** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM10-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, 2005** |
|                                              |   |   |
| **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                                                    |   | (I.R.S. Employer |
| incorporation or  organization)                                                     |   | Identification No.) |
|                                                                                |   |   |
| **7 New  England Executive Park**                                                   |
| **Burlington,  MA 01803**                                                           |
| (Address of principal  executive offices)                                           |
|                                                                                |   |   |
| **Telephone Number (781)  238-1111**                                                |
| (Registrant’s telephone  number, including area code)                          |
|                                                                                |   |   |
| **None**                                                                            |
| (Former name, former  address and former fiscal year, if changed since last report) |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required 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.

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 126-2 of theExchange Act):  Yes  o   No.  ý.

 

As of July 31, 2005, there were 20,525,682 shares ofthe Registrant’s Ordinary Shares outstanding, excluding 134,000 Ordinary Sharesheld by the registrant as treasury shares that are “dormant” shares forpurposes of Israeli law.

 

 

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

 

2

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**PART I - FINANCIAL INFORMATION**

 

**RADVIEWSOFTWARE LTD. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

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

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                 | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                 |       |               |       |                   |       |
| Current Assets:                                                                                                                                                                                                                            |       |               |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                                                  |       | $                  | 1,750      |                   | $          | 2,163 |   |
| Accounts receivable, net of reserves of $72 at June 30, 2005 and  December 31, 2004                                                                                                                                                        |       | 806                |       | 605                    |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                  |       | 276                |       | 375                    |       |
| Total Current Assets                                                                                                                                                                                                                       |       | 2,832              |       | 3,143                  |       |
|                                                                                                                                                                                                                                       |       |               |       |                   |       |
| Property and Equipment, net                                                                                                                                                                                                                |       | 184                |       | 164                    |       |
| Other Assets                                                                                                                                                                                                                               |       | 402                |       | 607                    |       |
|                                                                                                                                                                                                                                       |       |               |       |                   |       |
| Total Assets                                                                                                                                                                                                                               |       | $                  | 3,418      |                   | $          | 3,914 |   |
|                                                                                                                                                                                                                                       |       |               |       |                   |       |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIT**                                                                                                                                                                                             |       |               |       |                   |       |
| Current Liabilities:                                                                                                                                                                                                                       |       |               |       |                   |       |
| Revolving line of credit, net of discount of $48 at June 30, 2005                                                                                                                                                                          |       | $                  | 1,252      |                   | $          | — |   |
| Accounts payable                                                                                                                                                                                                                           |       | 361                |       | 239                    |       |
| Accrued expenses                                                                                                                                                                                                                           |       | 1,144              |       | 1,141                  |       |
| Deferred revenue                                                                                                                                                                                                                           |       | 1,400              |       | 1,905                  |       |
| Total Current Liabilities                                                                                                                                                                                                                  |       | 4,157              |       | 3,285                  |       |
|                                                                                                                                                                                                                                       |       |               |       |                   |       |
| Long-term Liabilities:                                                                                                                                                                                                                     |       |               |       |                   |       |
| Accrued severance                                                                                                                                                                                                                          |       | 543                |       | 713                    |       |
|                                                                                                                                                                                                                                       |       |               |       |                   |       |
| Total Liabilities                                                                                                                                                                                                                          |       | 4,700              |       | 3,998                  |       |
|                                                                                                                                                                                                                                       |       |               |       |                   |       |
| Shareholders’ Deficit:                                                                                                                                                                                                                |       |               |       |                   |       |
| Ordinary shares, NIS 0.01 par value –  Authorized – 40,000,000 shares;   Issued – 20,659,682 shares at June 30, 2005 and December 31, 2004;   Outstanding – 20,525,682 shares at June 30, 2005 and   December 31, 2004 |       | 51                 |       | 51                     |       |
| Treasury shares, at cost – 134,000 shares                                                                                                                                                                                             |       | (100               | )          | (100                   | )          |
| Additional paid-in capital                                                                                                                                                                                                                 |       | 56,927             |       | 56,813                 |       |
| Accumulated deficit                                                                                                                                                                                                                        |       | (58,160            | )          | (56,848                | )          |
| Total Shareholders’ Deficit                                                                                                                                                                                                           |       | (1,282             | )          | (84                    | )          |
|                                                                                                                                                                                                                                       |       |               |       |                   |       |
| Total Liabilities and Shareholders’ Deficit                                                                                                                                                                                           |       | $                  | 3,418      |                   | $          | 3,914 |   |

 

Theaccompanying notes are an integral part of these condensed consolidated financialstatements.

 

3

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**RADVIEW SOFTWARE LTD. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(In thousands, except per sharedata)**

**(Unaudited)**

** **
| ** **                                                                                | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                                                 |       |                              |       |                            |       |   |   |   |   |
| Software  licenses                                                                        |       | $                                 | 1,026      |                            | $          | 523 |   | $ | 1,966 |   | $ | 970 |   |
| Services                                                                                  |       | 614                               |       | 545                             |       | 1,181 |   | 1,078 |   |
| Total Revenues                                                                            |       | 1,640                             |       | 1,068                           |       | 3,147 |   | 2,048 |   |
|                                                                                      |       |                              |       |                            |       |   |   |   |   |
| Cost of  Revenues:                                                                        |       |                              |       |                            |       |   |   |   |   |
| Software  licenses                                                                        |       | 35                                |       | 18                              |       | 71 |   | 49 |   |
| Services                                                                                  |       | 52                                |       | 77                              |       | 109 |   | 157 |   |
| Total Cost of  Revenues                                                                   |       | 87                                |       | 95                              |       | 180 |   | 206 |   |
|                                                                                      |       |                              |       |                            |       |   |   |   |   |
| Gross Profit                                                                              |       | 1,553                             |       | 973                             |       | 2,967 |   | 1,842 |   |
|                                                                                      |       |                              |       |                            |       |   |   |   |   |
| Operating  Expenses:                                                                      |       |                              |       |                            |       |   |   |   |   |
| Sales and  marketing                                                                      |       | 999                               |       | 897                             |       | 1,960 |   | 1,746 |   |
| Research and  development                                                                 |       | 659                               |       | 636                             |       | 1,369 |   | 1,305 |   |
| General and  administrative                                                               |       | 466                               |       | 417                             |       | 942 |   | 922 |   |
| Total Operating  Expenses                                                                 |       | 2,124                             |       | 1,950                           |       | 4,271 |   | 3,973 |   |
|                                                                                      |       |                              |       |                            |       |   |   |   |   |
| Operating loss                                                                            |       | (571                              | )          | (977                            | )          | (1,304 | ) | (2,131 | ) |
|                                                                                      |       |                              |       |                            |       |   |   |   |   |
| Interest income  (expense), net                                                           |       | (3                                | )          | 3                               |       | (5 | ) | 6 |   |
| Other income  (expense), net                                                              |       | 5                                 |       | (21                             | )          | (3 | ) | (21 | ) |
|                                                                                      |       |                              |       |                            |       |   |   |   |   |
| Net loss                                                                                  |       | $                                 | (569       | )                               | $          | (995 | ) | $ | (1,312 | ) | $ | (2,146 | ) |
|                                                                                      |       |                              |       |                            |       |   |   |   |   |
| Basic and  diluted net loss per share                                                     |       | $                                 | (0.03      | )                               | $          | (0.05 | ) | $ | (0.06 | ) | $ | (0.11 | ) |
|                                                                                      |       |                              |       |                            |       |   |   |   |   |
| Weighted average  number of shares used in computing basic and diluted net loss per share |       | 20,526                            |       | 20,456                          |       | 20,526 |   | 19,126 |   |

