##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K



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|   |  |                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the Fiscal Year Ended December 31,
    2002                                                 
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                                 

Commission File Number 0-26241

BackWeb Technologies Ltd.

(Exact name of registrant as specified in its
charter)


|                                                                                    |  |                                            
|----------------------------------------------------------------------------------- |  | -------------------------------------------
|Israel                                                                              |  | 51-2198508                                 
|(State or other jurisdiction of
    incorporation or organization)                  |  | (I.R.S. Employer
    Identification Number)
|                                                                                   
|3 Abba Hillel Street, Ramat Gan, Israel(Address of principal executive
    offices) |  | 52136(Zip Code)                            

(972) 3-6118800

(Registrants Telephone Number, Including
Area Code)


Securities registered pursuant to
Section 12(b) of the Act:

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange On Which Registered
|                    |  |                                          
|None                |  | None                                     

Securities registered pursuant to
Section 12(g) of the Act:

Ordinary Shares, NIS 0.03 par
value

(Title of Class)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

Indicate by check mark if the disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K. þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes o          No þ

The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the
registrant as of June 28, 2002, which was the last business
day of the registrants most recently completed second
fiscal quarter, was approximately $14,502,269.

As of March 3, 2003, there were 39,818,628
shares of the registrants Ordinary Shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.



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TABLE OF CONTENTS



|                                                                                                           |                                                                                                         |  |  |  |  |  |  | 
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|TABLE OF CONTENTS                                                                                         
|Cautionary Statement Regarding Forward-Looking Statements                                                 
|PART I                                                                                                    
|                                                                                                           | Item 1. Business                                                                                       
|                                                                                                           | Item 2. Properties                                                                                     
|                                                                                                           | Item 3. Legal Proceedings                                                                              
|                                                                                                           | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                                                                                   
|                                                                                                           | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|Item 6. Selected Consolidated Financial Data                                                              
|BackWeb Technologies Ltd. Consolidated Statements of Operations                                           
|                                                                                                           | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                                                                           | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                    
|                                                                                                           | Item 8. Financial Statements and Supplementary Data                                                    
|Unaudited Quarterly Financial Data for 2002 and 2001                                                      
|BACKWEB TECHNOLOGIES LTD. CONSOLIDATED STATEMENTS OF OPERATIONS                                           
|BACKWEB TECHNOLOGIES LTD. CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY                                 
|                                                                                                           | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|                                                                                                           | Item 11. Executive Compensation                                                                        
|                                                                                                           | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                                                                           | Item 13. Certain Relationships and Related Transactions                                                
|                                                                                                           | Item 14. Controls and Procedures                                                                       
|PART IV                                                                                                   
|                                                                                                           | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SCHEDULE II                                                                                               
|SIGNATURES                                                                                                
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934
|EXHIBIT 21.1                                                                                              
|EXHIBIT 23.1                                                                                              
|EXHIBIT 99.1                                                                                              



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BACKWEB TECHNOLOGIES LTD.

ANNUAL REPORT ON FORM 10-K

Year Ended December 31, 2002





TABLE OF CONTENTS

|               |  |                                                                                                    |    |      |    | 
|-------------- |  | -------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                                    |    | Page
|               |  |                                                                                                    |    |     
|PART I        
|Item 1.        |  | Business                                                                                           |    |      | 3  | 
|Item 2.        |  | Properties                                                                                         |    |      | 25 | 
|Item 3.        |  | Legal Proceedings                                                                                  |    |      | 25 | 
|Item 4.        |  | Submission of Matter to a Vote of Security Holders                                                 |    |      | 26 | 
|PART II       
|Item 5.        |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |    |      | 26 | 
|Item 6.        |  | Selected Financial Data                                                                            |    |      | 27 | 
|Item 7.        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |    |      | 29 | 
|Item 7A.       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |    |      | 39 | 
|Item 8.        |  | Financial Statements and Supplementary Data                                                        |    |      | 40 | 
|Item 9.        |  | Changes in and Disagreements With Accountants On
    Accounting and Financial Disclosure           |    |      | 67 | 
|PART III      
|Item 10.       |  | Directors and Executive Officers of the Registrant                                                 |    |      | 67 | 
|Item 11.       |  | Executive Compensation                                                                             |    |      | 69 | 
|Item 12.       |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |    |      | 72 | 
|Item 13.       |  | Certain Relationships and Related Transactions                                                     |    |      | 75 | 
|Item 14.       |  | Controls and Procedures                                                                            |    |      | 76 | 
|PART IV       
|Item 15.       |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                               |    |      | 76 | 
|Signatures     |  |                                                                                                    | 80 |     
|Certifications |  |                                                                                                    | 81 |     

BackWeb Technologies Ltd. was incorporated in the
State of Israel in 1995. The principal executive offices of the
Company are located at 3 Abba Hillel Street, Ramat Gan,
Israel 52136. In the United States, the Companys
principal offices are located at 2077 Gateway Place,
Suite 500, San Jose, California 95110. The
Companys website may be accessed at www.backweb.com;
however, the information in, or that can be accessed through,
our website is not part of this report.

