                                                                                                                                                  |       |                           |       |                        |       |
| Revolving line of credit, net of discount of $35 at September 30,  2005                                                                                                                                                                                          |       | $                              | 1,196      |                        | $          | — |   |
| Accounts payable                                                                                                                                                                                                                                                      |       | 322                            |       | 239                         |       |
| Accrued expenses                                                                                                                                                                                                                                                      |       | 1,153                          |       | 1,141                       |       |
| Deferred revenue                                                                                                                                                                                                                                                      |       | 1,465                          |       | 1,905                       |       |
| Total Current Liabilities                                                                                                                                                                                                                                             |       | 4,136                          |       | 3,285                       |       |
|                                                                                                                                                                                                                                                                  |       |                           |       |                        |       |
| Long-term Liabilities:                                                                                                                                                                                                                                                |       |                           |       |                        |       |
| Accrued severance                                                                                                                                                                                                                                                     |       | 554                            |       | 713                         |       |
|                                                                                                                                                                                                                                                                  |       |                           |       |                        |       |
| Total Liabilities                                                                                                                                                                                                                                                     |       | 4,690                          |       | 3,998                       |       |
|                                                                                                                                                                                                                                                                  |       |                           |       |                        |       |
| Shareholders’ Deficit:                                                                                                                                                                                                                                           |       |                           |       |                        |       |
| Ordinary shares, NIS 0.01 par value – Authorized – 40,000,000 shares;  Issued – 20,659,682 shares at September 30, 2005 and December 31,  2004;  Outstanding – 20,525,682 shares at September 30, 2005 and  December 31, 2004 |       | 51                             |       | 51                          |       |
| Treasury shares, at cost – 134,000 shares                                                                                                                                                                                                                        |       | (100                           | )          | (100                        | )          |
| Additional paid-in capital                                                                                                                                                                                                                                            |       | 56,954                         |       | 56,813                      |       |
| Accumulated deficit                                                                                                                                                                                                                                                   |       | (58,795                        | )          | (56,848                     | )          |
| Total Shareholders’ Deficit                                                                                                                                                                                                                                      |       | (1,890                         | )          | (84                         | )          |
|                                                                                                                                                                                                                                                                  |       |                           |       |                        |       |
| Total Liabilities and Shareholders’ Deficit                                                                                                                                                                                                                      |       | $                              | 2,800      |                        | $          | 3,914 |   |

 

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

 

3

----

 

**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(In thousands, except per share data)**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Software  licenses                                                                        |       | $                                          | 597        |                                      | $          | 703 |   | $ | 2,563 |   | $ | 1,673 |   |
| Services                                                                                  |       | 650                                        |       | 583                                       |       | 1,831 |   | 1,661 |   |
| Total Revenues                                                                            |       | 1,247                                      |       | 1,286                                     |       | 4,394 |   | 3,334 |   |
|                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Cost of Revenues:                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Software  licenses                                                                        |       | 50                                         |       | 15                                        |       | 121 |   | 64 |   |
| Services                                                                                  |       | 108                                        |       | 84                                        |       | 217 |   | 241 |   |
| Total Cost of  Revenues                                                                   |       | 158                                        |       | 99                                        |       | 338 |   | 305 |   |
|                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Gross Profit                                                                              |       | 1,089                                      |       | 1,187                                     |       | 4,056 |   | 3,029 |   |
|                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Operating  Expenses:                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Sales and  marketing                                                                      |       | 720                                        |       | 899                                       |       | 2,680 |   | 2,645 |   |
| Research and  development                                                                 |       | 465                                        |       | 617                                       |       | 1,834 |   | 1,922 |   |
| General and  administrative                                                               |       | 472                                        |       | 442                                       |       | 1,414 |   | 1,364 |   |
| Total Operating  Expenses                                                                 |       | 1,657                                      |       | 1,958                                     |       | 5,928 |   | 5,931 |   |
|                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Operating loss                                                                            |       | (568                                       | )          | (771                                      | )          | (1,872 | ) | (2,902 | ) |
|                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Interest income  (expense), net                                                           |       | (67                                        | )          | 6                                         |       | (72 | ) | 12 |   |
| Other expense,  net                                                                       |       | —                                     |       | (3                                        | )          | (3 | ) | (24 | ) |
|                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Net loss                                                                                  |       | $                                          | (635       | )                                         | $          | (768 | ) | $ | (1,947 | ) | $ | (2,914 | ) |
|                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Basic and  diluted net loss per share                                                     |       | $                                          | (0.03      | )                                         | $          | (0.04 | ) | $ | (0.09 | ) | $ | (0.15 | ) |
|                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average  number of shares used in computing basic and diluted net loss per share |       | 20,526                                     |       | 20,511                                    |       | 20,526 |   | 19,591 |   |

 

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

 

4

----

 

**RADVIEWSOFTWARE LTD. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                                     | ** ** | **Nine Months Ended****September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| Cash Flows from Operating Activities:                                                                          |       |                                        |       |   |   |
| Net loss                                                                                                       |       | $                                           | (1,947     | ) | $ | (2,914 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities—                              |       |                                        |       |   |   |
| Depreciation                                                                                                   |       | 76                                          |       | 183 |   |
| Stock-based compensation                                                                                       |       | 89                                          |       | 84 |   |
| Amortization of warrant discount and debt issuance costs in connection  with revolving line of credit facility |       | 42                                          |       | — |   |
| Accrued severance                                                                                              |       | (159                                        | )          | 45 |   |
| Changes in operating assets and liabilities—                                                              |       |                                        |       |   |   |
| Accounts receivable, net                                                                                       |       | (242                                        | )          | 168 |   |
| Prepaid expenses and other current assets                                                                      |       | 176                                         |       | 113 |   |
| Accounts payable                                                                                               |       | 83                                          |       | (28 | ) |
| Accrued expenses                                                                                               |       | 41                                          |       | (51 | ) |
| Accrued restructuring charge                                                                                   |       | (29                                         | )          | (276 | ) |
| Deferred revenue                                                                                               |       | (440                                        | )          | 888 |   |
| Net cash used in operating activities                                                                          |       | (2,310                                      | )          | (1,788 | ) |
|                                                                                                           |       |                                        |       |   |   |
| Cash Flows from Investing Activities:                                                                          |       |                                        |       |   |   |
| Purchases of property and equipment                                                                            |       | (79                                         | )          | (38 | ) |
| Decrease in other assets                                                                                       |       | 207                                         |       | 66 |   |
| Net cash provided by investing activities                                                                      |       | 128                                         |       | 28 |   |
|                                                                                                           |       |                                        |       |   |   |
| Cash Flows from Financing Activities:                                                                          |       |                                        |       |   |   |
| Borrowings under revolving line of credit facility, net                                                        |       | 1,179                                       |       | — |   |
| Issuance of warrants in connection with revolving line of credit  facility                                     |       | 52                                          |       | — |   |
| Proceeds from private placement of ordinary shares, net                                                        |       | —                                      |       | 1,784 |   |
| Proceeds from exercise of stock options                                                                        |       | —                                      |       | 32 |   |
| Net cash provided by financing activities                                                                      |       | 1,231                                       |       | 1,816 |   |
|                                                                                                           |       |                                        |       |   |   |
| Increase (decrease) in cash and cash equivalents                                                               |       | (951                                        | )          | 56 |   |
|                                                                                                           |       |                                        |       |   |   |
| Cash and cash equivalents, beginning of period                                                                 |       | 2,163                                       |       | 3,075 |   |
| Cash and cash equivalents, end of period                                                                       |       | $                                           | 1,212      |   | $ | 3,131 |   |
|                                                                                                           |       |                                        |       |   |   |
| Cash paid during period for interest                                                                           |       | $                                           | 45         |   | $ | 5 |   |

 

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

 

5

----

 

**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.  Operations**

 

RadView SoftwareLtd. (the “Company”) is an Israeli corporation. The Company develops, markets and supports software that enablesorganizations to verify the scalability, efficiency and reliability of webapplications, and facilitates their rapid development.