 

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

 

4

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**RADVIEWSOFTWARE LTD. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(Unaudited)**

** **
| ** **                                                                                                     | ** ** | **Six Months Ended****   June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Cash Flows from Operating Activities:                                                                          |       |                                     |       |   |   |
| Net loss                                                                                                       |       | $                                        | (1,312     | ) | $ | (2,146 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities—                              |       |                                     |       |   |   |
| Depreciation                                                                                                   |       | 53                                       |       | 136 |   |
| Stock-based compensation                                                                                       |       | 62                                       |       | 84 |   |
| Amortization of warrant discount and debt issuance costs in connection with  revolving line of credit facility |       | 10                                       |       | — |   |
| Accrued severance                                                                                              |       | (170                                     | )          | 25 |   |
| Changes in operating assets and liabilities—                                                              |       |                                     |       |   |   |
| Accounts receivable, net                                                                                       |       | (201                                     | )          | 64 |   |
| Prepaid expenses and other current assets                                                                      |       | 93                                       |       | 65 |   |
| Accounts payable                                                                                               |       | 122                                      |       | (28 | ) |
| Accrued expenses                                                                                               |       | 3                                        |       | (187 | ) |
| Deferred revenue                                                                                               |       | (505                                     | )          | 195 |   |
| Net cash used in operating activities                                                                          |       | (1,845                                   | )          | (1,792 | ) |
|                                                                                                           |       |                                     |       |   |   |
| Cash Flows from Investing Activities:                                                                          |       |                                     |       |   |   |
| Purchases of property and equipment                                                                            |       | (73                                      | )          | (20 | ) |
| Decrease (increase) in other assets                                                                            |       | 205                                      |       | (3 | ) |
| Net cash provided by (used in) investing activities                                                            |       | 132                                      |       | (23 | ) |
|                                                                                                           |       |                                     |       |   |   |
| Cash Flows from Financing Activities:                                                                          |       |                                     |       |   |   |
| Borrowings under revolving line of credit facility, net                                                        |       | 1,248                                    |       | — |   |
| Issuance of warrants in connection with revolving line of credit  facility                                     |       | 52                                       |       | — |   |
| Proceeds from private placement of ordinary shares, net                                                        |       | —                                   |       | 1,792 |   |
| Proceeds from exercise of stock options                                                                        |       | —                                   |       | 27 |   |
| Net cash provided by financing activities                                                                      |       | 1,300                                    |       | 1,819 |   |
|                                                                                                           |       |                                     |       |   |   |
| Increase (decrease) in cash and cash equivalents                                                               |       | (413                                     | )          | 4 |   |
|                                                                                                           |       |                                     |       |   |   |
| Cash and cash equivalents, beginning of period                                                                 |       | 2,163                                    |       | 3,075 |   |
| Cash and cash equivalents, end of period                                                                       |       | $                                        | 1,750      |   | $ | 3,079 |   |
|                                                                                                           |       |                                     |       |   |   |
| Cash paid during period for interest                                                                           |       | $                                        | 17         |   | $ | 4 |   |

 

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

 

5

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**RADVIEW SOFTWARE LTD. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

**1. ****Operations**

 

RadView Software Ltd. (the “Company”) is an Israelicorporation.  The Company develops,markets and supports software that enables organizations to verify thescalability, efficiency and reliability of web applications, and facilitatestheir rapid development.

 

The Company has a history of incurring net losses andhad an accumulated deficit of $58.2 million at June 30, 2005.  The Company has funded these lossesprincipally from proceeds from equity financings, including the privateplacement of its ordinary shares completed in March 2004 (see Note 5), andborrowings under a revolving line of credit facility (see Note 4).

 

License revenues from technology license transactionswere a major contributing factor to the Company’s increase in revenues for thesix months ended June 30, 2005.  TheCompany has been unable to complete anticipated comparable technology licensetransactions with other partners and as a result expects that revenues for thesecond half of 2005 will be lower than in the first half of 2005.  Accordingly, in July 2005, the Companyimplemented a series of measures to lower operating expenses by approximately$430,000 per quarter by reducing discretionary operating expenses across alldepartments and terminating seven employees.

 

Management believes, based on its projected revenuesand expenses and assuming continued compliance with the financial covenants ofthe revolving line of credit, that existing cash and cash equivalents, alongwith borrowings under the revolving line of credit facility, will be adequateto fund operations through December 31, 2005. Thereafter, the Company believes it will need to obtain additionalequity or debt financing in order to adequately fund operations.  Further, if the Company is unable to extendthe terms of its existing revolving line of credit facility, which expires inMay 2006, or if it is unable to maintain compliance with the financialcovenants contained in the revolving credit agreement, then it will alsorequire additional financing to repay the outstanding borrowings under therevolving line of credit.  If additionalfinancing is required, the Company may not be able to complete financing onacceptable terms or at all, in which case the Company might not be able tocontinue its operation as a going concern.

 

**2. ****Significant AccountingPolicies**

 

TheCompany’s condensed consolidated financial statements are prepared inaccordance with U.S. generally accepted accounting principles for interimfinancial information.  The significantpolicies followed in the preparation of the condensed consolidated financialstatements, applied on a consistent basis, are as follows.

 

**(a)**          Use of Estimates

 

The preparation of the financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesas of the date of the financial statements and the reported amounts of revenuesand expenses during the reporting periods. Actual results could differ from these estimates.

 

**(b)****       FinancialStatements in U.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.

 

6

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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:

 

•                  MonetaryItems — At the exchange rate in effect on the balance sheet date.

•                  NonmonetaryItems — At historical exchange rates.