We are subject to the informational requirements
of the Securities Exchange Act of 1934. Therefore, we file
periodic reports, proxy statements and other information with
the Securities and Exchange Commission. All our periodic reports
and proxy statements, including our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, and any amendments to those reports,
are available, free of charge, through our website. These
reports and amendments are available through our website as soon
as reasonably practicable after we electronically file such
report or amendment.

BackWeb, the BackWeb logo, ProactivePortal,
Polite, Polite Agent, Polite Neighborcast, Polite Proxy, and
Polite Upstream are our registered trademarks and e-Accelerator
and Foundation are trademarks of ours

1



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that appear in this Annual Report on
Form 10-K. All other trademarks or trade names appearing
elsewhere in this Annual Report are the property of their
respective owners.


The terms BackWeb,
Company, we, us and
our as used in this Annual Report on Form 10-K
refer to BackWeb Technologies Ltd. and its subsidiaries as a
combined entity, except where it is made clear that such term
means only the parent company.

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Cautionary Statement Regarding Forward-Looking
Statements

This Annual Report on Form 10-K contains
express or implied forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are those that predict or describe
future events or trends and that do not relate solely to
historical matters. The words believes,
expects, anticipates,
intends, forecasts,
projects, plans, estimates
or anticipates or similar expressions identify
forward-looking statements, although not all forward-looking
statements contain these identifying words. All statements in
this Annual Report regarding our future strategy, future
operations, projected financial position, estimated future
revenue, projected costs, our ability to achieve cost reductions
in the amounts and in the timeframes anticipated, our ability to
transition new product introductions effectively, future
prospects and results that might be obtained by pursuing
managements current plans and objectives are
forward-looking statements. These forward-looking statements
involve risks and uncertainties and readers are cautioned not to
place undue reliance on forward-looking statements, as we cannot
assure you that the events or circumstances reflected in these
statements will be achieved or will occur. The Companys
actual results may differ materially from such statements.
Factors that may cause or contribute to such differences include
those discussed elsewhere in this Annual Report, including
materials set forth under the caption Risk Factors
and elsewhere in this Annual Report, or detailed in our other
SEC reports and filings. Although the Company believes that the
assumptions underlying its forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and,
therefore, we cannot assure you that the results contemplated in
such forward-looking statements will be realized. The inclusion
of such forward-looking information should not be regarded as a
representation by the Company or any other person that the
future events, plans or expectations contemplated by the Company
will be achieved. Forward-looking statements reflect the
Companys current views with respect to future events and
financial performance or operations and speak only as of the
date the statements are made. The Company undertakes no
obligation to issue any updates or revisions to any
forward-looking statements to reflect any change in the
Companys expectations with regard thereto or any change in
events, conditions or circumstances on which any such statements
are based.




PART I






|        |         
|------- | --------
|Item 1. | Business

Overview

BackWeb provides offline Web infrastructure
software and application-specific software that enable companies
to extend the reach of their Web assets to the mobile community
of their customers, partners and employees. The Companys
products address the need of mobile users who are disconnected
from a network to access and transact with critical enterprise
Web content and applications, such as sales tools, forecast
management, contact lists, service repair guides, expense report
updates, pricing data, time sheets, collaboration sessions, work
orders and other essential documents and applications. Our
products have been licensed by companies worldwide in such
industries as high technology manufacturing, financial services
and insurance, telecommunications, entertainment and media, and
government.

Our BackWeb® ProactivePortal®
infrastructure software enables mobile users to access online
portals, websites and Web applications when they are doing
offline work and disconnected from the network. Our BackWeb
e-Accelerator Web application provides an extended
enterprise with a complete stand-alone solution to manage,
publish and deliver pertinent information and alerts to both
online and offline users. Our ProactivePortal and e-Accelerator
products were developed on top of BackWeb
Foundation,TM our core Polite® delivery and
synchronization software. BackWeb Foundation is also a
stand-alone development platform that allows organizations to
develop applications that efficiently gather, target,
synchronize and deliver digital data in any format to
users desktops throughout an extended enterprise.

