**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark one)**                                                                                                     |
|--------------------------------------------------------------------------------------------------------------------|
|                                                                                                               |
| **ý****  Quarterly report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|                                                                                                               |
| **For the quarterly period ended June 30, 2004**                                                              |
|                                                                                                               |
| **OR**                                                                                                             |
|                                                                                                               |
| **o****  Transition report pursuant to Section 13 or 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  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

**7 New England Executive Park**

**Burlington, MA 01803**

(Address of principal executive offices)

 

**TelephoneNumber (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 to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) Yes  ý  No  o, and(2) has been subject to such filing requirements for the past 90 days:  Yes  ý  No  o.

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 126-2 of the Exchange Act):  Yes  o   No. ý.

 

Asof July 31, 2004, there were 20,503,740 shares of the Registrant’sOrdinary Shares outstanding, excluding 134,000 Ordinary Shares held by theregistrant as treasury shares that are “dormant” shares for purposes of Israelilaw.

 

 

----

 

**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 June 30, 2004 and December 31,  2003                      |   |
|     |                                                                                                             |   |
|     | Condensed  Consolidated Statements of Operations for the three and six months ended  June 30, 2004 and 2003 |   |
|     |                                                                                                             |   |
|     | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30,  2004 and 2003           |   |
|     |                                                                                                             |   |
|     | 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 1.  | Legal Proceedings                                                                                                |   |
|     |                                                                                                             |   |
| Item 2.  | Changes in Securities and Use of  Proceeds                                                                       |   |
|     |                                                                                                             |   |
| Item 6.  | Exhibits and Reports on Form 8-K                                                                                 |   |
|     |                                                                                                             |   |
|     | Signatures                                                                                                       |   |
|     |                                                                                                             |   |
|     | Certifications                                                                                                   |   |

 

2

----

 

**PART I****- FINANCIAL INFORMATION**

 

**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
|                                                                                                                                                                                                                                                                                                   |   | **June 30,  2004** |   | **December 31,  2003** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
| **ASSETS**                                                                                                                                                                                                                                                                                             |   |                    |   |                        |   |
| Current Assets:                                                                                                                                                                                                                                                                                        |   |                    |   |                        |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                              |   | $                       | 3,079  |                        | $      | 3,075 |   |
| Accounts receivable, net of reserves of $96  at June 30, 2004 and $72 at December 31, 2003                                                                                                                                                                                                   |   | 614                     |   | 678                         |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                              |   | 361                     |   | 426                         |   |
| Total Current Assets                                                                                                                                                                                                                                                                                   |   | 4,054                   |   | 4,179                       |   |
|                                                                                                                                                                                                                                                                                                   |   |                    |   |                        |   |
| Property and Equipment, net                                                                                                                                                                                                                                                                            |   | 217                     |   | 333                         |   |
| Other Assets                                                                                                                                                                                                                                                                                           |   | 646                     |   | 643                         |   |
|                                                                                                                                                                                                                                                                                                   |   |                    |   |                        |   |
| Total Assets                                                                                                                                                                                                                                                                                           |   | $                       | 4,917  |                        | $      | 5,155 |   |
|                                                                                                                                                                                                                                                                                                   |   |                    |   |                        |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                                          |   |                    |   |                        |   |
| Current Liabilities:                                                                                                                                                                                                                                                                                   |   |                    |   |                        |   |
| Accounts payable                                                                                                                                                                                                                                                                                       |   | $                       | 339    |                        | $      | 367 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                       |   | 944                     |   | 989                         |   |
| Accrued restructuring charge, current  portion                                                                                                                                                                                                                                                         |   | 178                     |   | 225                         |   |
| Deferred revenue                                                                                                                                                                                                                                                                                       |   | 1,259                   |   | 1,064                       |   |
| Total Current Liabilities                                                                                                                                                                                                                                                                              |   | 2,720                   |   | 2,645                       |   |
|                                                                                                                                                                                                                                                                                                   |   |                    |   |                        |   |
| Long-term Liabilities:                                                                                                                                                                                                                                                                                 |   |                    |   |                        |   |
| Accrued restructuring charge, less current  portion                                                                                                                                                                                                                                                    |   | —                  |   | 95                          |   |
| Accrued severance                                                                                                                                                                                                                                                                                      |   | 644                     |   | 619                         |   |
| Total Long-Term Liabilities                                                                                                                                                                                                                                                                            |   | 644                     |   | 714                         |   |
|                                                                                                                                                                                                                                                                                                   |   |                    |   |                        |   |
| Total Liabilities                                                                                                                                                                                                                                                                                      |   | 3,364                   |   | 3,359                       |   |
|                                                                                                                                                                                                                                                                                                   |   |                    |   |                        |   |
| Shareholders’ Equity:                                                                                                                                                                                                                                                                             |   |                    |   |                        |   |
| Ordinary shares, NIS 0.01 par value –  Authorized – 40,000,000 shares;  Issued – 20,637,740 shares at June 30, 2004 and 17,194,545 shares at  December 31, 2003;  Outstanding – 20,503,740 shares at June 30, 2004 and 17,060,545 shares  at December 31, 2003 |   | 51                      |   | 43                          |   |
| Treasury shares, at cost – 134,000 shares                                                                                                                                                                                                                                                         |   | (100                    | )      | (100                        | )      |
| Additional paid-in capital                                                                                                                                                                                                                                                                             |   | 56,816                  |   | 55,010                      |   |
| Deferred compensation                                                                                                                                                                                                                                                                                  |   | —                  |   | (89                         | )      |
| Accumulated deficit                                                                                                                                                                                                                                                                                    |   | (55,214                 | )      | (53,068                     | )      |
| Total Shareholders’ Equity                                                                                                                                                                                                                                                                        |   | 1,553                   |   | 1,796                       |   |
|                                                                                                                                                                                                                                                                                                   |   |                    |   |                        |   |
| Total Liabilities and Shareholders’ Equity                                                                                                                                                                                                                                                        |   | $                       | 4,917  |                        | $      | 5,155 |   |

 

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

 

3

----

 