•                  Revenueand Expense Items — At the exchange rates in effect as of the date ofrecognition of those items (excluding depreciation and other items derivingfrom nonmonetary items).

 

All exchange gains and losses from the above-mentionedtranslation (which were immaterial for all periods presented) are reflected inthe statements of operations.  Therepresentative rate of exchange was U.S. $1.00 to 4.574 New Israeli Shekel(“NIS”) at June 30, 2005, U.S. $1.00 to NIS 4.308 at December 31, 2004, andU.S. $1.00 to NIS 4.497 at June 30, 2004.

 

***(c)  Interim FinancialStatements***

* *

Theaccompanying condensed consolidated balance sheet as of June 30, 2005, the condensedconsolidated statements of operations for the three and six months ended June30, 2005 and 2004, and the condensed consolidated statements of cash flows forthe six months ended June 30, 2005 and 2004, are unaudited but, in the opinionof management, include all adjustments necessary for a fair presentation ofresults for these interim periods.  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with U.S. generally accepted accounting principles havebeen omitted, although the Company believes that the disclosures included areadequate to make the information presented not misleading. The results ofoperations for the three and six months ended June 30, 2005 are not necessarilyindicative of the results to be expected for the entire fiscal year.  These financial statements should be read inconjunction with the annual consolidated financial statements for 2004 andrelated notes included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2004.

 

**(d)**          Research and DevelopmentCost

 

The Company has evaluated the establishment oftechnological feasibility of its products in accordance with SFAS No. 86, *Accounting for the Costs of Computer Software to BeSold, Leased or Otherwise Marketed*. The Company sells products in a market that is subject to rapidtechnological change, new product development and changing customer needs.  Accordingly, the Company has concluded that technologicalfeasibility is not established until the development stage of the product isnearly complete.  The Company definestechnological feasibility as the completion of a working model.  The time period during which costs could becapitalized from the point of reaching technological feasibility until the timeof general product release is very short. Consequently, the amounts that could be capitalized are not material tothe Company’s financial position or results of operations.  Therefore, the Company has charged all suchcosts to research and development expense in the period incurred.

 

***(e)  Revenue Recognition***

* *

The Company generates revenues mainly from licensingthe rights to use its software products. The Company also generates revenues from support and maintenanceservices 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.

 

The Company recognizes revenue in accordance withStatement of Position (“SOP”) 97-2, *SoftwareRevenue Recognition,* and SOP 98-9, *Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions*.  ****Under SOP 97-2, r****evenuesfrom software product licenses are recognized upon delivery of the softwareprovided there is persuasive evidence of an agreement, the fee is fixed ordeterminable and collection of the related receivable is probable and nofurther obligations exist.  Revenuesunder multiple-element arrangements, which may include software licenses,support and maintenance, and training and consulting services, are allocated toeach element based on their respective fair values based on vendor-specificobjective evidence.  This objective

 

7

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evidence represents the price of products and services when soldseparately.  ****W****hen vendor-specificobjective evidence of fair value exists for undelivered elements but does notexist for delivered elements of a software arrangement, the Company uses theresidual method for recognition of revenues, when all other revenue recognitioncriteria are met.  Under the residualmethod, the Company defers revenues related to the undelivered elements basedon their vendor specific objective evidence of fair value and recognizes theremaining arrangement fee for the delivered elements.  When vendor-specific objective evidence offair value for undelivered elements does not exist, revenues from the entirearrangement are recognized over the term of the agreement.

 

Revenues from support and maintenance agreements arerecognized ratably over the term of the maintenance period, which is typicallyone year. Revenues from training arrangements are recognized as the services areperformed.

 

Revenue is recognized for software licenses sold toresellers or distributors at the time of shipment, provided that all revenuerecognition criteria set forth in SOP 97-2 are fulfilled.

 

The Company generally does not grant a right of returnto its customers.  When a right of returnexists, revenue is deferred until the right of return expires, at which timerevenue is recognized provided that all other revenue recognition criteria aremet.

 

Amounts collected or billed prior to satisfying theabove revenue recognition criteria are reflected as deferred revenue.  Deferred revenue represents deferredmaintenance revenue, and to a lesser extent, deferred software licenserevenues.

 

**(f)**            Employee Stock Options

 

In December 2004, the FASB issued SFAS No. 123R(Revised 2004) (“SFAS 123(R)”), Share-Based Payment, which replaces SFAS No.123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No.25, Accounting for Stock Issued to Employees. SFAS 123(R), as amended, requires all share-based payments to employees,including grants of employee stock options, to be recognized in the financialstatements based on their fair values beginning with the first annual reportingperiod beginning after June 15, 2005. Early adoption will be permitted inperiods in which financial statements have not yet been issued.  SFAS 123(R) permits public companies to adoptits requirements using one of two methods:

 

•                  A “modifiedprospective” method in which compensation cost is recognized beginning with theeffective date (a) based on the requirements of SFAS 123(R) for all share-basedpayments granted after the effective date and (b) based on the requirements ofSFAS 123 for all awards granted to employees prior to the effective date ofSFAS 123(R) that remain unvested on the effective date.

•                  A “modifiedretrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under SFAS 123 for purposes of pro formadisclosures either (a) all prior periods presented or (b) prior interim periodsof the year of adoption.

 

The Company has elected to adopt early the provisionsof SFAS 123(R) effective January 1, 2005 following the modified prospective methodof adoption described above.

 

8

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The Company has determined the fair value of sharebased-payments issued after January 1, 2005 and unvested options granted inprior periods using the Black-Scholes option valuation model, using thefollowing weighted-average assumptions:

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

 

For all periods presented before January 1, 2005, theCompany elected to follow Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Options Issued to Employees,*and FASB Interpretation (“FIN”) No. 44, *Accountingfor Certain Transactions Involving Stock Compensation,* in accountingfor its employee stock option plans. Under APB No. 25, when the exercise price of an employee stock option isequivalent to or above the market price of the underlying stock on the date ofgrant, no compensation expense is recognized. The Company adopted the disclosure provisions of SFAS No. 148, *Accounting for Stock-Based Compensation - Transitionand Disclosure*, which amended certain provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*,to provide alternative methods of transition for an entity that voluntarilychanges to the fair value based method of accounting for stock-based employeecompensation, effective as of the beginning of the fiscal year.

 

Pro formainformation regarding the Company’s net loss and net loss per share prior tothe adoption of SFAS No. 123(R) has been determined as if the Company hadaccounted for its employee stock options under the fair value method prescribedby SFAS No. 123.