Our objective is to establish BackWeb as the
leading provider of offline Web infrastructure software and
become the standard infrastructure for offline Web access. Our
initial penetration into the offline Web access market is
through the enterprise portal market. We intend to establish
BackWeb ProactivePortal technology

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as the leading offline infrastructure software
platform for offline access in the enterprise portal market. To
this end, portal industry leaders, such as IBM, SAP and
Plumtree, have selected ProactivePortal software as their
offline portal offering; industry analysts, such as Gartner and
META, have positively reviewed our ProactivePortal technology;
and customers have endorsed our infrastructure software. Key
elements of our strategy to enable us to capitalize on these
positive reviews and endorsements and fulfill our objective
include:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Expanding our distribution and market reach
    through strategic partnerships, such
    as those we have established with SAP, IBM and Plumtree. We
    intend to continue to establish multiple indirect distribution
    channels worldwide through resellers, OEMs and large
    applications vendors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Continuing to enhance our products and
    technologyby dedicating substantial
    resources to the development of new and innovative software
    products and technologies. We believe that our early entry into
    the market for offline access for the enterprise portal has
    allowed us to establish technological leadership and a
    time-to-market advantage. We intend to continue to focus our
    development efforts on increasing the functionality and
    flexibility of the BackWeb ProactivePortal technology to
    facilitate its adoption and to increase technological barriers
    to entry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Leveraging the emergence of the market for
    wireless technologyby extending our
    current product offerings to include multi-channel access by
    non-laptop devices. We believe that laptop devices provide the
    immediate opportunity for offline Web access. However, in the
    mid- to long-term future, we expect other offline devices, such
    as personal digital assistants, or PDAs, to be increasingly used
    within companies and that the need for a Web synchronization
    infrastructure will grow with the proliferation of wireless
    technology. We believe wireless technology will significantly
    reduce online Web access response time and the acceptance of
    wireless devices and technology within enterprises will
    significantly depend on the user experience and network
    responsiveness. We believe our offline infrastructure can help
    accelerate this acceptance, and we intend to extend our offline
    Web infrastructure offerings, specifically for wireless
    technology and other offline devices, over the course of the
    next several years.

Industry Background

The Internet has changed the nature of business
operations and competition. Companies, as well as their
suppliers, customers and employees, now commonly conduct
business electronically. To compete effectively, market forces
are pushing companies and application vendors to move their
information technology, or IT, investments to the Web to enable
them to stay in closer contact with employees, partners and
customers.

As a result, the Web is increasingly becoming the
single point of interaction for the workplace, and the
requirements for Web-based portals have grown to include
aggregation and integration of applications, processes and
content. Enterprise portals, in particular, serve as a key to
unified applications access and information and knowledge
management across the enterprise and can improve worker
productivity, increase customer satisfaction and accelerate the
pace at which companies do business. Maximizing usage of
enterprise portals by employees, partners and customers has
therefore become a critical factor in enabling companies to
derive maximum business value from their portals. Similar to
e-mail systems, portals need to go beyond online only access to
allow a companys high-value, revenue generating users,
such as sales and services field personnel, to do work and
interact with the portal when they are on the road and
disconnected from the network.

We believe that in order for the Web to be used
efficiently as an effective communication medium across the
extended enterprise, a complementary offline Web infrastructure
must be utilized. This offline infrastructure must:



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Provide offline Web access with user
    experience unificationso that whether
    the viewer is interacting from the online mode or from the
    offline mode, the look and feel is the same;              
|
| |  | Efficiently synchronize large amounts of data
    with a minimal impact on the user
    experience, while protecting the
    network of a company and its extended enterprise from overload
    disruptions;

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| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | Permit offline interaction tracking and
    reporting; and                                                      
|
| |  | Enable quick and non-intrusive Web
    integration, preventing the need to
    re-engineer Web application code.

BackWeb Technology and Products

We develop, market and support offline Web access
software that enables companies to extend the reach of their Web
assets to their mobile community of customers, partners and
employees. Our software enables mobile users to access and
transact with a companys critical Web content and
applications by enabling offline access to the corporate website
or portal. Mobile users can then take their website or
enterprise portal wherever they go and perform transactions when
disconnected from the network.

Our products and technology provide the benefits
of:



| |   |                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Improved on-the-road
    productivityby adapting the online
    Web to offline usage by mobile users, enabling them to access
    and transact with Web content and applications while offline;                                                                                    
|
| |  | Acceleration of business
    processesby allowing offline data
    entry submission for items, such as service orders, expense
    reports, sales forecasts, time sheets and collaboration
    sessions, enabling users to productively use forced down
    time while traveling;
|
| |  | Increased customer
    satisfactionby providing our
    customers field workforce access to important business
    information when servicing a customer in the field, enabling
    them to respond to their customers more quickly and effectively;                              
|
| |  | Decreased coststhrough the reduction of the costs incurred in manually
    distributing information, and the costs associated with
    unnecessary repeat service calls resulting from the inability of
    users to access the latest service data;                               
|
| |  | Improved Web and portal
    effectivenessthrough tracking and
    reporting offline interactions which makes apparent what
    content, information, and applications mobile users most often
    utilize or need to access to;                                                    
|
| |  | Increased end user
    productivityby enabling offline
    synchronization to be done in the background, taking advantage
    of unused bandwidth, without degrading the end user experience
    when remotely connected; and                                                      
|
| |  | Leveraging current IT investments and lower
    total cost of ownershipby deploying
    in a matter of weeks, and integrating with a customers
    existing portal environment to maintain the existing Web user
    interface and eliminate the need to rewrite code.            