 

TheCompany has a history of incurring net losses and had an accumulated deficit of$58.8 million at September 30, 2005. The Company has funded these losses principally from proceeds fromequity financings, including the private placement of its ordinary sharescompleted in March 2004 (see Note 5), and borrowings under a revolvingline of credit facility (see Note 4).

 

Licenserevenues from technology license transactions recognized in the first sixmonths of 2005 were a major contributing factor to the Company’s increase inrevenues for the nine-month period ended September 30, 2005.  However, since the conclusion of thetechnology license revenue in June 2005, the Company has been unable tocomplete additional comparable technology license transactions with otherpartners.  As a result of anticipatedlower revenues in the second half of 2005, the Company implemented a series ofmeasures in July 2005 to lower operating expenses.   These measures contributed significantly toa decrease of $467,000 in quarterly operating expenses from the second to thethird quarter of 2005.

 

The Company is currently evaluating its alternatives for the sale ofthe Company and is currently engaged in discussions with prospectivepurchasers.  The Company is attempting toenter into a definitive acquisition agreement before the end of December 2005.Any transaction will be subject to the negotiation and execution of adefinitive acquisition agreement satisfactory to both parties and also wouldlikely be subject to approval by the Company’s shareholders and will be subjectto the applicable provisions of the Israeli Companies Law, 1999, governing sucha transaction.  In addition, the Companyexpects that any potential acquisition agreement will provide for interimfinancing to the Company to support the operations of the Company until theclosing of the proposed acquisition. There can be no assurance, however, thatthe Company will be able to reach agreement with any prospective purchaser.

 

Managementbelieves, assuming receipt of interim financing from a potential acquirercombined with projected revenues and expenses, and further assuming continuedcompliance with the financial covenants of the revolving line of credit, that existingcash and cash equivalents, along with the interim financing and borrowingsunder the revolving line of credit facility, will be adequate to fundoperations through the completion of an acquisition.  If an acquisition agreement providing forinterim financing is not executed in a timely manner, if an acquisition of theCompany is not consummated, and/or if the Company is unable to maintaincompliance with the financial covenants contained in the revolving creditagreement, then the Company will require additional financing to repay theoutstanding borrowings under the revolving line of credit and to operate itsbusiness.  If additional financing isrequired, the Company would likely not be able to complete financing onacceptable terms or at all, in which case the Company would likely not be ableto continue its operation as a going concern.

 

**2.  Significant Accounting Policies**

 

The Company’scondensed consolidated financial statements are prepared in accordance withU.S. generally accepted accounting principles for interim financialinformation.  The significant policiesfollowed in the preparation of the condensed consolidated financial statements,applied on a consistent basis, are as follows.

 

**(a)**          Use of Estimates

** **

The preparation ofthe financial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and

 

6

----

 

disclosure of contingentassets and liabilities as of the date of the financial statements and thereported amounts of revenues and expenses during the reporting periods.  Actual results could differ from theseestimates.

 

**(b)****          Financial Statements inU.S. Dollars**

 

The consolidatedfinancial statements of the Company have been prepared in U.S. dollars becausethe currency of the primary economic environment in which the operations of theCompany are conducted is the U.S. dollar. Substantially all of the Company’ssales are in U.S. dollars. Most purchases of materials, components and mostmarketing and management costs are denominated in U.S. dollars. Therefore, thefunctional currency of the Company is the U.S. dollar.

 

Transactions andbalances denominated in U.S. dollars are presented at their original amounts.Transactions and balances in other currencies are translated into U.S. dollarsin accordance with the principles set forth in the Financial AccountingStandards Board of the United States (“FASB”) Statement of Financial AccountingStandards (“SFAS”) No. 52, *ForeignCurrency Translation*. Accordingly, items have been translated asfollows:

 

•                  Monetary Items — At the exchange ratein effect on the balance sheet date.

•                  Nonmonetary Items — At historicalexchange rates.

•                  Revenue and Expense Items — At theexchange rates in effect as of the date of recognition of those items(excluding depreciation and other items deriving from nonmonetary items).

 

Allexchange gains and losses from the above-mentioned translation (which wereimmaterial for all periods presented) are reflected in the statements ofoperations.  The representative rate ofexchange was U.S. $1.00 to 4.598 New Israeli Shekel (“NIS”) at September 30,2005, U.S. $1.00 to NIS 4.308 at December 31, 2004, and U.S. $1.00 to NIS4.482 at September 30, 2004.

 

***(c)  Interim Financial Statements***

* *

The accompanying condensedconsolidated balance sheet as of September 30, 2005, the condensed consolidatedstatements of operations for the three and nine months ended September 30,2005 and 2004, and the condensed consolidated statements of cash flows for the ninemonths ended September 30, 2005 and 2004, are unaudited but, in theopinion of management, include all adjustments necessary for a fairpresentation of results for these interim periods.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with U.S.generally accepted accounting principles have been omitted, although theCompany believes that the disclosures included are adequate to make theinformation presented not misleading. The results of operations for the threeand nine months ended September 30, 2005 are not necessarily indicative ofthe results to be expected for the entire fiscal year.  These financial statements should be read inconjunction with the annual consolidated financial statements for 2004 andrelated notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

**(d)**          Research and Development Cost

** **

TheCompany has evaluated the establishment of technological feasibility of itsproducts in accordance with SFAS No. 86, *Accountingfor the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed*.  The Company sells products in a market thatis subject to rapid technological change, new product development and changingcustomer needs.  Accordingly, the Companyhas concluded that technological feasibility is not established until thedevelopment stage of the product is nearly complete.  The Company defines technological feasibilityas the completion of a working model. The time period during which costs could be capitalized from the pointof reaching technological feasibility until the time of general product releaseis very short.  Consequently, the amountsthat could be capitalized are not material to the Company’s financial positionor results of operations.  Therefore, theCompany has charged all such costs to research and development expense in theperiod incurred.