**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
|                                                                                      |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                                                      |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
| Revenues:                                                                                 |   |                                   |   |                                 |   |   |   |   |   |
| Software licenses                                                                         |   | $                                      | 523    |                                 | $      | 622 |   | $ | 970 |   | $ | 1,289 |   |
| Services                                                                                  |   | 545                                    |   | 589                                  |   | 1,078 |   | 1,142 |   |
| Total Revenues                                                                            |   | 1,068                                  |   | 1,211                                |   | 2,048 |   | 2,431 |   |
|                                                                                      |   |                                   |   |                                 |   |   |   |   |   |
| Cost of Revenues:                                                                         |   |                                   |   |                                 |   |   |   |   |   |
| Software licenses                                                                         |   | 18                                     |   | 15                                   |   | 49 |   | 35 |   |
| Services                                                                                  |   | 77                                     |   | 111                                  |   | 157 |   | 230 |   |
| Total Cost of Revenues                                                                    |   | 95                                     |   | 126                                  |   | 206 |   | 265 |   |
|                                                                                      |   |                                   |   |                                 |   |   |   |   |   |
| Gross Profit                                                                              |   | 973                                    |   | 1,085                                |   | 1,842 |   | 2,166 |   |
|                                                                                      |   |                                   |   |                                 |   |   |   |   |   |
| Operating Expenses:                                                                       |   |                                   |   |                                 |   |   |   |   |   |
| Sales and marketing                                                                       |   | 897                                    |   | 1,040                                |   | 1,702 |   | 2,270 |   |
| Research and development                                                                  |   | 636                                    |   | 650                                  |   | 1,268 |   | 1,500 |   |
| General and administrative                                                                |   | 417                                    |   | 406                                  |   | 919 |   | 843 |   |
| Stock-based compensation (1)                                                              |   | —                                 |   | 103                                  |   | 84 |   | 214 |   |
| Restructuring charges (Note 4)                                                            |   | —                                 |   | 245                                  |   | — |   | 245 |   |
| Total Operating Expenses                                                                  |   | 1,950                                  |   | 2,444                                |   | 3,973 |   | 5,072 |   |
|                                                                                      |   |                                   |   |                                 |   |   |   |   |   |
| Operating loss                                                                            |   | (977                                   | )      | (1,359                               | )      | (2,131 | ) | (2,906 | ) |
|                                                                                      |   |                                   |   |                                 |   |   |   |   |   |
| Interest income, net                                                                      |   | 3                                      |   | 10                                   |   | 6 |   | 24 |   |
| Other expense, net                                                                        |   | (21                                    | )      | (46                                  | )      | (21 | ) | (54 | ) |
|                                                                                      |   |                                   |   |                                 |   |   |   |   |   |
| Net loss                                                                                  |   | $                                      | (995   | )                                    | $      | (1,395 | ) | $ | (2,146 | ) | $ | (2,936 | ) |
|                                                                                      |   |                                   |   |                                 |   |   |   |   |   |
| Basic and diluted net loss per share                                                      |   | $                                      | (0.05  | )                                    | $      | (0.08 | ) | $ | (0.11 | ) | $ | (0.18 | ) |
|                                                                                      |   |                                   |   |                                 |   |   |   |   |   |
| Weighted average number of shares used in  computing basic and diluted net loss per share |   | 20,456                                 |   | 16,478                               |   | 19,126 |   | 16,474 |   |
|                                                                                      |   |                                   |   |                                 |   |   |   |   |   |

----

| (1) The following summarizes the  departmental allocation of the stock-based compensation charge: |   |   |   |   |   |   |   |   |   |
|---------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Sales and marketing                                                                               |   | $      | — |   | $      | 28     |   | $      | 44     |   | $ | 67 |   |
| Research and development                                                                          |   | — |   | 36     |   | 37     |   | 80     |   |
| General and administrative                                                                        |   | — |   | 39     |   | 3      |   | 67     |   |
| Total stock-based compensation                                                                    |   | $      | — |   | $      | 103    |   | $      | 84     |   | $ | 214 |   |

 

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

 

4

----

 

**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
|                                                                         |   | **Six Months  Ended  June 30,** |   |
|------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                         |   | **2004**                             |   | **2003** |   |
| Cash Flows from Operating Activities:                                        |   |                                 |   |   |   |
| Net loss                                                                     |   | $                                    | (2,146 | ) | $ | (2,936 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities- |   |                                 |   |   |   |
| Depreciation                                                                 |   | 136                                  |   | 372 |   |
| Amortization of deferred compensation                                        |   | 84                                   |   | 214 |   |
| Accrued severance pay                                                        |   | 25                                   |   | (202 | ) |
| Changes in operating assets and  liabilities-                                |   |                                 |   |   |   |
| Accounts receivable, net                                                     |   | 64                                   |   | 140 |   |
| Prepaid expenses and other current assets                                    |   | 65                                   |   | 122 |   |
| Accounts payable                                                             |   | (28                                  | )      | 37 |   |
| Accrued expenses                                                             |   | (45                                  | )      | (431 | ) |
| Accrued restructuring charge                                                 |   | (142                                 | )      | (12 | ) |
| Deferred revenue                                                             |   | 195                                  |   | 122 |   |
| Net cash used in operating activities                                        |   | (1,792                               | )      | (2,574 | ) |
|                                                                         |   |                                 |   |   |   |
| Cash Flows from Investing Activities:                                        |   |                                 |   |   |   |
| Purchases of property and equipment                                          |   | (20                                  | )      | (81 | ) |
| Decrease (increase) in other assets                                          |   | (3                                   | )      | 97 |   |
| Net cash provided by (used in) investing  activities                         |   | (23                                  | )      | 16 |   |
|                                                                         |   |                                 |   |   |   |
| Cash Flows from Financing Activities:                                        |   |                                 |   |   |   |
| Proceeds from private placement of ordinary  shares, net                     |   | 1,792                                |   | — |   |
| Proceeds from exercise of stock options                                      |   | 27                                   |   | 4 |   |
| Net cash provided by financing activities                                    |   | 1,819                                |   | 4 |   |
|                                                                         |   |                                 |   |   |   |
| Increase (decrease) in cash and cash  equivalents                            |   | 4                                    |   | (2,554 | ) |
|                                                                         |   |                                 |   |   |   |
| Cash and cash equivalents, beginning of  period                              |   | 3,075                                |   | 7,566 |   |
| Cash and cash equivalents, end of period                                     |   | $                                    | 3,079  |   | $ | 5,012 |   |
|                                                                         |   |                                 |   |   |   |
| Cash paid during period for interest                                         |   | $                                    | 4      |   | $ | 8 |   |

 

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

 

5

----

 

**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.  Operations**

 

RadViewSoftware Ltd. (the “Company”) is an Israeli corporation.  The Company develops, markets and supportssoftware that enables organizations to verify the scalability, efficiency andreliability of web applications, and facilitates their rapid development.

 

TheCompany has a history of incurring net losses and had an accumulated deficit ofapproximately $55.2 million at June 30, 2004.  The Company has funded these losses principally from proceedsfrom equity financing, including the private placement of its ordinary sharescompleted in March 2004 (see Note 4). In each of 2001, 2002 and 2003, the Company restructured its business toreduce total operating expenses by more than 60% through reductions inworkforce and the termination of certain leases.

 

InJuly 2004, the Company completed a $1,000,000 technology licensetransaction with a distribution partner (see Note 7).  Management believes that existing cash and cash equivalents,along with the proceeds from this technology license transaction, will beadequate to fund operations at least through June 30, 2005.

 

**2.  SignificantAccounting Policies**

 

TheCompany’s condensed consolidated financial statements are prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information.  Thesignificant policies followed in the preparation of the condensed consolidatedfinancial statements, applied on a consistent basis, are as follows.