 

The followingtable illustrates the effect on net loss and net loss per share if the Companyhad applied the fair value recognition provisions of SFAS No. 123 tostock-based employee compensation prior to January 1, 2005.

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

 

The Company applies SFAS No. 123 and Emerging IssuesTask Force No. 96-18 “Accounting for Equity Instruments That Are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling, Goods orServices” (“EITF 96-18”), with respect to options and warrants issued tonon-employees. SFAS No. 123 and EITF 96-18 require the use of option valuationmodels to measure the fair value of the options and warrants at the measurementdate.

 

9

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**(g)**         Reclassifications

 

Certain amounts in the accompanying consolidatedfinancial statements have been reclassified to conform to the current period’spresentation.

 

**3.  Net Loss 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.

 

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,**       | ** ** |
|-------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                              | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                                                              | ** ** | **(In thousands)** | ** ** |
|                                                                    |       |               |       |   |   |
| Stock options                                                           |       | 3,361              |       | 3,534 |   |
| Warrants held by  certain investors (See Note 5(b))                     |       | 2,334              |       | 3,000 |   |
| Additional  investment rights held by certain investors (See Note 5(b)) |       | —             |       | 3,333 |   |
| Warrants held by  Comerica Bank (See Note 4)                            |       | 353                |       | — |   |

 

**4.****             ****RevolvingLine of Credit Facility**

 

On May 27, 2005, the Company, through RadView SoftwareInc., the Company’s U.S. subsidiary (the “U.S. Subsidiary”), obtained aone-year revolving line of credit facility with Comerica Bank for borrowings ofup to $2.0 million.  Advances under thefacility will be limited to the lesser of $2.0 million or the sum of 75% ofeligible accounts receivables plus $1.0 million.  As of June 30, 2005, the maximum amount ofadvances available under the facility, based on the collateral formula, was$1.5 million, of which the Company had borrowed $1.3 million.

 

Borrowings under the facility bear interest at thebank’s prime rate (6.0% as of June 30, 2005) plus 1.25%.  Borrowings under the credit facility aresecured by substantially all of the assets of the U.S. Subsidiary and specifiedassets of the Company, and guaranteed by the Company and specified subsidiariesof the Company.  The Company and the U.S.Subsidiary are required to maintain compliance with financial covenantsincluding: (a) a minimum cash balance of $1.2 million, which may be reduced to$1.0 million upon execution of a control arrangement by a third party banksatisfactory to Comerica Bank, and (b) specified net income (loss) levels basedon the Company’s consolidated operating budget. As of June 30, 2005, the Company was in compliance with these financialcovenants.

 

In connection with the facility, the Company issued tothe bank a warrant to purchase 352,941 of the Company’s ordinary shares at anexercise price of $0.17 per share.  Thewarrant was exercisable immediately and has a term of seven years.  The warrant also provides for piggybackregistration rights.  The totalconsideration of $1.3 million was allocated based on the relative fair valuesof the revolving line of credit and the warrants in accordance with APB No. 14,*Accounting for Convertible Debt and DebtIssued with Stock Purchase Warrants.* At the grant date, the fair value of the warrants was determined usingthe Black- Scholes option-pricing model assuming a risk free interest of 3.94%,a volatility factor of 120%, dividend yield of 0% and contractual life of sevenyears.

 

The Company also incurred financing costs consistingof bank fees and legal costs totaling $70,000, which have been accounted for asdeferred financing costs and are included in prepaid expenses and other currentassets.  These deferred financing costsare also being charged to interest expense over the one-year term of thefacility.  Interest 

 

10

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expense resulting from the amortization of both the warrant discountand deferred financing costs totaled $10,000 for the three and six months endedJune 30, 2005.

 

**5. ****Shareholders’ Equity**

 

**(a)**       Private Placement

** **

On March 17, 2004, the Company completed a privateplacement (the “Private Placement”) of its ordinary shares, additionalinvestment rights to purchase ordinary shares (“Additional Investment Rights”)and four series of warrants to purchase ordinary shares (“Warrants”) pursuantto a securities purchase agreement (the “Purchase Agreement”) between theCompany and certain purchasers named therein (the “Purchasers”), in reliance onan exemption under Section 4(2) of the Securities Act of 1933, as amended, andRegulation D promulgated thereunder.

 

The Company issued 3,333,331 ordinary shares to thePurchasers for a purchase price per share of $0.60, or aggregate gross proceedsof $2.0 million.  The Company also issued Additional Investment Rights andWarrants to the Purchasers.  The Companyreceived net proceeds of $1.8 million from the Private Placement.

 

In accordance with the Purchase Agreement, the Companywas required to register for resale on Form S-3 (the “Registration Statement”)the ordinary shares issued in the Private Placement and the ordinary sharesissuable upon exercise of the Additional Investment Rights and Warrants.  The Registration Statement was declaredeffective on June 17, 2004.   The Companymust maintain the effectiveness of the Registration Statement for a period ofup to two years from the effective date of the Registration Statement.

 

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

 

In connection with the Private Placement, the Companyissued to the Purchasers Additional Investment Rights to purchase 3,333,331ordinary shares at an exercise price of $0.810 per share, exercisable fromMarch 11, 2004 until June 17, 2005.  Asof June 30, 2005, none of the Additional Investment Rights were exercised andthe Additional Investment Rights have expired.

 

The Company also issued to the Purchasers four seriesof Warrants as follows:

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

 

The Warrants were initially exercisable for the numberof shares indicated above, subject to customary anti-dilution adjustments and,with respect to the Series C and D warrants, subject to the conditionsindicated below.  The Series A and SeriesB warrants became exercisable beginning September 11, 2004 for a term as notedin the table above.  One half of theSeries C and Series D warrants became exercisable on September 20, 2004, thedate the Company’s ordinary shares were delisted from the Nasdaq SmallCapMarket.   Because the AdditionalInvestment Rights were not exercised before the delisting event, the otherone-half of the Series C and Series D warrants will not become exercisable.

 

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

 

11

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The Company may require the Purchasers to exercisetheir right to purchase ordinary shares pursuant to the Additional InvestmentRights or Warrants if the closing price of the ordinary shares on an eligiblemarket exceeds the respective exercise prices of the Additional InvestmentRights or any series of the Warrants by at least 100% for twenty consecutivetrading days on which the average daily trading volume of the ordinary sharesis at least 250,000 Ordinary Shares, excluding blocks of 25,000 or moreordinary shares.

 

Pursuant to an evaluation of the terms of the PurchaseAgreement under the provisions of EITF 00-19,

*Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock*,the Company has classified all the above derivative financial instrumentsissued in connection with the private placement as equity.