 

7

----

 

***(e)  Revenue Recognition***

* *

TheCompany generates revenues mainly from licensing the rights to use its softwareproducts.  The Company also generatesrevenues from support and maintenance services and, to a lesser extent,training and consulting services.  TheCompany sells its products primarily through its direct sales force and, to alesser extent, through resellers and distributors considered as end-users.

 

TheCompany recognizes revenue in accordance with Statement of Position (“SOP”) 97-2,*Software Revenue Recognition,* andSOP 98-9, *Modification of SOP 97-2, Software Revenue Recognition, With Respect toCertain Transactions*.  ****Under SOP 97-2, r****evenuesfrom software product licenses are recognized upon delivery of the softwareprovided there is persuasive evidence of an agreement, the fee is fixed ordeterminable and collection of the related receivable is probable and nofurther obligations exist.  Revenuesunder multiple-element arrangements, which may include software licenses,support and maintenance, and training and consulting services, are allocated toeach element based on their respective fair values based on vendor-specificobjective evidence.  This objectiveevidence represents the price of products and services when sold separately.  ****W****hen vendor-specificobjective evidence of fair value exists for undelivered elements but does notexist for delivered elements of a software arrangement, the Company uses theresidual method for recognition of revenues, when all other revenue recognitioncriteria are met.  Under the residualmethod, the Company defers revenues related to the undelivered elements basedon their vendor specific objective evidence of fair value and recognizes theremaining arrangement fee for the delivered elements.  When vendor-specific objective evidence offair value for undelivered elements does not exist, revenues from the entirearrangement are recognized over the term of the agreement.

 

Revenuesfrom support and maintenance agreements are recognized ratably over the term ofthe maintenance period, which is typically one year. Revenues from trainingarrangements are recognized as the services are performed.

 

Revenueis recognized for software licenses sold to resellers or distributors at thetime of shipment, provided that all revenue recognition criteria set forth inSOP 97-2 are fulfilled.

 

The Companygenerally does not grant a right of return to its customers.  When a right of return exists, revenue isdeferred until the right of return expires, at which time revenue is recognizedprovided that all other revenue recognition criteria are met.

 

Amountscollected or billed prior to satisfying the above revenue recognition criteriaare reflected as deferred revenue. Deferred revenue represents deferred maintenance revenue, and to alesser extent, deferred software license revenues.

 

**(f)**            Employee Stock Options

** **

In December 2004,the FASB issued SFAS No. 123R (Revised 2004) (“SFAS 123(R)”), Share-BasedPayment, which replaces SFAS No. 123, Accounting for Stock-Based Compensation,and supersedes APB Opinion No. 25, Accounting for Stock Issued toEmployees.  SFAS 123(R), as amended,requires all share-based payments to employees, including grants of employeestock options, to be recognized in the financial statements based on their fairvalues beginning with the first annual reporting period beginning after January 1,2006. Early adoption will be permitted in periods in which financial statementshave not yet been issued.  SFAS 123(R)permits public companies to adopt its requirements using one of two methods:

 

•                  A“modified prospective” method in which compensation cost is recognizedbeginning with the effective date (a) based on the requirements of SFAS123(R) for all share-based payments granted after the effective date and (b) basedon the requirements of SFAS 123 for all awards granted to employees prior tothe effective date of SFAS 123(R) that remain unvested on the effective date.

•                  A“modified retrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under

 

8

----

 

SFAS123 for purposes of pro forma disclosures either (a) all prior periodspresented or (b) prior interim periods of the year of adoption.

 

TheCompany has elected to adopt early the provisions of SFAS 123(R) effective January 1,2005 following the modified prospective method of adoption described above.

 

TheCompany has determined the fair value of share based-payments issued after January 1,2005 and unvested options granted in prior periods using the Black-Scholesoption valuation model, using the following weighted-average assumptions:

 
| ** **               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                     |       |                                       |       |                                      |       |   |   |   |   |
| Expected life of  option |       | 4 years                                    |       | 4 years                                   |       | 4 years |   | 4 years |   |
| Dividend yield           |       | —                                     |       | —                                    |       | — |   | — |   |
| Expected  volatility     |       | 123                                        | %          | 110                                       | %          | 123 | % | 110 | % |
| Risk-free  interest rate |       | 3.9                                        | %          | 3.4                                       | %          | 3.9 | % | 3.4 | % |

 

Forall periods presented before January 1, 2005, the Company elected tofollow Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Options Issued to Employees,*and FASB Interpretation (“FIN”) No. 44, *Accountingfor Certain Transactions Involving Stock Compensation,* in accountingfor its employee stock option plans. Under APB No. 25, when the exercise price of an employee stockoption is equivalent to or above the market price of the underlying stock onthe date of grant, no compensation expense is recognized.  The Company adopted the disclosure provisionsof SFAS No. 148, *Accounting forStock-Based Compensation - Transition and Disclosure*, which amendedcertain provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation*, to provide alternative methods oftransition for an entity that voluntarily changes to the fair value basedmethod of accounting for stock-based employee compensation, effective as of thebeginning of the fiscal year.

 

Pro forma informationregarding the Company’s net loss and net loss per share prior to the adoptionof SFAS No. 123(R) has been determined as if the Company had accounted forits employee stock options under the fair value method prescribed by SFAS No. 123.

 

 The following table illustrates the effect onnet loss and net loss per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123 to stock-based employeecompensation prior to January 1, 2005.

 
| ** **                                                                                | ** ** | **Three Months  Ended  September 30,  2004** | ** ** | **Nine Months  Ended  September 30,  2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                | ** ** | **(In thousands, except per share data)**         | ** ** |
|                                                                                      |       |                                              |       |                                             |       |
| Net loss, as  reported                                                                    |       | $                                                 | (768       | )                                                | $          | (2,914 | ) |
| Add: Stock-based  compensation included in reported net loss                              |       | —                                            |       | 84                                               |       |
| Deduct: Total  stock-based compensation expense determined under fair value based methods |       | (64                                               | )          | (312                                             | )          |
| Pro forma net  loss                                                                       |       | $                                                 | (832       | )                                                | $          | (3,142 | ) |
|                                                                                      |       |                                              |       |                                             |       |
| Basic and  diluted net loss per share:                                                    |       |                                              |       |                                             |       |
| As reported                                                                               |       | $                                                 | (0.04      | )                                                | $          | (0.15 | ) |
| Pro forma                                                                                 |       | $                                                 | (0.04      | )                                                | $          | (0.16 | ) |

 

9

----

 

TheCompany applies SFAS No. 123 and Emerging Issues Task Force No. 96-18,*Accounting for Equity Instruments That AreIssued to Other Than Employees for Acquiring, or in Conjunction with Selling,Goods or Services* (“EITF 96-18”), with respect to options andwarrants issued to non-employees.  SFAS No. 123and EITF 96-18 require the use of option valuation models to measure the fairvalue of the options and warrants at the measurement date.

 

**(g)**         Reclassifications

** **

Certainamounts in the accompanying condensed consolidated financial statements havebeen reclassified to conform to the current period’s presentation.