 

*(a)**      **Use of Estimates*

 

Thepreparation of the financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities as of the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting periods.  Actualresults could differ from these estimates.

 

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

 

Theconsolidated financial statements of the Company have been prepared in U.S.dollars because the currency of the primary economic environment in which theoperations of the Company are conducted is the U.S. dollar. Substantially allof the Company’s sales are in U.S. dollars. Most purchases of materials,components and most marketing and management costs are denominated in U.S.dollars. Therefore, the functional currency of the Company is the U.S. dollar.

 

Transactionsand balances denominated in U.S. dollars are presented at their originalamounts. Transactions and balances in other currencies are translated into U.S.dollars in accordance with the principles set forth in the Financial AccountingStandards Board of the United States (“FASB”) Statement of Financial AccountingStandards (“SFAS”) No. 52, *Foreign CurrencyTranslation*. Accordingly, items have been translated as follows:

 

•                  Monetary Items – At the exchange rate ineffect on the balance sheet date.

•                  Nonmonetary Items – At historical exchangerates.

•                  Revenue and Expense Items – At the exchangerates in effect as of the date of recognition of those items (excludingdepreciation 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 4.497 New Israeli Shekel (“NIS”) at June 30,2004, U.S. $1.00 to NIS 4.379 at December 31, 2003, and U.S. $1.00 to NIS4.312 at June 30, 2003.

 

6

----

 

*(c)**       **Interim FinancialStatements*

 

Theaccompanying condensed consolidated balance sheet as of June 30, 2004, thecondensed consolidated statements of operations for the three and six monthsended June 30, 2004 and 2003, and the condensed consolidated statements ofcash flows for the six months ended June 30, 2004 and 2003, are unauditedbut, in the opinion of management, include all adjustments necessary for a fairpresentation of results for these interim periods.  Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principles generallyaccepted in the United States have been omitted, although the Company believesthat the disclosures included are adequate to make the information presentednot misleading. The results of operations for the three and six months endedJune 30, 2004 are not necessarily indicative of the results to be expectedfor the entire fiscal year.  Thesefinancial statements should be read in conjunction with the annual consolidatedfinancial statements for 2003 and related notes included in the Company’s Form10-K filed with the SEC on March 29, 2004.

 

*(d)**      **Research and DevelopmentCost*

 

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, theCompany has concluded that technological feasibility is not established untilthe development stage of the product is nearly complete.  The Company defines technologicalfeasibility as the completion of a working model.  The time period during which costs could be capitalized from thepoint of reaching technological feasibility until the time of general productrelease is very short.  Consequently,the amounts that could be capitalized are not material to the Company’sfinancial position or results of operations. Therefore, the Company has charged all such costs to research anddevelopment expense in the period incurred.

 

*(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. The Company sells its products primarilythrough its direct sales force and, to a lesser extent, through resellers anddistributors considered as end-users.

 

TheCompany recognizes revenue in accordance with Statement of Position (“SOP”)97-2, *Software Revenue Recognition,*and SOP 98-9, *Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions*.  Under SOP 97-2, revenues from softwareproduct licenses are recognized upon delivery of the software provided there ispersuasive evidence of an agreement, the fee is fixed or determinable andcollection of the related receivable is probable and no further obligationsexist.  Revenues under multiple-elementarrangements, which may include software licenses, support and maintenance, andtraining and consulting services, are allocated to each element based on theirrespective fair values, based on vendor-specific objective evidence.  This objective evidence represents the priceof products and services when sold separately. Revenue is recognized for software licenses sold to resellers ordistributors at the time of shipment, provided that all revenue recognitioncriteria set forth in SOP 97-2 are fulfilled.

 

SOP98-9****requires the use of theresidual method for recognition of revenues when vendor-specific objectiveevidence exists for undelivered elements but does not exist for deliveredelements of a software arrangement when all other revenue recognition criteriaset forth in SOP 97-2 are met. If fair value for a delivered element does notexist but the fair value does exist for all undelivered elements, the Companydefers the fair value of the undelivered elements and recognizes the remainingvalue for the delivered elements.

 

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.

 

7

----

 

TheCompany generally 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 primarily represents deferred maintenance revenue, andto a lesser extent, deferred software license revenues.

 

*(f)**          **Employee Stock Options*

 

AtJune 30, 2004, the Company has three stock option plans.  The Company has elected to follow AccountingPrinciples Board (“APB”) Opinion No. 25, *Accountingfor Stock Options Issued to Employees* and FASB Interpretation (“FIN”)No. 44 *Accounting for Certain TransactionsInvolving Stock Compensation,* in accounting for its employee stockoption plans.  Under APB No. 25, whenthe exercise price of an employee stock option is equivalent to or above themarket price of the underlying stock on the date of grant, no compensationexpense is recognized.  The Companyadopted the disclosure provisions of SFAS No. 148, *Accounting for Stock-Based Compensation - Transition and Disclosure*,which amended certain provisions of SFAS No. 123 *Accounting for Stock-Based Compensation*, to providealternative methods of transition for an entity that voluntarily changes to thefair value based method of accounting for stock-based employee compensation,effective as of the beginning of the fiscal year.  The Company continues to apply the provisions of APB No. 25 inaccounting for stock-based compensation.

 

Proforma information regarding the Company’s net loss and net loss per share isrequired by SFAS No. 123 and has been determined as if the Company hadaccounted for its employee stock options under the fair value method prescribedby SFAS No. 123.   The following tableillustrates the effect on net loss and net loss per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123 to stock-basedemployee compensation.

 
|                                                                                             |   | **Three  Months Ended  June 30,**     |   | **Six Months  Ended  June 30,** |   |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------|--------|
|                                                                                             |   | **2004**                                   |   | **2003**                             |   | **2004** |   | **2003** |   |
|                                                                                             |   | **(In  thousands, except per share data)** |   |
|                                                                                             |   |                                       |   |                                 |   |   |   |   |   |
| Net loss, as reported                                                                            |   | $                                          | (995   | )                                    | $      | (1,395 | ) | $ | (2,146 | ) | $ | (2,936 | ) |
| Add:   Stock-based compensation included in reported net loss                               |   | —                                     |   | 103                                  |   | 84 |   | 214 |   |
| Deduct:   Total stock-based compensation expense determined under fair value  based methods |   | (106                                       | )      | (214                                 | )      | (248 | ) | (452 | ) |
| Pro forma net loss                                                                               |   | $                                          | (1,101 | )                                    | $      | (1,506 | ) | $ | (2,310 | ) | $ | (3,174 | ) |
|                                                                                             |   |                                       |   |                                 |   |   |   |   |   |
| Basic and diluted net loss per share                                                             |   |                                       |   |                                 |   |   |   |   |   |
| As reported                                                                                      |   | $                                          | (0.05  | )                                    | $      | (0.08 | ) | $ | (0.11 | ) | $ | (0.18 | ) |
| Pro forma                                                                                        |   | $                                          | (0.05  | )                                    | $      | (0.09 | ) | $ | (0.12 | ) | $ | (0.19 | ) |

 

**3.  Earnings Per Share**

 

Basicand diluted net loss 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.