 

**6.  Technology License Transaction**

 

On July 7, 2004, the Company received $1,000,000 incash from a technology license transaction for its WebLOAD product with Ixia,an original equipment manufacturer, pursuant to the exercise of an option byIxia under the terms of a development, publishing and distributionagreement.  As a result of the optionexercise, the technology license provides Ixia with expanded license rightsincluding the right to access and use source code for the WebLOAD product andthe right to create derivative products. Under the terms of the original agreement, Ixia was required to continueto pay to the Company royalties on its sale of WebLOAD at a reduced ratethrough July 7, 2005.  Ixia was alsogranted a right to make a single lump-sum payment of $250,000 to the Company inlieu of its reduced royalty obligations. In November 2004, Ixia exercised its right and made payment to theCompany of $250,000.  Accordingly, Ixiahas no further license fee or royalty payment obligations to the Companypursuant to this arrangement.

 

The Company is obligated to provide product updatesand technical and engineering support to Ixia until July 2005.  The Company has recognized the $1,000,000technology license fee as revenue over the 12-month period commencing July 7,2004, over the term the Company was obligated to provide support services toIxia.  The Company has recognized asrevenue the $250,000 payment in lieu of royalties on a straight-line basis overthe remaining term from November 2004 until June 2005.

 

Revenue recognized under this technology licensetransaction was $362,000 for the three months ended June 30, 2005 and $725,000for the six months ended June 30, 2005, and has been classified as softwarelicenses revenues in the condensed consolidated statements of operations.  There were no technology license revenues forthe three and six months ended June 30, 2004.

 

**7.  Commitments**

 

On May 26, 2005, the Company amended the lease for itscurrent office space in Tel Aviv, Israel, whereby the term was extended anadditional 12 months to expire on August 31, 2006 and the base rent, parkingfees and security deposit amount were reduced.

 

12

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

 

The Company has adopted SFAS No. 131, *Disclosures About Segments of an Enterprise and Related Information*.The Company operates in one reportable segment (see Note 1 for a briefdescription of the Company’s business). The total revenues are attributed togeographic areas based on the location of the end-user customer as follows:

 
| ** **     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **     | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **     | ** ** | **(In thousands)**               | ** ** |
|           |       |                             |       |                           |       |   |   |   |   |
| United States  |       | $                                | 1,221      |                           | $          | 757 |   | $ | 2,267 |   | $ | 1,418 |   |
| Europe         |       | 266                              |       | 190                            |       | 544 |   | 314 |   |
| Israel         |       | 53                               |       | 17                             |       | 81 |   | 135 |   |
| Other          |       | 100                              |       | 104                            |       | 255 |   | 181 |   |
| Total revenues |       | $                                | 1,640      |                           | $          | 1,068 |   | $ | 3,147 |   | $ | 2,048 |   |

 

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**MANAGEMENT’S DISCUSSION ANDANALYSIS OF**

**FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

*Statements in this QuarterlyReport on Form 10-Q concerning RadView’s business outlook or futureperformance; anticipated revenues, expenses or other financial items; product introductionsand plans and objectives related thereto; and statements concerning assumptionsmade or expectations as to any future events, conditions, performance or othermatters, are “forward-looking statements” as that term is defined under U. S.federal securities laws. Forward-looking statements are subject to variousrisks, uncertainties and other factors that could cause actual results todiffer materially from those stated in such statements. These risks,uncertainties and factors include, but are not limited to: our history oflosses; market acceptance of our products; our ability to develop new productsand enhance existing products; impact of significant competition; and otherfactors detailed in RadView’s filings with the Securities and ExchangeCommission, including this Quarterly Report on Form 10-Q.*

 

# **Overview**

 

We develop, market and support software that enablescompanies to assure the scalability, performance, efficiency and reliability ofweb applications.  In May 2004, weintroduced the TestView suite of products, which provides a comprehensive testmanagement solution for test automation and reporting for webapplications.  The TestView suiteefficiently integrates test management and automation with the functionality ofour existing stand-alone products to include functional testing, load testing,and root-cause analysis.

 

We derive the majority of our software licenserevenues from perpetual licenses of our load testing products and, to a lesserextent, our functional testing and root-cause analysis products.  We derive the majority of our servicesrevenues from support and maintenance arrangements and, to a lesser extent,from training and consulting services.  Substantiallyall of our revenues are denominated in U.S. dollars.

 

Part of our strategy is to increase ourrelationships with OEM distribution partners. During the second half of 2004 and the first half of 2005, a significantportion of our license revenues was derived from royalty and technology licensefees received in 2004 from our OEM relationship with Ixia.  In June 2005, we concluded the revenuerecognition of all fees received from Ixia. We do not expect to receive any additional royalty or license fees fromIxia in the future.

 

In December 2004, we entered into an OEMdistribution agreement with Allen Systems Group, or ASG, for the distributionof our TestView suite using their private label in exchange for royalty fees to be paid to us.  They also received an option to purchase byJune 2005 a technology license to use the source code of our TestView suite fora license fee of $2.5 million payable in two annual installments.  This option was not exercised.

 

As a result of the completion of the recognition ofrevenues from the Ixia technology arrangement and the lack of a replacementtransaction that would result in additional technology license revenues, weexpect that our license revenues will decrease in the second half of 2005compared to the first half of 2005.  Ouroperating plan for 2005 had anticipated the receipt of $1.3 million in cashfrom the exercise of the OEM technology license option expected in June2005.  Because this option was notexercised, in July 2005, we implemented several cost reduction measures tolower our operating expenses by approximately $430,000 per quarter throughreductions in discretionary spending across all departments and termination ofseven employees, primarily from research and development and sales andmarketing.  As a result of these costreductions, we expect that our operating expenses will decrease in the secondhalf of 2005 compared to the first half of 2005.

 

Our cash balance was $1.8 million as of June 30,2005.  In May 2005, we obtained from abank a one-year revolving line of credit facility, under which advances arelimited to the lesser of $2.0 million or the sum of 75% of eligible accountsreceivable plus $1.0 million.  As of June30, 2005, availability under this facility was $1.5 million and outstandingborrowings under this facility were $1.3 million.

 

We believe, based on our projected revenues andexpenses and assuming continued compliance with the financial covenants of therevolving line of credit, that our existing cash and cash equivalents, alongwith borrowings

 

14

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under the revolving lineof credit facility will be adequate to fund operations through December 31,2005.  Thereafter, we believe we willneed to obtain additional equity or debt financing in order to adequately fundoperations.  Further, if we are unable toextend the terms of the existing revolving line of credit facility, whichexpires in May 2006, or if we are unable to maintain compliance with thefinancial covenants contained in the revolving credit agreement, then we willalso require additional financing to repay the outstanding borrowings under therevolving line of credit.  If additionalfinancing is required, we may not be able to complete financing on acceptableterms or at all, in which case we might not be able to continue our operationas a going concern.