 

**3.****          ****Net Loss Per Share**

 

Basic and diluted netloss per share is presented in conformity with SFAS No. 128, *Earnings Per Share*, for all periodspresented.  Basic and diluted net lossper ordinary share was determined by dividing net loss attributable to ordinaryshareholders by the weighted average ordinary shares outstanding during theperiod.  Diluted net loss per ordinaryshare is the same as basic net loss per ordinary share for all periodspresented, as the effects of the Company’s potential additional ordinary shareswere antidilutive.

 

The calculation ofdiluted net loss per share excludes outstanding stock options, warrants andadditional investment rights held by certain investors because their inclusionwould be antidilutive, as set forth in the following table.

 
| ** **                                                              | ** ** | **September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                              | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                                              | ** ** | **(In thousands)**     | ** ** |
|                                                                    |       |                   |       |   |   |
| Stock options                                                           |       | 3,082                  |       | 3,400 |   |
| Warrants held by  certain investors (See Note 5(b))                     |       | 2,334                  |       | 3,000 |   |
| Additional  investment rights held by certain investors (See Note 5(b)) |       | —                 |       | 3,333 |   |
| Warrants held by  Comerica Bank (See Note 4)                            |       | 353                    |       | — |   |

 

**4.****          ****Revolving Line of Credit Facility**

 

On May 27,2005, the Company, through RadView Software Inc., the Company’s U.S. subsidiary(the “U.S. Subsidiary”), obtained a one-year revolving line of credit facilitywith Comerica Bank for borrowings of up to $2.0 million.  Advances under the facility will be limitedto the lesser of $2.0 million or the sum of 75% of eligible accountsreceivables plus $1.0 million.  As of September 30,2005, the maximum amount of advances available under the facility, based on thecollateral formula, was $1.4 million, of which the Company had borrowed $1.2million.

 

Borrowings under thefacility bear interest at the bank’s prime rate (6.0% as of September 30,2005) plus 1.25%.  Borrowings under thecredit facility are secured by substantially all of the assets of the U.S.Subsidiary and specified assets of the Company, and guaranteed by the Companyand specified subsidiaries of the Company. The Company and the U.S. Subsidiary are required to maintain compliancewith financial covenants including: (a) a minimum cash balance of $1.0million and (b) specified net income (loss) levels based on the Company’sconsolidated operating budget.  As of September 30,2005, the Company was in compliance with these financial covenants.

 

Inconnection with the facility, the Company issued to the bank a warrant topurchase 352,941 of the Company’s ordinary shares at an exercise price of $0.17per share.  The warrant was exercisableimmediately and has a term of seven years. The warrant also provides for piggyback registration rights.  The total consideration of $1.3 million wasallocated based on the relative fair values of the revolving line of credit andthe warrants in accordance with APB No. 14, *Accounting for Convertible Debt and Debt Issued with Stock PurchaseWarrants.*  At the grant date,the fair

 

10

----

 

value of the warrants was determined to be $52,000 using theBlack-Scholes option-pricing model assuming a risk free interest of 3.9%, avolatility factor of 120%, dividend yield of 0% and contractual life of sevenyears.

 

TheCompany also incurred financing costs consisting of bank fees and legal coststotaling $70,000, which have been accounted for as deferred financing costs andare included in prepaid expenses and other current assets.  These deferred financing costs are also beingcharged to interest expense over the one-year term of the facility.  Interest expense resulting from theamortization of both the warrant discount and deferred financing costs totaled$32,000 and $42,000 for the three and nine months ended September 30,2005, respectively.

 

**5.  Shareholders’ Equity**

 

**(a)**          Private Placement

** **

On March 17,2004, the Company completed a private placement (the “Private Placement”) ofits ordinary shares, additional investment rights to purchase ordinary shares (“AdditionalInvestment Rights”) and four series of warrants to purchase ordinary shares (“Warrants”)pursuant to a securities purchase agreement (the “Purchase Agreement”) betweenthe Company and certain purchasers named therein (the “Purchasers”), inreliance on an exemption under Section 4(2) of the Securities Act of1933, as amended, and Regulation D promulgated thereunder.

 

TheCompany issued 3,333,331 ordinary shares to the Purchasers for a purchase priceper share of $0.60, or aggregate gross proceeds of $2.0 million.  TheCompany also issued Additional Investment Rights and Warrants to thePurchasers.  The Company received netproceeds of $1.8 million from the Private Placement.

 

Inaccordance with the Purchase Agreement, the Company was required to registerfor resale on Form S-3 (the “Registration Statement”) the ordinary sharesissued in the Private Placement and the ordinary shares issuable upon exerciseof the Additional Investment Rights and Warrants.  The Registration Statement was declaredeffective on June 17, 2004.   TheCompany must maintain the effectiveness of the Registration Statement through June 17,2006.

 

**(b)  Warrants and Additional Investment Rights**

** **

Inconnection with the Private Placement, the Company issued to the PurchasersAdditional Investment Rights to purchase 3,333,331 ordinary shares at anexercise price of $0.810 per share, exercisable from March 11, 2004 until June 17,2005.  None of the Additional InvestmentRights were exercised before their expiration in June 2005 and are nolonger outstanding as of September 30, 2005.

 

TheCompany also issued to the Purchasers four series of Warrants as follows:

 
| **Series**              | ** ** | **Term**              | ** ** | **Exercise  Price** | ** ** | **Number of  Shares** | ** ** |
|-------------------------|------------|-----------------------|------------|---------------------|------------|-----------------------|------------|
|                    |       |                  |       |                |       |                  |       |
| Series A  warrants |       | Four and a half years |       | $                   | 0.98       |                  | 1,000,000  |   |
| Series B  warrants |       | Two years             |       | $                   | 0.86       |                  | 666,668    |   |
| Series C  warrants |       | Four and a half years |       | $                   | 0.98       |                  | 666,664    |   |
| Series D  warrants |       | Two years             |       | $                   | 0.86       |                  | 666,664    |   |
|                    |       |                  |       |                |       | 2,999,996             |       |

 

The Warrants wereinitially exercisable for the number of shares indicated above, subject tocustomary anti-dilution adjustments and, with respect to the Series C andD warrants, subject to the conditions indicated below.  The Series A and Series B warrantsbecame exercisable beginning September 11, 2004 for a term as noted in thetable above.  One half of the Series Cand Series D warrants became exercisable on September 20, 2004, thedate the Company’s ordinary shares were delisted from the Nasdaq SmallCapMarket.   Because the AdditionalInvestment Rights were not exercised before the delisting event, the otherone-half of the Series C and Series D warrants are not exercisable.As a result, warrants to purchase 2,333,332 shares remain exercisable.

 

11

----

 

In May 2005,the Company issued a warrant to a bank (see Note 4) at an exercise price belowthe then current exercise price of the Warrants, resulting in an adjustment tothe exercise price in accordance with the anti-dilution provisions of theWarrants.  The table above reflects theadjusted exercise price for the Warrants immediately following the issuance ofthe bank warrant.