 

8

----

 

Thecalculation of diluted net loss per share excludes outstanding stock options,warrants and additional investment rights held by certain investors becausetheir inclusion would be antidilutive, as set forth in the following table.

 
|                                                                    |   | **June 30,**   |   |
|-------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                    |   | **2004**            |   | **2003** |   |
|                                                                    |   | **(In  thousands)** |   |
|                                                                    |   |                |   |   |   |
| Stock options                                                           |   | 3,534               |   | 4,365 |   |
| Warrants (See Note 4(b))                                                |   | 3,000               |   | — |   |
| Additional investment rights held by  certain investors (See Note 4(b)) |   | 3,333               |   | — |   |

 

**4.  Shareholders’Equity**

 

*(a)**      **Private Placement*

 

OnMarch 17, 2004, the Company completed a private placement (the “PrivatePlacement”) of its ordinary shares, additional investment rights to purchaseordinary shares (“Additional Investment Rights”) and four series of warrants topurchase ordinary shares (“Warrants”) pursuant to a securities purchaseagreement (the “Purchase Agreement”) between the Company and certain purchasersnamed therein (the “Purchasers”), in reliance on an exemption underSection 4(2) of the Securities Act of 1933, as amended, and Regulation Dpromulgated 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.  The Company received net proceeds of $1.8million 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 Company filed the Registration Statement with the Securitiesand Exchange Commission on April 8, 2004 and the Registration Statementwas declared effective on June 17, 2004.  The Company must maintain the effectiveness of the RegistrationStatement for a period of up to two years from the effective date of theRegistration Statement.

 

*(b)**      **Warrants and AdditionalInvestment Rights*

 

Inconnection with the Private Placement, the Company issued to the Purchasers AdditionalInvestment Rights to purchase 3,333,331 ordinary shares at an exercise price of$0.810 per share, exercisable from March 11, 2004 until one year after theeffective date of the Registration Statement.

 

Inaddition, the Company issued to the Purchasers four series of warrants asfollows:

 
| **Series**        |   | **Term**              |   | **Exercise  Price** |   | **Number of  Shares** |      |
|-------------------|--------|-----------------------|--------|---------------------|--------|-----------------------|-----------|
|              |   |                  |   |                |   |                  |      |
| Series A warrants |   | Four and a half years |   | $                   | 0.992  |                  | 1,000,000 |   |
| Series B warrants |   | Two years             |   | $                   | 0.873  |                  | 666,668   |   |
| Series C warrants |   | Four and a half years |   | $                   | 0.992  |                  | 666,664   |   |
| Series D warrants |   | Two years             |   | $                   | 0.873  |                  | 666,664   |   |
|              |   |                  |   |                |   | 2,999,996             |      |

 

Allof the Warrants are subject to customary anti-dilution adjustments.  The Series A and Series B warrants areexercisable beginning September 11, 2004 and for a term as noted in thetable above.  The Series C and Series Dwarrants become exercisable only in the event that the Company’s ordinaryshares are delisted from The Nasdaq

 

9

----

 

SmallCap Market, beginning upon the later of the date of delisting andSeptember 11, 2004, for the term noted in the table above.

 

OnAugust 2, 2004, the Company received a letter from the Nasdaq informingthe Company that it did not comply with Marketplace Rule 4320(e)(2)(B).  This rule requires a listed company to meetone of three tests involving shareholders’ equity, market capitalization or netincome.  As of June 30, 2004, theCompany’s shareholders’ equity was $1,553,000, which was below the minimumshareholders’ equity requirement of $2.5 million.  The Company also does not satisfy either of the other twotests.  The Nasdaq also informed theCompany that it is reviewing the Company’s eligibility for continued listing onthe Nasdaq SmallCap Market.  Inconnection with their review, the Nasdaq has requested that the Company provideon or before August 16, 2004 the Company’s specific plans to achieve andsustain compliance with the listing requirements.  The Company is presently preparing a response to the Nasdaq withthe requested information.

 

TheCompany may require the Purchasers to exercise their right to purchase ordinaryshares pursuant to the Additional Investment Rights or Warrants if the closingprice of the ordinary shares on The Nasdaq SmallCap Market or alternative thereforexceeds the respective exercise prices of the Additional Investment Rights orany series of the Warrants by at least 100% for twenty consecutive trading dayson which the average daily trading volume of the ordinary shares on the NasdaqSmallCap Market or alternative therefor is at least 250,000 Ordinary Shares,excluding blocks of 25,000 or more ordinary shares.

 

**5.   AccruedRestructuring Charges**

 

Thefollowing is a reconciliation of the activity in the accrued restructuringcharge for each of the six-month periods ended June 30, 2003 and 2004:

 
| **Description**                   |   | **Balance,  Beginning  of Period** |   | **Provision** |   | **Payments  and  Write-offs** |   | **Balance,  End of Period** |   |
|-----------------------------------|--------|------------------------------------|--------|---------------|--------|-------------------------------|--------|-----------------------------|--------|
|                              |   | **(In  thousands)**                |   |
| **Six Months Ended-**             |   |                               |   |          |   |                          |   |                        |   |
| **June 30, 2003:**           |   |                               |   |          |   |                          |   |                        |   |
| Employee severance costs          |   | $                                  | — |          | $      | 207                           |   | $                           | (105   | ) | $ | 102 |   |
| Idle-lease costs                  |   | 612                                |   | 26            |   | (144                          | )      | 494                         |   |
| Property and equipment impairment |   | —                             |   | 4             |   | —                        |   | 4                           |   |
| Vendor contract termination fees  |   | —                             |   | 8             |   | (8                            | )      | —                      |   |
|                              |   | $                                  | 612    |          | $      | 245                           |   | $                           | (257   | ) | $ | 600 |   |
| **June 30, 2004:**           |   |                               |   |          |   |                          |   |                        |   |
| Idle-lease costs                  |   | $                                  | 320    |          | $      | —                        |   | $                           | (142   | ) | $ | 178 |   |

 

Amountspayable within one year have been classified as a current liability in theaccompanying condensed consolidated balance sheets.