 

We have retained Revolution Partners, LLC, aninvestment-banking firm, as our financial advisor to assist us in exploringstrategic alternatives to enhance shareholder value.  We cannot be sure ofthe timing or nature of any transaction that may occur or if any transactionwill result at all from the retention of Revolution Partners, LLC.

 

# **Applicationof Critical Accounting Policies and Estimates**

 

## ***General***

 

We prepare our consolidated financial statements inconformity with U.S. generally accepted accounting principles.  As such, we are required to make certainestimates, judgments and assumptions that we believe are reasonable based uponthe information available. These estimates and assumptions affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the periodspresented.  To fully understand andevaluate our reported financial results, we believe it is important tounderstand the significant estimates and judgments applied as they relate toour policies for revenue recognition, software development costs, restructuringcosts and accounting for stock options. More detailed descriptions of these policies are provided in Note 2 tothe consolidated financial statements.

 

## ***Revenue Recognition***

 

Our revenue recognition approach requires that fourbasic criteria must be met before revenue can be recognized: (1) persuasiveevidence of an arrangement exists; (2) delivery has occurred or servicesrendered; (3) the fee is fixed and determinable; and (4) collectibility isreasonably assured.  Determination ofcriteria (3) and (4) is based on management’s judgments regarding the fixednature of the fee charged for services rendered and products delivered, and thecollectibility of those fees.  Shouldchanges in conditions cause management to determine these criteria are not metfor certain future transactions, revenue recognized for any reporting periodcould be adversely affected.

 

## ***Software Development Costs***

 

Software development costs incurred from the point ofreaching technological feasibility until the time of general product releaseshould be capitalized.  We definetechnological feasibility as the completion of a working model.  The determination of technological feasibilityrequires the exercise of judgment by our management.  Because we sell our products in a market thatis subject to rapid technological change, new product development and changingcustomer needs, we have concluded that technological feasibility is notestablished until the development stage of the product is nearly complete.  For us, the period in which we can capitalizesoftware development costs is very short, so the amounts that could becapitalized are not material to our financial statements.  Therefore, we have charged all such costs toresearch and development expense in the period incurred.

 

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

 

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

 

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beginning of the first quarter of adoption of SFAS 123(R).  We have determined the fair value of sharebased-payments issued after January 1, 2005 using the Black-Scholes optionvaluation model.

 

For reporting periods before January 1, 2005, weaccounted for stock options using the intrinsic method in accordance withAccounting Principles Board, or APB, Opinion No. 25, *Accounting for Stock Issued to Employees*.  Under this approach we did not record anyexpense at the time the options were granted unless the exercise price of agranted option is below the fair market price of our ordinary shares on thedate of grant.   For reporting periodsbefore January 1, 2005, we have provided disclosures of impact to our reportednet loss and net loss per share if we had applied the fair value method.

 

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

 

**Results of Operations**

 

The following table sets forth, as a percentage oftotal revenues, consolidated statement of operations data for the periodsindicated:

 
| ** **                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                       |       |                             |       |                           |       |   |   |   |   |
| Software  licenses              |       | 62.6                             | %          | 49.0                           | %          | 62.5 | % | 47.4 | % |
| Services                        |       | 37.4                             |       | 51.0                           |       | 37.5 |   | 52.6 |   |
| Total revenues                  |       | 100.0                            |       | 100.0                          |       | 100.0 |   | 100.0 |   |
|                            |       |                             |       |                           |       |   |   |   |   |
| Cost of Sales:                  |       |                             |       |                           |       |   |   |   |   |
| Software  licenses              |       | 2.1                              |       | 1.7                            |       | 2.3 |   | 2.4 |   |
| Services                        |       | 3.2                              |       | 7.2                            |       | 3.5 |   | 7.7 |   |
| Total cost of  sales            |       | 5.3                              |       | 8.9                            |       | 5.7 |   | 10.1 |   |
|                            |       |                             |       |                           |       |   |   |   |   |
| Gross Profit                    |       | 94.7                             |       | 91.1                           |       | 94.3 |   | 89.9 |   |
|                            |       |                             |       |                           |       |   |   |   |   |
| Operating  Expenses:            |       |                             |       |                           |       |   |   |   |   |
| Sales and  marketing            |       | 60.9                             |       | 84.0                           |       | 62.3 |   | 85.3 |   |
| Research and  development       |       | 40.2                             |       | 59.6                           |       | 43.5 |   | 63.7 |   |
| General and  administrative     |       | 28.4                             |       | 39.0                           |       | 29.9 |   | 45.0 |   |
| Total operating  expenses       |       | 129.5                            |       | 182.6                          |       | 135.7 |   | 194.0 |   |
|                            |       |                             |       |                           |       |   |   |   |   |
| Operating loss                  |       | (34.8                            | )          | (91.5                          | )          | (41.4 | ) | (104.1 | ) |
|                            |       |                             |       |                           |       |   |   |   |   |
| Interest income  (expense), net |       | (0.2                             | )          | 0.3                            |       | (0.1 | ) | 0.3 |   |
| Other income  (expense), net    |       | 0.3                              |       | (2.0                           | )          | (0.1 | ) | (1.0 | ) |
|                            |       |                             |       |                           |       |   |   |   |   |
| Net loss                        |       | (34.7                            | )%         | (93.2                          | )%         | (41.7 | )% | (104.8 | )% |

 

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**Three and Six Months Ended June 30, 2005 and 2004**

 

***Revenues***

 

*Total Revenues*.  Total revenues were $1.6 millionfor the three months ended June 30, 2005 and $1.1 million for the same periodin 2004, which represents an increase of $572,000, or 53.6%.  Total revenues were $3.1 million for the sixmonths ended June 30, 2005 and $2.0 million for the same period in 2004, whichrepresents an increase of $1.1 million, or 53.7%.  These increases resulted primarily from anincrease in software licenses revenues.

 

*Software Licenses*.  Software license revenuesconsist primarily of revenues from the sale of licenses to our end-usercustomers and revenues from the sale of a technology license to Ixia. Software license revenues were $1.0 millionfor the three months ended June 30, 2005 and $523,000 for the same period in2004, which represents an increase of $503,000, or 96.2%.  This increase resulted from $362,000 ofadditional Ixia technology license revenues in 2005 and, to a lesser extent,from increased sales of software licenses to customers in the U.S. due toincreased sales of the TestView suite, which was released in May 2004.  Software license revenues were $2.0 millionfor the six months ended June 30, 2005 and $970,000 for the same period in2004, which represents an increase of $996,000, or 102.7%.  This increase resulted primarily from$725,000 of additional Ixia technology license fee revenues in 2005 and, to alesser extent, from an increase in software licenses sold to customersattributable to increased sales of the TestView suite. We do not expect torecognize any additional Ixia technology license fee revenues during theremainder of 2005.