 

The Company mayrequire the Purchasers to exercise their right to purchase ordinary sharespursuant to the Warrants if the closing price of the ordinary shares on aneligible market exceeds the respective exercise prices of any series of theWarrants by at least 100% for twenty consecutive trading days on which theaverage daily trading volume of the ordinary shares is at least 250,000Ordinary Shares, excluding blocks of 25,000 or more ordinary shares.

 

Pursuantto an evaluation of the terms of the Purchase Agreement under the provisions ofEITF 00-19, *Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock*, the Company has classified all the above derivative financialinstruments issued in connection with the private placement as equity.

 

**6.  Technology License Transaction**

 

On July 7,2004, the Company received $1,000,000 in cash from a technology licensetransaction for its WebLOAD product with Ixia, an original equipmentmanufacturer, pursuant to the exercise of an option by Ixia under the terms ofa development, publishing and distribution agreement.  As a result of the option exercise, the technologylicense provides Ixia with expanded license rights including the right toaccess and use source code for the WebLOAD product and the right to createderivative products.  Under the terms ofthe original agreement, Ixia was required to continue to pay to the Companyroyalties on its sale of WebLOAD at a reduced rate through July 7,2005.  Ixia was also granted a right tomake a single lump-sum payment of $250,000 to the Company in lieu of itsreduced royalty obligations.  In November 2004,Ixia exercised its right and made payment to the Company of $250,000.  Accordingly, Ixia has no further license feeor royalty payment obligations to the Company pursuant to this arrangement.

 

TheCompany was obligated to provide product updates and technical and engineeringsupport to Ixia until July 2005. The Company recognized the $1,000,000 technology license fee as revenueover the 12-month period commencing July 7, 2004, over the term theCompany was obligated to provide support services to Ixia.  The Company recognized as revenue the$250,000 payment in lieu of royalties on a straight-line basis over theremaining term from November 2004 until June 2005.

 

TheCompany recognized revenue under this technology license transaction of$250,000 for the nine months ended September 30, 2004 and $725,000 for thesame period in 2005 that has been classified as software licenses revenues inthe condensed consolidated statements of operations.

 

12

----

 

**7.  Disclosures About Segments of an Enterprise**

 

TheCompany has adopted SFAS No. 131, *Disclosures About Segmentsof an Enterprise and Related Information*. The Company operates inone reportable segment (see Note 1 for a brief description of the Company’sbusiness). The total revenues are attributed to geographic areas based on thelocation of the end-user customer as follows:

 
| ** **     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **     | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **     | ** ** | **(In thousands)**                         | ** ** |
|           |       |                                       |       |                                      |       |   |   |   |   |
| United States  |       | $                                          | 891        |                                      | $          | 1,016 |   | $ | 3,158 |   | $ | 2,434 |   |
| Europe         |       | 198                                        |       | 224                                       |       | 742 |   | 538 |   |
| Israel         |       | 88                                         |       | 39                                        |       | 169 |   | 174 |   |
| Other          |       | 70                                         |       | 7                                         |       | 325 |   | 188 |   |
| Total revenues |       | $                                          | 1,247      |                                      | $          | 1,286 |   | $ | 4,394 |   | $ | 3,334 |   |

 

13

----

 

**MANAGEMENT’S DISCUSSION ANDANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Statementsin this Quarterly Report on Form 10-Q concerning RadView’s businessoutlook or future performance; anticipated revenues, expenses or otherfinancial items; product introductions and plans and objectives relatedthereto; and statements concerning assumptions made or expectations as to anyfuture events, conditions, performance or other matters, are “forward-lookingstatements” as that term is defined under U. S. federal securities laws.Forward-looking statements are subject to various risks, uncertainties andother factors that could cause actual results to differ materially from thosestated in such statements. These risks, uncertainties and factors include, butare not limited to: our history of losses; need for additional financing;market acceptance of our products; our ability to develop new products andenhance existing products; impact of significant competition; and other factorsdetailed in RadView’s filings with the Securities and Exchange Commission,including this Quarterly Report on Form 10-Q.*

 

# **Overview**

# ** **

Wedevelop, market and support software that enables companies to assure thescalability, performance, efficiency and reliability of web applications.  In May 2004, we introduced the TestViewsuite of products, which provides a comprehensive test management solution fortest automation and reporting for web applications.  The TestView suite efficiently integratestest management and automation with the functionality of our existingstand-alone products to include functional testing, load testing, androot-cause analysis.  In May 2005and September 2005, we introduced new versions of our WebLOAD Analyzerproduct to provide root-cause analysis solutions for the Windows/.NETenvironment and J2EE environment.

 

Wederive the majority of our software license revenues from perpetual licenses ofour load testing products and, to a lesser extent, our functional testing androot-cause analysis products.  We derivethe majority of our services revenues from support and maintenance arrangementsand, to a lesser extent, from training and consulting services.  Substantially all of our revenues aredenominated in U.S. dollars.

 

Licenserevenues from technology license transactions recognized in the last six monthsof 2004 and the first six months of 2005 were a major contributing factor tothe Company’s increase in revenues for the nine-month period ended September 30,2005.  However, since the conclusion of asignificant technology license revenue transaction in June 2005, theCompany has been unable to complete additional comparable technology licensetransactions with other partners.  As aresult of anticipated lower revenues in the second half of 2005, the Companyimplemented a series of measures in July 2005 to lower operating expenses.These measures contributed significantly to a reduction of quarterly operatingexpenses of $467,000 from the second to the third quarter of 2005.

 

We are currently evaluating our alternatives for the sale of ourbusiness and are currently engaged in discussions with prospectivepurchasers.  We are attempting to enterinto a definitive acquisition agreement before the end of December 2005.  Any transaction will be subject to thenegotiation and execution of a definitive acquisition agreement satisfactory toboth parties and also would likely be subject to approval by our shareholdersand will be subject to Israeli Companies Law, as applicable.  In addition, we expect that any potentialacquisition agreement will provide for interim financing to us to support ouroperations until the closing of the proposed acquisition.  There can be no assurance, however, that wewill be able to reach agreement with any prospective purchaser.

 

Our cash balancewas $1.2 million as of September 30, 2005 compared to $2.2 million as of December 31,2004.  In May 2005, we obtained froma bank a one-year revolving line of credit facility, under which advances arelimited to the lesser of $2.0 million or the sum of 75% of eligible accountsreceivable plus $1.0 million.  As of September 30,2005, availability under this facility was $1.4 million and outstandingborrowings under this facility were $1.2 million.

 

Webelieve, assuming receipt of interim financing from a potential acquirercombined with projected revenues and expenses, and further assuming continuedcompliance with the financial covenants of the revolving line of credit, thatexisting cash and cash equivalents, along with the interim financing andborrowings under the revolving line of

 

14

----

 

credit facility, will be adequate to fund operations through thecompletion of an acquisition.  If anacquisition agreement providing for interim financing is not executed in atimely manner, if an acquisition of our business is not consummated, and/or ifwe are unable to maintain compliance with the financial covenants contained inthe revolving credit agreement, then we will require additional financing torepay the outstanding borrowings under the revolving line of credit and tooperate our business.  If additionalfinancing is required, we would likely not be able to complete financing onacceptable terms or at all, in which case we would likely not be able tocontinue our operations as a going concern.