 

10

----

 

**6.  Disclosures AboutSegments of an Enterprise**

 

TheCompany has adopted SFAS No. 131, *DisclosuresAbout Segments of an Enterprise and Related Information*. The Companyoperates in one reportable segment (see Note 1 for a brief description of theCompany’s business). The total revenues are attributed to geographic areasbased on the location of the end-user customer as follows:

 
|           |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|           |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
|           |   | **(In  thousands)**                    |   |
|           |   |                                   |   |                                 |   |   |   |   |   |
| United States  |   | $                                      | 757    |                                 | $      | 804 |   | $ | 1,418 |   | $ | 1,582 |   |
| Europe         |   | 190                                    |   | 81                                   |   | 314 |   | 255 |   |
| Israel         |   | 17                                     |   | 167                                  |   | 135 |   | 329 |   |
| Other          |   | 104                                    |   | 159                                  |   | 181 |   | 265 |   |
| Total revenues |   | $                                      | 1,068  |                                 | $      | 1,211 |   | $ | 2,048 |   | $ | 2,431 |   |

 

**7.  Subsequent Events**

 

*(a)**      **Technology LicenseTransaction*

 

OnJuly 7, 2004, the Company completed a $1,000,000 technology licensetransaction for our WebLOAD product with an original equipment manufacturer, orOEM, partner pursuant to the exercise of an option by the OEM partner under theterms of a development, publishing and distribution agreement.   The technology license provides the OEMpartner with expanded rights including the right to access and use source codefor the WebLOAD product and the right to create derivative products.  The OEM partner is required to continue topay to the Company royalties on its sale of WebLOAD at a reduced rate throughJuly 7, 2005, after which the OEM partner would have no further paymentobligations to the Company.  The OEMpartner has the right to make a single payment of $250,000 to the Companywithin five days of the receipt of source code materials in lieu of itsobligations to pay the reduced royalty.

 

TheCompany is obligated to provide product updates and technical and engineeringsupport to the OEM partner until July 2005.  The Company will recognize the $1,000,000 technology license feeas revenue over the 12-month period that commenced on July 7, 2004. .  If the OEM partner elects to make the$250,000 payment in lieu of its reduced royalty obligation, then this amountwould also be recognized as revenue over the same 12-month period.

 

*(b)**      **Office Lease*

 

OnJuly 20, 2004, the Company amended the lease on its Burlington,Massachusetts office space.  Under theamendment, the Company substituted its original space for a smaller office at alower base rent.  The new space is for4,929 square feet and expires in July 2009.  The original lease was for 11,228 square feet and would haveexpired in March 2005.

 

11

----

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Statements in this Quarterly Report on Form 10-Qconcerning RadView’s business outlook or future performance; anticipatedrevenues, expenses or other financial items; product introductions and plansand objectives related thereto; and statements concerning assumptions made orexpectations as to any future events, conditions, performance or other matters,are “forward-looking statements” as that term is defined under U. S. federalsecurities laws. Forward-looking statements are subject to various risks,uncertainties and other factors that could cause actual results to differmaterially from those stated in such statements. These risks, uncertainties andfactors include, but are not limited to: our history of losses; marketacceptance of our products; our ability to develop new products and enhanceexisting 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, efficiency and reliability of web applications.   In 1997, we introduced WebLOAD, asingle-user load testing solution designed to assess the performance andaccelerate the deployment of web applications. In February 2000, we introduced WebRM, a multiple-user load testingsolution, which extends the functionality of WebLOAD to facilitate the collaborativetesting efforts of both small and large testing teams to verify web applicationquality throughout the application development lifecycle.  In August 2001, we introduced WebFT, atesting tool for verification of the functionality of web applications.  In July 2003, we introduced WebLOADAnalyzer, a solution for identifying the root-cause of performance problemswithin web applications.  In May 2004,we introduced TestView, a comprehensive web application testing solution thatintegrates WebFT for functional testing, WebLOAD for load and scalabilitytesting and TestView Manager for test management through a central console.

 

OnJuly 7, 2004, we completed a $1,000,000 technology license transaction forour WebLOAD product with Ixia, an original equipment manufacturer partnerpursuant to the exercise of an option by Ixia under the terms of a development,publishing and distribution agreement.  The technology license provides Ixia with expanded rights including theright to access and use source code for the WebLOAD product and the right tocreate derivative products.  Ixia isrequired to continue to pay to us royalties on its sale of WebLOAD at a reducedrate through July 7, 2005, after which they would have no further paymentobligations to us.  Ixia has the rightto make a single payment of $250,000 to us within five days of the receipt ofsource code materials in lieu of its obligations to pay the reducedroyalty.  We are obligated to provideproduct updates and technical and engineering support to Ixia untilJuly 2005.  We will recognize the$1,000,000 technology license fee as revenue over the 12-month period thatcommenced July 7, 2004. Accordingly, these revenues will be recognized commencing with thequarter ending September 30, 2004. If Ixia elects to make the $250,000 payment in lieu of its reducedroyalty obligation, then this amount would also be recognized as revenue overthe same 12-month period.

 

**Application of Critical Accounting Policiesand Estimates**

 

***General***

 

Weprepare our consolidated financial statements in conformity with accountingprinciples generally accepted in the U.S. As such, we are required to make certain estimates, judgments andassumptions that we believe are reasonable based upon the informationavailable. These estimates and assumptions affect the reported amounts ofassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the periods presented.  To fully understand and evaluate ourreported financial results, we believe it is important to understand thesignificant estimates and judgments applied as they relate to our policies forrevenue recognition, software development costs, restructuring costs andaccounting for stock options.  Moredetailed descriptions of these policies are provided in Note 2 to theconsolidated financial statements.

 

12

----

 

***Revenue Recognition***

 

Ourrevenue recognition approach requires that four basic criteria must be metbefore revenue can be recognized: (1) persuasive evidence of an arrangementexists; (2) delivery has occurred or services rendered; (3) the fee is fixedand determinable; and (4) collectibility is reasonably assured.  Determination of criteria (3) and (4) isbased on management’s judgments regarding the fixed nature of the fee chargedfor services rendered and products delivered, and the collectibility of thosefees.  Should changes in conditionscause management to determine these criteria are not met for certain futuretransactions, revenue recognized for any reporting period could be adverselyaffected.

 

***Software DevelopmentCosts***

 

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 the amountsthat could be capitalized are not material to our financial statements.  Therefore, we have charged all such costs toresearch and development expense in the period incurred

 

***RestructuringCharges***

 

Inprior years, we recorded significant restructuring charges. These restructuringcharges included estimates pertaining to employee separation costs and thesettlements of contractual obligations resulting from our actions.  In addition, we have estimated the costs forcertain under-utilized facilities and have made assumptions regarding apotential sub-lessee’s future rental rate, as well as the amount of timerequired to identify a sub-lessee.  Todate, our actual restructuring costs have approximated the estimated costsrecorded; however, actual future costs of amounts not yet paid may differ fromthese estimates.

 

***Accounting for StockOptions***

 

Weaccount for stock options issued to employees under the intrinsic method inaccordance with Accounting Principles Board, or APB, Opinion No. 25, *Accounting for Stock Issued to Employees*.  Under this approach we do not record anyexpense at the time the options are granted unless the exercise price of agranted option is below the fair market price of our ordinary shares on thedate of grant.  We have provided disclosuresof impact to our reported net loss and net loss per share if we had applied thefair value method.  The pro forma fairvalue disclosures requires the application of estimates, such as estimatedexpected life of the options and estimated market volatility for our ordinaryshares.  These estimates are based onmanagement’s review of historical option lives and computations of marketvolatility for our ordinary shares.