 

*Services*.  Services revenues consistprimarily of revenue from annual support and maintenance contracts and, to alesser extent, training and consulting services.  Services revenues were $614,000 for the threemonths ended June 30, 2005 compared to $545,000 for the same period in2004.  Service revenues were $1.2 millionfor the six months ended June 30, 2005 compared to $1.1 million for the sameperiod in 2004.

 

***Cost of Revenues***

 

*Cost of Software Licenses*.  Costof software licenses consists principally of direct product costs, such asproduct media and packaging, as well as royalties due to third parties.  Cost of software licenses was $35,000, or3.4% of software license revenues, for the three months ended June 30, 2005compared to $18,000, or 3.4% of software license revenues, for the same periodin 2004. The cost of revenues as a percentage of software license revenuesremained constant despite the increase in software license revenues due to anincrease in third-party royalties.  Costof software licenses was $71,000, or 3.6% of software license revenues, for thesix months ended June 30, 2005 compared to $49,000, or 5.1% of software licenserevenue, for the same period in 2004. The decrease in cost of revenues as apercentage of software license revenues resulted from an increase in softwarelicenses revenue attributable to technology licenses for which we incurred nomaterial incremental direct costs.

 

*Cost of Services*.  Cost of services consistsprincipally of personnel-related costs associated with customer support andtraining.  Cost of services was $52,000,or 8.5% of services revenues, for the three months ended June 30, 2005 comparedto $77,000, or 14.1% of services revenues, for the same period in 2004.  Cost of services was $109,000, or 9.2% ofservices revenues, for the six months ended June 30, 2005 compared to $157,000,or 14.6% of services revenues, for the same period in 2004. These decreaseswere due to lower personnel costs for support and maintenance servicesresulting from staff reallocations made in late 2004.

 

***Operating Expenses***

 

*Sales and Marketing*.  Sales and marketing expensesconsist principally of salaries and commissions earned by sales personnel,travel and marketing program costs such as trade shows, advertising and productpromotion.  Sales and marketing expenseswere $999,000, or 60.9% of total revenues, for the three months ended June 30,2005 compared to $897,000, or 84.0% of total revenues, for the same period in2004.  Sales and marketing expenses were$2.0 million, or 62.3% of total revenues, for the six months ended June 30,2005 compared to  $1.7 million, or 85.3%of total revenues, for the same period in 2004. The increase in these expenses was due primarily to sales trainingcosts, and increases in salaries and commissions in addition to staffreallocations made in late 2004.  The 

 

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decrease of these expenses as a percentage oftotal revenues was due to the increase in total revenues, for which we incurredno material incremental direct costs, partially offset by the increase in salesand marketing expenses.  As a result ofthe cost reductions made by us in July 2005, we expect our sales and marketingexpenses to decline in the second half of 2005 compared to the first half of2005.

 

*Research and Development*. Research and development expenses consist principally of salaries andrelated expenses required to develop and enhance our products.  Research and development expenses were  $659,000, or 40.2% of total revenues, for thethree months ended June 30, 2005 compared to $636,000, or 59.6% of totalrevenues, for the same period in 2004. Research and development expenses were $1.4 million, or 43.5% of totalrevenues, for the six months ended June 30, 2005 compared to $1.3 million, or63.7% of total revenues, for the same period in 2004.  As a result of the cost reductions made by usin July 2005, we expect our research and development expenses to decline in thesecond half of 2005 compared to the first half of 2005.

 

*General and Administrative*. General and administrative expenses consist principally of finance,executive and administrative salaries and related expenses, professional feesand other costs associated with being a public company.  General and administrative expenses were$466,000, or 28.4% of total revenues, for the three months ended June 30, 2005compared to $417,000, or 39.0% of total revenues, for the same period in2004.  General and administrativeexpenses were $942,000, or 29.9% of total revenues, for the six months endedJune 30, 2005 compared to $922,000, or 45.0% of total revenues, for the sameperiod in 2004.  These increases were dueprimarily to increases in salary related costs. As a result of the cost reductions made by us in July 2005, we expectour general and administrative expenses to decline in the second half of 2005compared to the first half of 2005.

 

*Interest Income (Expense), Net*. Interest income (expense), net consists principally of interest expensesand amortization of warrant discount and deferred financing costs arising from outstanding borrowings under therevolving line of credit facility, offset by interest earned on cashinvestments.  Interest expense, net was$3,000 for the three months ended June 30, 2005 compared to interest income,net of $3,000 for the same period in 2004. Interest expense, net was $5,000 for the six months ended June 30, 2005compared to interest income, net of $6,000 for the same period in 2004.  The change in interest income (expense), net,resulted from interest expenses in connection with borrowings under ourrevolving line of credit facility, partially offset by interest income from thelower invested cash balances in 2005 as compared to 2004.

 

*Other Income (Expense), Net*. Other income (expense), net consists principally of currency translationgains and losses.  Other income, net was$5,000 for the three months ended June 30, 2005 compared to other expense, netof $21,000 for the same period in 2004. Other expense, net was $3,000 for the six months ended June 30, 2005compared to $21,000 for the same period in 2004.  The change in other income (expense), net wasdue to exchange rate fluctuations.

 

*Income Taxes.* We have estimated net operating loss carryforwards for Israeli taxpurposes totaling approximately $21.3 million through June 30, 2005 that wouldreduce future Israeli income taxes, if any. These net operating losses may becarried forward indefinitely and offset against future taxable businessincome.  We expect that during the periodthese losses 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 $31.5 million through June 30,2005.  These losses are available tooffset any future U.S. taxable income of the U.S. subsidiary and will expirebetween 2012 and 2025.  The Company hasrecorded a full valuation allowance against its deferred tax asset due to theuncertainty surrounding the ability and the timing of the realization of thesetax benefits.

 

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# **Liquidity and CapitalResources**

 

Cash and cash equivalentstotaled $1.8 million as of June 30, 2005 and $2.2 million as of December 31,2004.