 

# **Application of CriticalAccounting Policies and Estimates**

# ** **

## ***General***

## *** ***

We prepare ourconsolidated financial statements in conformity with U.S. generally acceptedaccounting principles.  As such, we arerequired to make certain estimates, judgments and assumptions that we believeare reasonable based upon the information available. These estimates andassumptions affect the reported amounts of assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the periods presented.  To fullyunderstand and evaluate our reported financial results, we believe it isimportant to understand the significant estimates and judgments applied as theyrelate to our policies for revenue recognition, software development costs,restructuring costs and accounting for stock options.  More detailed descriptions of these policiesare provided in Note 2 to the consolidated financial statements.

 

## ***Revenue Recognition***

## *** ***

Our revenuerecognition approach requires that four basic criteria must be met beforerevenue can be recognized: (1) persuasive evidence of an arrangementexists; (2) delivery has occurred or services rendered; (3) the feeis fixed and determinable; and (4) collectibility is reasonablyassured.  Determination of criteria (3) and(4) is based on management’s judgments regarding the fixed nature of thefee charged for services rendered and products delivered, and thecollectibility of those fees.  Shouldchanges in conditions cause management to determine these criteria are not metfor certain future transactions, revenue recognized for any reporting periodcould be adversely affected.

 

## ***Software Development Costs***

## *** ***

Softwaredevelopment costs incurred from the point of reaching technological feasibilityuntil the time of general product release should be capitalized.  We define technological feasibility as thecompletion of a working model.  Thedetermination of technological feasibility requires the exercise of judgment byour management.  Because we sell ourproducts in a market that is subject to rapid technological change, new productdevelopment and changing customer needs, we have concluded that technologicalfeasibility is not established until the development stage of the product isnearly complete.  For us, the period inwhich we can capitalize software development costs is very short, so theamounts that could be capitalized are not material to our financialstatements.  Therefore, we have chargedall such costs to research and development expense in the period incurred.

 

## ***Accounting for Stock Options***

## *** ***

EffectiveJanuary 1, 2005, we have accounted for stock options issued to employeesin accordance with SFAS No. 123R (Revised 2004) (“SFAS 123(R)”), *Share-Based Payment*.  Under this approach all share based paymentsto employees, including grants of employee stock options, are required to berecognized in the financial statements based on their fair values, instead ofproviding the information in a pro forma disclosure in the notes to thefinancial statements.   We have electedto use the modified prospective method of adoption as permitted under SFAS 123(R), which requires that compensation expense be recorded for all unvestedstock options and restricted stock at the beginning of the first quarter ofadoption of SFAS 123(R).  We havedetermined the fair value of share based-payments issued after January 1,2005 using the Black-Scholes option valuation model.

 

Forreporting periods before January 1, 2005, we accounted for stock optionsusing the intrinsic method in accordance with Accounting Principles Board, orAPB, Opinion No. 25, *Accounting forStock Issued to Employees*.

 

15

----

 

Under this approach we did not record any expense at the time theoptions were granted unless the exercise price of a granted option is below thefair market price of our ordinary shares on the date of grant.   For reporting periods before January 1,2005, we have provided disclosures of impact to our reported net loss and netloss per share if we had applied the fair value method.

 

Thedetermination of fair value of stock options, whether for actual expensereporting under SFAS 123(R) or for pro forma disclosures, requires theapplication of estimates, such as estimated expected life of the options andestimated market volatility for our ordinary shares.  These estimates are based on management’sreview of historical option lives and computations of market volatility for ourordinary shares.

 

**Resultsof Operations**

 

Thefollowing table sets forth, as a percentage of total revenues, consolidatedstatement of operations data for the periods indicated:

 
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                       |       |                                       |       |                                      |       |   |   |   |   |
| Software  licenses              |       | 47.9                                       | %          | 54.7                                      | %          | 58.3 | % | 50.2 | % |
| Services                        |       | 52.1                                       |       | 45.3                                      |       | 41.7 |   | 49.8 |   |
| Total revenues                  |       | 100.0                                      |       | 100.0                                     |       | 100.0 |   | 100.0 |   |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Cost of Sales:                  |       |                                       |       |                                      |       |   |   |   |   |
| Software  licenses              |       | 4.0                                        |       | 1.2                                       |       | 2.8 |   | 1.9 |   |
| Services                        |       | 8.7                                        |       | 6.5                                       |       | 4.9 |   | 7.2 |   |
| Total cost of  sales            |       | 12.7                                       |       | 7.7                                       |       | 7.7 |   | 9.1 |   |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Gross Profit                    |       | 87.3                                       |       | 92.3                                      |       | 92.3 |   | 90.9 |   |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Operating  Expenses:            |       |                                       |       |                                      |       |   |   |   |   |
| Sales and  marketing            |       | 57.7                                       |       | 69.9                                      |       | 61.0 |   | 79.4 |   |
| Research and  development       |       | 37.3                                       |       | 48.0                                      |       | 41.7 |   | 57.6 |   |
| General and  administrative     |       | 37.9                                       |       | 34.4                                      |       | 32.2 |   | 40.9 |   |
| Total operating  expenses       |       | 132.9                                      |       | 152.3                                     |       | 134.9 |   | 177.9 |   |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Operating loss                  |       | (45.5                                      | )          | (60.0                                     | )          | (42.6 | ) | (87.0 | ) |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Interest income  (expense), net |       | (5.4                                       | )          | 0.5                                       |       | (1.6 | ) | 0.4 |   |
| Other expense,  net             |       | 0.0                                        |       | (0.2                                      | )          | (0.1 | ) | (0.8 | ) |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Net loss                        |       | (50.9                                      | )%         | (59.7                                     | )%         | (44.3 | )% | (87.4 | )% |

 

16

----

 

**Three andNine Months Ended September 30,2005 and 2004**

 

***Revenues***

 

*Total Revenues*. Total revenues were $1.2 million for the three months ended September 30, 2005 and $1.3 million for the same periodin 2004. This decrease was due to a decline in software licenses revenuespartially offset by an increase in services revenues.  Total revenues were $4.4 million for the ninemonths ended September 30,2005 and $3.3 million for the same period in 2004, which represents an increaseof $1.1 million, or 31.8%, primarily due to the technology license transactionwith Ixia, as well as increases in other software licenses and servicesrevenues.

 

*Software Licenses*.  Softwarelicense revenues consist primarily of revenues from the sale of licenses to ourend-user customers and revenues from the sale of a technology license. Software license revenues were $597,000 for the three months ended September 30, 2005 and $703,000 for the same period in2004, which represents a decrease of $106,000, or 15.1%.  We recognized $250,000 of revenues in thethree-month period in 2004 from the technology license with Ixia. We had nocomparable revenue from this license in the three-month period in 2005. Thisdecrease in software license revenues was partially offset by increased salesvolume in the U.S. primarily due to recent product introductions, includingTestView and new versions of WebLOAD Analyzer. Software license revenues were $2.6 million for the nine months ended September 30, 2005 and $1.7 million for the same periodin 2004, which represents an increase of $890,000, or 53.2%.  This increase resulted primarily from$475,000 of incremental revenue recognized in the nine-month period in 2005from the technology license with Ixia compared to the same period in 2004 andfrom an increase in software licenses sold to customers attributable toincreased sales volume associated with product introductions.