 

13

----

 

**Results of Operations**

 

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

 
|                       |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                       |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
| Revenues:                  |   |                                   |   |                                 |   |   |   |   |   |
| Software licenses          |   | 49.0                                   | %      | 51.4                                 | %      | 47.4 | % | 53.0 | % |
| Services                   |   | 51.0                                   |   | 48.6                                 |   | 52.6 |   | 47.0 |   |
| Total revenues             |   | 100.0                                  |   | 100.0                                |   | 100.0 |   | 100.0 |   |
|                       |   |                                   |   |                                 |   |   |   |   |   |
| Cost of Sales:             |   |                                   |   |                                 |   |   |   |   |   |
| Software licenses          |   | 1.7                                    |   | 1.2                                  |   | 2.4 |   | 1.4 |   |
| Services                   |   | 7.2                                    |   | 9.2                                  |   | 7.7 |   | 9.5 |   |
| Total cost of sales        |   | 8.9                                    |   | 10.4                                 |   | 10.1 |   | 10.9 |   |
|                       |   |                                   |   |                                 |   |   |   |   |   |
| Gross Profit               |   | 91.1                                   |   | 89.6                                 |   | 89.9 |   | 89.1 |   |
|                       |   |                                   |   |                                 |   |   |   |   |   |
| Operating Expenses:        |   |                                   |   |                                 |   |   |   |   |   |
| Sales and marketing        |   | 84.0                                   |   | 85.9                                 |   | 83.1 |   | 93.4 |   |
| Research and development   |   | 59.6                                   |   | 53.7                                 |   | 61.9 |   | 61.7 |   |
| General and administrative |   | 39.0                                   |   | 33.5                                 |   | 44.9 |   | 34.7 |   |
| Stock-based compensation   |   | 0.0                                    |   | 8.5                                  |   | 4.1 |   | 8.7 |   |
| Restructuring charges      |   | 0.0                                    |   | 20.2                                 |   | 0.0 |   | 10.1 |   |
| Total operating expenses   |   | 182.6                                  |   | 201.8                                |   | 194.0 |   | 208.6 |   |
|                       |   |                                   |   |                                 |   |   |   |   |   |
| Operating loss             |   | (91.5                                  | )      | (112.2                               | )      | (104.1 | ) | (119.5 | ) |
|                       |   |                                   |   |                                 |   |   |   |   |   |
| Interest income, net       |   | 0.3                                    |   | 0.8                                  |   | 0.3 |   | 0.9 |   |
| Other expense, net         |   | (2.0                                   | )      | (3.8                                 | )      | (1.0 | ) | (2.2 | ) |
|                       |   |                                   |   |                                 |   |   |   |   |   |
| Net loss                   |   | (93.2                                  | )%     | (115.2                               | )%     | (104.8 | )% | (120.8 | )% |

 

**Three and Six Months Ended June 30, 2004 and 2003**

 

***Revenues***

 

*Total Revenues*. Total revenues were $1.1 million for thethree months ended June 30, 2004 and $1.2 million for the same period in2003, which represents a decrease of $143,000, or 11.8%.  Total revenues were $2.0 million for the sixmonths ended June 30, 2004 and $2.4 million for the same period in 2003,which represents a decrease of $383,000, or 15.8%. The decreases in totalrevenues resulted primarily from a decline in sales of software licenses.

 

*Software Licenses*. Software license revenues were $523,000 for the three months endedJune 30, 2004 and $622,000 for the same period in 2003, which represents adecrease of $99,000, or 15.9%.  Thisdecrease consisted of a decline in software license revenues of $105,000 fromNorth American customers, offset, in part, by a $6,000 increase of softwarelicense revenues from international customers. Software license revenues were $970,000 for the six months endedJune 30, 2004 and reflects a decrease of $319,000, or 24.7%, as comparedto software license revenues of $1.3 million for the same period in 2002.  This decrease consisted of a decline insoftware license revenues of $214,000 from U.S. customers and $105,000 frominternational customers. Software license revenues decreased as a result of adecline in orders for our enterprise solution.

 

*Services*.  Services revenues consistprimarily of revenue from annual support and maintenance contracts and, to alesser extent, training and consulting services.  Services revenues were $545,000 for the three months endedJune 30, 2004 and $589,000 for the same period in 2003.  The decrease in services revenues of$44,000, or 7.5%, was lower than the decrease in revenues from softwarelicenses due to improved renewal orders from our support and

 

14

----

 

maintenance business.  Servicerevenues were $1.1 million for the six months ended June 30, 2004,representing a decrease of $64,000, or 5.6%, as compared to service revenues of$1.1 million for the same period in 2003. This decrease consisted of a decline in services revenues of $41,000from U.S. customers and $23,000 from international customers.

 

***Cost of Revenues***

 

*Cost of Software Licenses*. Cost of software licenses consistsprincipally of direct product costs, such as product media and packaging, aswell as royalties due to third parties. Cost of software licenses increased to $18,000, or 3.4% of softwarelicense revenue, for the three months ended June 30, 2004 from $15,000, or2.4% of software license revenue, for the same period in 2003.  Cost of software licenses increased from$35,000, or 2.7% of software license revenue, for the six months endedJune 30, 2003 to $49,000, or 5.1% of software license revenue, for thesame period in 2004. These increases were due to increased royalties payable toa third party based on revenues from our WebLOAD Analyzer product introduced inJuly 2003.

 

*Cost of Services*. Cost of services consists principally ofpersonnel-related costs associated with customer support and training.  Cost of services decreased to $77,000, or14.1% of service revenue, for the three months ended June 30, 2004 from$111,000, or 18.8% of service revenue, for the same period in 2003.  Cost of services decreased from $230,000, or20.1% of service revenue, for the six months ended June 30, 2003 to$157,000, or 14.6% of service revenue, for the same period in 2004. Thesedecreases were due to reduced personnel costs to provide support andmaintenance services resulting from the headcount reductions taken in the secondquarter of 2003.

 

***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 and marketing expenses decreased to $897,000, or 84.0% oftotal revenues, for the three months ended June 30, 2004 from $1.0million, or 85.9% of total revenues, for the same period in 2003. Sales andmarketing expenses decreased from $2.3 million, or 93.4% of total revenues, forthe six months ended June 30, 2003 to $1.7 million, or 83.1% of totalrevenues, for the same period in 2004. These decreases were due primarily to headcount reductions of sales andmarketing personnel during the second quarter of 2003 along with reducedmarketing program spending.

 

*Research and Development*. Research and development expenses consist principally of salaries andrelated expenses required to develop and enhance the Company’s products.  Research and development expenses decreasedto $636,000, or 59.6% of total revenues, for the three months endedJune 30, 2004, from $650,000, or 53.7% of total revenues, for the sameperiod in 2003.  Research anddevelopment expenses decreased from $1.5 million, or 61.7% of total revenues,for the six months ended June 30, 2003, to $1.3 million, or 61.9% of totalrevenues, for the same period in 2004. These decreases were due primarily to headcount reductions of researchand development personnel during the second quarter of 2003.