 

Cash used in operating activities was $1.8 million forthe six months ended June 30, 2005 and June 30, 2004.  Cash used in operating activities for the sixmonths ended June 30, 2005 was due primarily to a net loss of $1.3 millioncombined with an increase of $201,000 in accounts receivable, a decrease in of$505,000 in deferred revenues, and a decrease of $170,000 in accrued severance,partially offset by an increase of $125,000 in accounts payable and accruedexpenses.  Accounts receivable increasedas a result of increased software license order bookings.  Deferred revenues decreased as a result ofthe recognition of revenues from the Ixia transaction during the first half of2005, partially offset by an increase in deferred revenues related to renewalof support and maintenance services. Accrued severance decreased as a result of payments made to terminatedemployees during the first half of 2005 in accordance with Israel employmentpractices.  Accrued expenses increased asa result of increased compensation related accruals and professional fees.

 

Cash provided by investingactivities was $132,000 for the six months ended June 30, 2005 and cash used ininvesting activities was $23,000 for the six months ended June 30, 2004.  The cash provided by investing activities in2005 resulted from a decrease of $205,000 in other assets, partially offset bythe purchase of $73,000 in property and equipment.   Other assets decreased as a result of therelease of severance fund deposits to certain terminated employees inaccordance with Israel employment practices and reduction in long-term depositsfor certain office leases.

 

Cash provided by financing activities was $1.3 millionfor the six months ended June 30, 2005 and $1.8 million for the same period in2004.  The cash provided by financingactivities in 2005 is due to borrowings under a revolving line of creditfacility entered into in May 2005.

 

On May 27, 2005, we obtained a one-year revolving lineof credit facility with Comerica Bank for borrowings of up to $2.0 million.  Advances under the facility will be limitedto the lesser of $2.0 million or the sum of 75% of eligible accountsreceivables plus $1.0 million. Borrowings under the facility will bear interest at the bank’s primerate plus 1.25%.  We are required tomaintain compliance with financial covenants including: (a) a minimum cashbalance of $1.2 million, which may be reduced to $1.0 million upon execution ofa control arrangement by a third party bank satisfactory to Comerica Bank, and(b) specified net income (loss) levels based on our consolidated operatingbudget.  As of June 30, 2005, we were incompliance with these financial covenants. Borrowings under the credit facility are secured by substantially all ofthe assets of the U.S. Subsidiary and specified assets of us, and guaranteed byus and specified subsidiaries of ours. As of June 30, 2005, the maximum amount of advances available under thefacility, based on the collateral formula, was $1.5 million, of which we hadborrowed $1.3 million.

 

Our cash balance was $1.8 million as of June 30, 2005,which included proceeds of $1.3 million from borrowings under our revolvingline of credit facility.  We believe,based on our projected revenues and expenses and assuming continued compliancewith the financial covenants of the revolving line of credit, that our existingcash and cash equivalents, along with borrowings under the revolving line ofcredit facility will be sufficient to meet our anticipated needs for workingcapital and, to a lesser extent, capital expenditures through December 31,2005.  Thereafter, we believe we willneed to obtain additional equity or debt financing in order to adequately fundoperations.  Further, if we are unable toextend the terms of our existing revolving line of credit facility, whichexpires in May 2006, or if we are unable to maintain compliance with thefinancial covenants contained in the revolving credit agreement, then we willalso require additional financing to repay outstanding borrowings under therevolving line of credit.  If additionalfinancing is required, we may not be able to complete financing on acceptableterms or at all, in which case we might not be able to continue our operationas a going concern.

 

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**Contractual Obligations**

 

We lease all of our office facilities undernoncancellable operating leases that expire over varying terms through2009.  In May 2005, we amended the leasefor our current office space in Tel Aviv, Israel, whereby the term was extendedan additional 12 months to expire on August 31, 2006 and each of the base rent,the parking fees and security deposit was reduced.  As of June 30, 2005, our contractualobligations 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            |       | $                          | 492        |   | $ | 188 |   | $ | 279 |   | $ | 25 |   | $ | — |   |
| Severance pay  (1)          |       | 543                        |       | — |   | — |   | — |   | 543 |   |
| Total                       |       | $                          | 1,035      |   | $ | 188 |   | $ | 279 |   | $ | 25 |   | $ | 543 |   |

 

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(1)          Severance pay relates toaccrued severance obligations to our Israeli employees as required underIsraeli labor laws.  These obligationsare payable only upon the termination of the respective employee and may be reducedif the employee’s termination is voluntary.

 

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

 

We do not use derivative financial instruments in ourinvesting portfolio.  We place ourinvestments in instruments that meet high credit quality standards such as moneymarket funds, government securities, and commercial paper.  We limit the amount of credit exposure to anyone issuer.  We do not expect anymaterial loss with respect to our investment portfolio.

 

We conduct business in various foreign currencies,primarily in Europe and Israel.  As aresult, we are exposed to the effects of foreign currency exchange ratefluctuations on the U.S. dollar value of foreign currency-denominated revenuesand expenses.  We do not use foreignexchange forward contracts to hedge our foreign currency denominatedreceivables.  Looking forward, there canbe no assurance that changes in foreign currency rates, relative to the U.S.dollar, will not materially adversely affect our consolidated results.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

**Evaluation of Controls and Procedures**

 

We carried out an evaluation, under the supervisionand with the participation of the our management, including our Chief ExecutiveOfficer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures asof the end of the period covered by this Quarterly Report on Form 10-Q.  Based on this evaluation, the CEO and CFOhave concluded that our disclosure controls and procedures are effective toensure that material information is recorded, processed, summarized andreported by our management on a timely basis in order to comply with ourdisclosure obligations under the Securities Exchange Act of 1934 and the SECrules thereunder.

 

**Changes in Internal Controls**

 

There were no significant changes in our internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of the evaluation.

** **

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**PART II - OTHER INFORMATION**

 

**Item6.  Exhibits**

**Exhibit Index**

 

4.1                                 WarrantAgreement with Comerica Bank dated May 25, 2005.

 

10.1                           Amendmentto Lease Agreement dated May 26, 2005 for 2 Habarzel St., Tel-Aviv, 69710,Israel (English Translation).

 

10.2                           Loanand Security Agreement between RadView Software Inc. and Comerica Bank datedMay 25, 2005.

 

10.3                           ThirdParty Security Agreement between RadView Software Ltd. and Comerica Bank datedMay 25, 2005.

 

31.1                           Certificationby Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                           Certificationby Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32                                    Certificationpursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

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**SIGNATURES**

** **

Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                  | RADVIEW SOFTWARE LTD.   |
|-----------------------|-------------------------|
|                  |                    |
|                  |                    |
| Date: August 15, 2005 | /s/ CHRISTOPHER DINEEN  |   |
|                  | Christopher Dineen      |
|                  | Chief Financial Officer |

 

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