 

*Services*. Services revenues consist primarily of revenue from annual support andmaintenance contracts and, to a lesser extent, training and consultingservices.  Services revenues were$650,000 for the three months ended September 30, 2005 compared to $583,000 for the sameperiod in 2004, which represents an increase of $67,000, or 11%.  Service revenues were $1.8 million for thenine months ended September 30,2005 compared to $1.7 million for the same period in 2004, which resulted in anincrease of $170,000, or 10%.  Theseincreases resulted primarily from the completion of a nonrecurring consultingservices contract in 2005 and increase maintenance services revenue derivedfrom new customers and renewal orders.

 

***Cost of Revenues***

 

*Cost of Software Licenses*.  Costof software licenses consists principally of direct product costs, such asproduct media and packaging, as well as royalties due to third parties.  Cost of software licenses was $50,000, or8.4% of software license revenues, for the three months ended September 30, 2005 compared to $15,000, or 2.1% ofsoftware license revenues, for the same period in 2004.  Cost of software licenses was $121,000, or4.7% of software license revenues, for the nine months ended September 30, 2005 compared to $64,000, or 3.8% ofsoftware license revenue, for the same period in 2004.  The cost of revenues increased due to anincrease in third-party royalties pursuant associated with a recentlyintroduced new version of our WebLOAD Analyzer product.

 

*Cost of Services*.  Costof services consists principally of personnel-related costs associated withcustomer support and training.  Cost ofservices was $108,000, or 16.6% of services revenues, for the three monthsended September 30, 2005compared to $84,000, or 14.4% of services revenues, for the same period in2004. The increase was due to nonrecurring consulting costs arising from acompleted consulting contract.  Cost ofservices was $217,000, or 11.9% of services revenues, for the nine months endedSeptember 30, 2005 comparedto $241,000, or 14.5% of services revenues, for the same period in 2004. Thedecrease was due to lower personnel costs for support and maintenance servicesresulting from staff reallocations made in late 2004.

 

***Operating Expenses***

 

*Sales and Marketing*. Sales and marketing expenses consist principally of salaries andcommissions earned by sales personnel, travel and marketing program costs suchas trade shows, advertising and product promotion.  Sales

 

17

----

 

and marketing expenses were $720,000, or57.7% of total revenues, for the three months ended September 30, 2005 compared to $899,000, or 69.9% oftotal revenues, for the same period in 2004. Sales and marketing expenses were $2.7 million, or 61.0% of totalrevenues, for the nine months ended September 30, 2005 compared to  $2.6 million, or 79.4% of total revenues, forthe same period in 2004.  These decreasesresulted primarily as a result of cost reductions in July 2005 achievedthrough reductions in personnel and salary-related costs and reduced marketingprogram spending.  We expect sales andmarketing expenses to remain at the same level as the third quarter of 2005throughout the remainder of 2005.

 

*Research and Development*. Research and development expenses consist principally of salaries andrelated expenses required to develop and enhance our products.  Research and development expenses were  $465,000, or 37.3% of total revenues, for thethree months ended September 30, 2005 compared to $617,000, or 48.0% of total revenues, for the sameperiod in 2004.  Research and developmentexpenses were $1.8 million, or 41.7% of total revenues, for the nine monthsended September 30, 2005compared to $1.9 million, or 57.6% of total revenues, for the same period in2004.  These decreases resulted primarilyas a result of cost reductions in July 2005 achieved through reductions inpersonnel and salary-related costs.  Weexpect research and development expenses to remain at the same level as thethird quarter of 2005 throughout the remainder of 2005.

 

*General and Administrative*. General and administrative expenses consist principally of finance,executive and administrative salaries and related expenses, professional feesand other costs associated with being a public company.  General and administrative expenses were$472,000, or 37.9% of total revenues, for the three months ended September 30, 2005 compared to $442,000, or 34.4% oftotal revenues, for the same period in 2004. This increase resulted from increased professional fees, partiallyoffset by reduced salary related costs. General and administrative expenses were $1.4 million, or 32.2% of totalrevenues, for the nine months ended September 30, 2005 compared to $1.4 million, or 40.9%of total revenues, for the same period in 2004.

 

*Interest Income (Expense), Net*. Interest income (expense), net consists principally of interest expensesand amortization of warrant discount and deferred financing costs arising from outstanding borrowings under therevolving line of credit facility, offset by interest earned on cashinvestments.  Interest expense, net was$67,000 for the three months ended September 30, 2005 compared to interestincome, net of $6,000 for the same period in 2004.  Interest expense, net was $72,000 for thenine months ended September 30, 2005 compared to interest income, net of$12,000 for the same period in 2004.  Thechange in interest income (expense), net, resulted from increased interestexpenses arising from borrowings under our revolving line of credit facilityand amortization of warrant discount and deferred financing costs, partiallyoffset by interest income from the lower invested cash balances in 2005 ascompared to 2004.

 

*Other Expense, Net*. Other expense, net consists principally of currency translation gains andlosses.  There was no other expense, netfor the three months ended September 30, 2005 and there was other expense, net of $3,000 for the same periodin 2004.  Other expense, net was $3,000for the nine months ended September 30, 2005 compared to $24,000 for the same period in 2004.  The change in other expense, net was due toexchange rate fluctuations.

 

*IncomeTaxes.*  We have estimatednet operating loss carryforwards for Israeli tax purposes totalingapproximately $21.8 million through September 30, 2005 that would reducefuture Israeli income taxes, if any. These net operating losses may be carriedforward indefinitely and offset against future taxable business income.  We expect that during the period these lossesare utilized, our income would be substantially tax exempt.  Accordingly, there will be no tax benefitavailable from these losses and no deferred income taxes have been included inour consolidated financial statements.

 

Our U.S. subsidiary hasestimated net operating loss carryforwards for U.S. federal and state taxpurposes totaling approximately $31.6 million through September 30,2005.  These losses are available tooffset any future U.S. taxable income of the U.S. subsidiary and will expirebetween 2012 and 2025.  The Company hasrecorded a full valuation allowance against its deferred tax asset due to theuncertainty surrounding the ability and the timing of the realization of thesetax benefits.

 

18

----

 

# **Liquidity and CapitalResources**

 

Cash and cash equivalents totaled $1.2 million as of September 30, 2005 and $2.2 million as of December 31,2004.