 

*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 expensesincreased to $417,000, or 39.0% of total revenues, for the three months endedJune 30, 2004 from $406,000, or 33.5% of total revenues, for the sameperiod in 2003.  General andadministrative expenses increased from $843,000, or 34.7% of total revenues,for the six months ended June 30, 2003 to $919,000, or 44.9% of totalrevenues, for the same period in 2004. These increases were due primarily toadditional professional fees incurred during the first quarter of 2004.

 

*Stock-based Compensation*. Stock-based compensation expense reflectsthe accounting charge relating to the issuance of equity instruments toemployees at an exercise price below fair market value at date of grant and toall equity instruments issued to nonemployees. For stock options granted to employees, the difference between theexercise price and the fair value of the ordinary shares on the date optionsare granted is charged to operations as stock-based compensation expense overthe vesting period of the underlying options. For stock options granted to nonemployees, the value of a particulargrant as determined by the Black-Scholes valuation model is charged to

 

15

----

 

operations as stock-based compensation expense over the service periodor vesting period of the underlying option. There was no stock-based compensation expense for the three months endedJune 30, 2004 compared to $103,000 for the same period in 2003.  Stock-based compensation expense was $84,000for the six months ended June 30, 2004 compared to $214,000 for the sameperiod in 2003.  This decrease resultedfrom the completion of all amortization of deferred compensation.  Deferred compensation on the unvestedoptions was included as a component of shareholders’ equity and charged tostock-based compensation expense over the vesting period of the underlyingoptions.

 

*Interest Income, Net*. Interest income, net consists principallyof interest earned on cash investments. Interest income, net was $3,000 for the three months ended June 30,2004 compared to $10,000 for the same period in 2003. Interest income, net was$6,000 for the six months ended June 30, 2004 compared to $24,000 for thesame period in 2003. The decreases in interest income resulted from lower investedcash balances in 2004 as compared to 2003.

 

*Other Expense, Net*. Other expense, net consists principally ofcurrency translation gains and losses. Other expense, net was $21,000 for the three months ended June 30,2004 compared to $46,000 for the same period in 2003. There was other expense,net of $21,000 for the six months ended June 30, 2003 compared to $54,000for the same period in 2003.  The changewas due to exchange rate fluctuations.

 

*Income Taxes.*  Wehave estimated net operating loss carryforwards for Israeli tax purposestotaling approximately $21.2 million through June 30, 2004 that wouldreduce future Israeli income taxes, if any. These net operating losses may becarried forward indefinitely and offset against future taxable business income.  We expect that during the period theselosses are 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.

 

OurU.S. subsidiary has estimated net operating loss carryforwards for U.S. Federaland state tax purposes totaling approximately $28.5 million throughJune 30, 2004.  These losses areavailable to offset any future U.S. taxable income of the U.S. subsidiary andwill expire between 2012 and 2024.  TheCompany has recorded a full valuation allowance against its deferred tax assetdue to the uncertainty surrounding the ability and the timing of therealization of these tax benefits.

 

**Liquidity and Capital Resources**

 

Cashand cash equivalents totaled $3.1 million as of June 30, 2004 and as ofDecember 31, 2003.

 

Cashused in operating activities have resulted substantially from our reported netlosses partially reduced by noncash items such as depreciation and stock-basedcompensation.

 

Cashused in operating activities was $1.8 million for the six months endedJune 30, 2004 and $2.6 million for the same period in 2003.  Cash used in operating activities for thesix months ended June 30, 2004 was due primarily to a net loss of $2.1million and a decrease of $215,000 in accounts payable, accrued expenses andaccrued restructuring, partially offset by noncash items and an increase of$195,000 in deferred revenues.  Accruedexpenses and accounts payable decreased as a result of the payment of accruedpayroll-related costs and professional fees. Deferred revenues increased resulting from several large support andmaintenance renewal orders received during the quarter along with the receiptof a prepaid royalty from a channel partner.

 

Cashused in investing activities was $23,000 for the six months ended June 30,2004 and resulted from the purchase of $20,000 in property and equipment and anincrease of $3,000 in other assets.

 

Cashprovided by financing activities was $1.8 million for the six months endedJune 30, 2004 and consisted primarily of $1.8 million of net proceeds froma private placement of 3,333,331 of our ordinary shares in March 2004 foran aggregate purchase price of $2.0 million. In connection with the private placement, the investors also receivedfour series of warrants to purchase an aggregate of up to 2,999,996 ordinaryshares at exercise prices ranging from $0.87 to $0.99 per share. Warrants topurchase 1,333,328 of these shares become exercisable only in

 

16

----

 

the event our ordinary shares are delisted from The Nasdaq SmallCapMarket. In addition, we granted the investors an option to purchase within oneyear an additional 3,333,331 ordinary shares at a purchase price of $0.81 pershare.

 

Weexpect that operating expenses and, to a lesser extent, our planned capitalexpenditures, will constitute a material use of our cash resources.  We believe that our existing cash and cashequivalents, including the proceeds from our recent technology licensetransaction, will be sufficient to meet our anticipated needs for workingcapital and capital expenditures at least through June 30, 2005.   We may find it necessary to obtainadditional equity or debt financing.  Inthe event additional financing is required, we may not be able to completefinancing on acceptable terms or at all.

 

OnFebruary 11, 2004, we received a letter from the Nasdaq under which wewere informed that as of December 31, 2003 we were not in compliance withMarketplace Rule 4320(e)(2)(B). This rule requires a listed company to meet oneof three tests involving shareholders’ equity, market capitalization or netincome. We provided the Nasdaq with our plan to achieve and sustain compliancewith The Nasdaq SmallCap Market minimum shareholders’ equity requirement of$2.5 million.  On April 1, 2004, atthe Nasdaq’s request, we filed a Form 8-K with the SEC that included a proforma balance sheet reflecting that our pro forma shareholders’ equity as ofFebruary 29, 2004 was approximately $2,735,000 after giving effect to thereceipt of the proceeds of our private placement of 3,333,331 ordinary sharescompleted on March 17, 2004.  OnApril 5, 2004, the Nasdaq advised us in writing that, based upon itsreview of our Form 8-K, its staff had determined that we were in compliancewith Marketplace Rule 4320(e)(2)(B) and that it had concluded its review of oureligibility for continued listing on The Nasdaq SmallCap Market.

 

OnAugust 2, 2004, we received a new letter from the Nasdaq informing us thatas of June 30, 2004 we did not comply with Marketplace Rule4320(e)(2)(B).  As of June 30,2004, our shareholders’ equity was $1,553,000, which was below the minimumshareholders’ equity requirement of $2.5 million.  We also do not satisfy either of the other two tests.  The Nasdaq informed us that it is reviewingour eligibility for continued listing on the Nasdaq SmallCap Market.  In connection with their review, the Nasdaqhas requested that we provide on or before August 16, 2004 our specificplans to achieve and sustain compliance with the listing requirements.  We are presently preparing a response to theNasdaq with the requested information.