 

Cash used inoperating activities was $2.3 million for the nine months ended September 30,2005 and $1.8 million for the sameperiod in 2004.  Cash used inoperating activities for the nine months ended September 30, 2005 was dueprimarily to a net loss of $1.9 million combined with an increase of $242,000in accounts receivable, a decrease of $440,000 in deferred revenues, and adecrease of $159,000 in accrued severance, partially offset by an increase of$124,000 in accounts payable and accrued expenses.  Accounts receivable increased as a result ofincreased software license order bookings. Deferred revenues decreased as a result of the completion in June 2005of recognition of previously deferred revenues from a technology licensetransaction, partially offset by increased deferred maintenance servicecontracts from new customers and renewal orders.  Accrued severance decreased as a result of paymentsto terminated employees in 2005 in accordance with Israel employmentpractices.  Accounts payable and accruedexpenses increased as a result of increased compensation related accruals andprofessional fees.

 

Cash provided by investing activities was $128,000 for the nine monthsended September 30, 2005and $28,000 for the same period in 2004. Cash provided by investing activities in 2005 resulted from a decreaseof $207,000 in other assets, partially offset by the purchase of $79,000 inproperty and equipment.   Other assetsdecreased as a result of the release of severance fund deposits to certainterminated employees in accordance with Israel employment practices andreduction in long-term deposits upon expiration of certain office leases.

 

Cash provided byfinancing activities was $1.2 million for the nine months ended September 30,2005 and $1.8 million for the same period in 2004.  The cash provided by financing activities in2005 consisted of borrowings under a revolving line of credit facility enteredinto in May 2005.

 

On May 27,2005, we obtained a one-year revolving line of credit facility with ComericaBank for borrowings of up to $2.0 million. Advances under the facility will be limited to the lesser of $2.0million or the sum of 75% of eligible accounts receivables plus $1.0million.  Borrowings under the facilitywill bear interest at the bank’s prime rate plus 1.25%.  We are required to maintain compliance withfinancial covenants including: (a) a minimum cash balance of $1.0 millionand (b) specified net loss levels based on our consolidated operatingbudget.  As of September 30, 2005,we were in compliance with these financial covenants.  Borrowings under the credit facility aresecured by substantially all of the assets of the U.S. Subsidiary and specifiedassets of ours, and guaranteed by us and specified subsidiaries of ours.  As of September 30, 2005, the maximumamount of advances available under the facility, based on the collateralformula, was $1.4 million, of which we had borrowed $1.2 million.

 

We are currently evaluating our alternatives for the sale of ourbusiness and are currently engaged in discussions with prospectivepurchasers.  Any transaction will besubject to the negotiation and execution of a definitive acquisition agreementsatisfactory to both parties and also would likely be subject to approval byour shareholders and will be subject to the Israeli Companies Law, asapplicable.  In addition, we expect thatany potential acquisition agreement will provide for interim financing to us tosupport our operations until the closing of the proposed acquisition.  There can be no assurance, however, that wewill be able to reach agreement with any prospective purchaser.

 

As of September 30,2005, we had a cash balance of$1.2 million as of September 30, 2005 and$1.2 million in borrowings outstanding under the revolving line of creditfacility compared to a cash balance of $2.2 million and no borrowings as of December 31,2004.  We believe, assuming receipt ofinterim financing from a potential acquirer combined with projected revenuesand expenses, and further assuming continued compliance with the financialcovenants of the revolving line of credit, that existing cash and cashequivalents, along with the interim financing and borrowings under therevolving line of credit facility, will be adequate to fund operations throughthe completion of an acquisition.  If anacquisition agreement providing for interim financing is not executed in atimely manner, if an acquisition of our business is not consummated, and/or ifwe are unable to maintain compliance with the financial covenants contained inthe revolving credit agreement, then we will require additional financing torepay the outstanding borrowings under the revolving line of credit and tooperate our business.  If additionalfinancing is

 

19

----

 

required, we would likelynot be able to complete financing on acceptable terms or at all, in which casewe would likely not be able to continue our operation as a going concern.

 

**ContractualObligations**

 

We lease all ofour office facilities under noncancellable operating leases that expire overvarying terms through 2009.  As of September 30,2005, our contractual obligations were as follows:

 
| ** **                  | ** ** | **Payments due by Period** | ** ** |
|-----------------------------|------------|----------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                  | ** ** | **(In Thousands)**         | ** ** |
|                        |       |                       |       |   |   |   |   |   |   |   |   |
| Operating leases            |       | $                          | 431        |   | $ | 166 |   | $ | 227 |   | $ | 38 |   | $ | — |   |
| Severance pay (1)           |       | 554                        |       | — |   | — |   | — |   | 554 |   |
| Total                       |       | $                          | 985        |   | $ | 166 |   | $ | 227 |   | $ | 38 |   | $ | 554 |   |

 

----

(1)          Severancepay relates to accrued severance obligations to our Israeli employees asrequired under Israeli labor laws.  Theseobligations are payable only upon the termination of the respective employeeand may be reduced if the employee’s termination is voluntary.

 

**ITEM3.  QUALITATIVE AND QUANTITATIVEDISCLOSURES ABOUT MARKET RISK**

 

We do not usederivative financial instruments in our investing portfolio.  We place our investments in instruments thatmeet high credit quality standards such as money market funds, governmentsecurities, and commercial paper.  Welimit the amount of credit exposure to any one issuer.  We do not expect any material loss withrespect to our investment portfolio.

 

We conductbusiness in various foreign currencies, primarily in Europe and Israel.  As a result, we are exposed to the effects offoreign currency exchange rate fluctuations on the U.S. dollar value of foreigncurrency-denominated revenues and expenses. We do not use foreign exchange forward contracts to hedge our foreigncurrency denominated receivables. Looking forward, there can be no assurance that changes in foreigncurrency rates, relative to the U.S. dollar, will not materially adverselyaffect our consolidated results.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

**Evaluationof Controls and Procedures**

 

Wecarried out an evaluation, under the supervision and with the participation ofthe our management, including our Chief Executive Officer, or CEO, and ChiefFinancial Officer, or CFO, of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures as of the end of the periodcovered by this Quarterly Report on Form 10-Q.  Based on this evaluation, the CEO and CFOhave concluded that our disclosure controls and procedures are effective toensure that material information is recorded, processed, summarized andreported by our management on a timely basis in order to comply with ourdisclosure obligations under the Securities Exchange Act of 1934 and the SEC rules thereunder.

 

**Changesin Internal Controls**

 

Therewere no significant changes in the Company’s internal controls or in otherfactors during the third quarter of 2005 that have materially affected, or arereasonably likely to materially affect, the Company’s internal controls.

 

20

----

 

**PART II - OTHER INFORMATION**

 

**Item 6. Exhibits**

 

**Exhibit Index**

 
| 31.1   |   | Certification by  Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                           |
| 31.2   |   | Certification by  Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                           |
| 32     |   | Certification  pursuant to 18 U.S.C Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                             |

 

21

----

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities and Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
|                               | RADVIEW SOFTWARE  LTD.   |
|------------------------------------|--------------------------|
|                               |                     |
|                               |                     |
| Date:  November 18, 2005 | /s/ CHRISTOPHER  DINEEN  |   |
|                               | Christopher  Dineen      |
|                               | Chief  Financial Officer |

 

22

----