 

Ifwe were to be delisted from The Nasdaq SmallCap Market, as discussed above,warrants to purchase 1,333,328 of our ordinary shares would becomeexercisable.  In addition, in the eventof a delisting, we and our shareholders may experience negative consequences,including a less liquid trading market for our ordinary shares; loss ofinvestor confidence that could result in the decline in the trading price orvolume of our ordinary shares; a decrease of our reputation with prospects,customers, employees and vendors; and reduced access to capital markets.

 

**Contractual Obligations**

 

Welease all of our office facilities under noncancellable operating leases thatexpire over varying terms through 2009. On July 20, 2004, we amended the lease to our Burlington,Massachusetts headquarters to reduce both our base rent and the square footageof our office.  The amended lease willexpire in July 2009.  As ofJune 30, 2004, adjusted for the impact of our subsequent lease amendment,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            |   | $                           | 659    |   | $ | 255 |   | $ | 228 |   | $ | 132 |   | $ | 44 |   |
| Severance pay (1)           |   | 644                         |   | — |   | — |   | — |   | 644 |   |
| Total                       |   | $                           | 1,303  |   | $ | 255 |   | $ | 228 |   | $ | 132 |   | $ | 688 |   |

 

----

(1)          Severancepay relates to accrued severance obligations to our Israeli employees asrequired under Israeli labor laws. These obligations are payable only upon the termination of therespective employee and may be reduced if the employee’s termination isvoluntary.

 

17

----

 

**ITEM 3****.  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK**

 

TheCompany does not use derivative financial instruments in its investingportfolio.  The Company places its investmentsin instruments that meet high credit quality standards such as money marketfunds, government securities, and commercial paper.  The Company limits the amount of credit exposure to any oneissuer.  The Company does not expect anymaterial loss with respect to its investment portfolio.

 

TheCompany conducts business in various foreign currencies, primarily in Europeand Israel.  As a result, the Company isexposed to the effect of foreign currency exchange rate fluctuations on theU.S. dollar value of foreign currency-denominated revenues and expenses.  The Company does not use foreign exchangeforward contracts to hedge its foreign currency denominated receivables.  Looking forward, there can be no assurancethat changes in foreign currency rates, relative to the U.S. dollar, will notmaterially adversely affect the consolidated results of the Company.

 

**ITEM 4****.  CONTROLS AND PROCEDURES**

 

**Evaluation of Controls and Procedures**

 

Wecarried out an evaluation, under the supervision and with the participation ofthe Company’s management, including the Company’s Chief Executive Officer, orCEO, and Chief Financial Officer, or CFO, of the effectiveness of the designand operation of the Company’s disclosure controls and procedures as of the endof the period covered by this Quarterly Report on Form 10-Q. Based on thisevaluation, the CEO and CFO have concluded that the Company’s disclosurecontrols and procedures are effective to ensure that material information isrecorded, processed, summarized and reported by management of the Company on atimely basis in order to comply with the Company’s disclosure obligations underthe Securities Exchange Act of 1934 and the SEC rules thereunder.

 

**Changes in internal controls**

 

Therewere no significant changes in the Company’s internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof the evaluation.

 

**PART II****- OTHER INFORMATION**

 

**Item 1****.  Legal Proceedings**

 

OnAugust 5, 2004, we filed suit against Veritas Software Corporation,Veritas Software (Israel) Ltd. and Precise Software Solutions Ltd. (direct orindirect wholly-owned subsidiaries of Veritas Software Corporation),collectively the defendants. We asserted claims of trade secretmisappropriation, violation of various intellectual property and statutoryrights and unfair competition. The claims are based on allegations that thedefendants improperly used our trade secrets received by the defendants, interalia, from three of our former employees, who were subsequently hired by thedefendants.  In addition to variousdamages, the suit requested a temporary injunction and permanent injunctionprohibiting defendants from misappropriating our technology.  An initial hearing was held onAugust 10, 2004.  OnAugust 12, 2004, we entered into a court-approved settlement with thedefendants.  Pursuant to the settlement,the defendants agreed, inter alia, not to use our trade secrets, to refrainfrom hiring additional RadView employees for a specified period and to certainlimitations for a specified period on our three former employees who are nowemployed by the defendants.

 

Inaddition to this lawsuit, we may be involved from time to time in litigationarising in the normal course of our business. Although we are currently not a party to any such litigation that webelieve would have a material adverse effect, individually or in the aggregate,on our business or financial condition, it is possible that in the future wecould become a party to such proceedings.

 

18

----

 

**Item 2****.  Changes in Securities and Use of Proceeds**

 

**(d) Use of Proceeds from Sale of Registered Securities**

 

OnAugust 9, 2000, in connection with our initial public offering, theSecurities and Exchange Commission declared effective a Registration Statementon Form F-1 (No. 333-41526) that registered 5,750,000 ordinary shares.

 

ThroughJune 30, 2004, we have used $34.0 million of the net proceeds of the $35.3million from our initial public offering as follows:

•                  $1.9 million for capital expenditures;

•                  $1.4 million for repayment of principal andaccrued interest on a loan with Rad Data Communications, Inc., a related party;

•                  $3.8 million for repayment of principal andaccrued interest on long-term debt with a bank;

•                  $100,000 for the repurchase of ordinaryshares; and

•                  $26.8 million for working capital.

 

**Item 6****.  Exhibits and Reports on Form 8-K**

 

**(a) Exhibit Index**

 

10.1*                    First Amendment to Lease Agreement dated July 20, 2004 for 7 NewEngland Executive Park, Burlington, Massachusetts, 01803.

 

31.1*                    Certification by Chief Executive Officer pursuant to 15 U.S.C.Section 7241, as adopted pursuant to Section 302 of theSarbanes-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 theSarbanes-Oxley Act of 2002.

 

32*                             Certification pursuant to 18 U.S.C Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

----

*  Filed herewith

 

**(b) Reports on Form 8-K:**

 

•                  On April 1, 2004, we filed a Form 8-K toreport the sale of 3,333,331 of our ordinary shares at the purchase price of$0.600 per share and for an aggregate purchase price of $2.0 million in aprivate placement. The investors also received four series of warrants topurchase an aggregate of up to 2,999,996 ordinary shares at exercise pricesranging from $0.873 to $0.992 per share. In addition, the Company granted the investors additional investmentrights to purchase within one year an additional 3,333,331 ordinary shares at apurchase price of $0.810 per share.

 

19

----

 

**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:  August 13, 2004 | /s/  CHRISTOPHER DINEEN  |   |
|                             | Christopher  Dineen      |
|                             | Chief  Financial Officer |

 

20

----