Technology:

Our infrastructure software platform is powered
by three core technologies that we have developed: Polite
Synchronization, OTML Offline Web Integration and Attention
Management.

Polite
Synchronization

Polite Synchronization enables the transmission
of significant volumes of digital data from BackWeb Polite
Communication Servers to BackWeb plug-ins on personal computers
through existing networks without interfering with normal
network applications and traffic. Polite Synchronization enables
companies to provide any user with rapid communication of
bandwidth-intensive data, regardless of whether they utilize
high-speed or low-speed data access services. Polite
Synchronization is designed to improve the efficiency of
transmission by reducing the amount of data to be transmitted
through various techniques, including the compression of data,
updating only the information which has changed since the
users previous download and by eliminating the need to
re-send an interrupted transmission by progressively resuming
the transmission at the point where

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it was interrupted. This bandwidth-sensitive
delivery is accomplished through the use of various components,
including the following:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Polite Agent®monitors the network activity of the plug-in and communicates
    with BackWeb Polite Communication Servers only when the
    connection is idle. It is able to interrupt BackWeb
    communications when other applications request use of the
    users network connection.                                                                                                                     
|
| |  | Polite Proxy®allows communication between the BackWeb proxy server and
    BackWeb Polite Communication Servers only when wide area
    network, or WAN, bandwidth utilization is below a specified
    threshold. It achieves this by monitoring the WAN.                                                                                                                                                      
|
| |  | Polite
    Neighborcast®enables the
    automatic transmission of digital data from one BackWeb plug-in
    to others on the same local area network, or LAN, obviating the
    need for transmission of the data from the server to each
    BackWeb plug-in. The transmission from BackWeb plug-in to
    BackWeb plug-in on the same LAN enables fast, efficient and
    cost-effective transmission of data.
|
| |  | Polite
    Upstream®enables the automatic
    transmission of digital data from BackWeb plug-ins to the
    BackWeb Polite Communication Server when the network connection
    is idle.                                                                                                                                                                                                                        

OTML Offline Web
Integration

BackWeb has developed a set of Hyper Text Markup
Language (HTML) tags referred to as OTML, or Offline Tagging
Markup Language, that extends HTML to support offline browsing.
OTML tags embedded within online HTML pages control the
transformation of the online HTML pages into pages that a
browser, enhanced with the BackWeb Plug-in, can display offline.
OTML is designed to preserve the personalization of the website
or portal, including layout and data preferences. OTML tags also
control the transformation of HTML data entry forms, allowing
end users to perform transactions while offline. Offline
transactions are queued while the user is offline and sent to
the server when the user connects to the network. The server
applies the transaction to the online Web environment and
reports back to the plug-in the results of the submission. A
Content Acquisition Server, or CAS, is a high performance OTML
processor that retrieves content from the target portal or
website and processes content for offline use. The CAS
transforms online HTML pages into their offline equivalent based
on OTML tags and can process OTML tags that are applied to the
HTML in run time (known as scripted OTML) or can
process OTML tags that already exist in the HTML (known as
embedded OTML). The CAS can be clustered to increase
scalability and is responsible for content acquisition
scheduling through automated or on-demand synchronization.

Attention
Management

BackWeb products are often used by customers to
deliver time-sensitive or otherwise critical information.
Attention Management is an automatic notification system
supported by BackWeb plug-in software on personal computers.
When content items are transmitted to the personal computer, the
BackWeb Attention Management capability alerts users with the
appropriate information for that user and content item.
Attention Management alerts users to the delivery of
business-critical information through a variety of display
techniques, including Flash Alerts. Flash Alerts are a
particular display technique that can be customized to notify
users and, if desired, can allow management to track the usage
of the delivered information. For example, the recipient can be
required to acknowledge its receipt of the information or to
immediately launch and interact with a designated application.
In addition, Attention Management displays can be programmed to
play automatically according to specific scheduling and
expiration parameters, after which the information and
associated data can be automatically purged. These features
enable companies to attract immediate attention to, and ensure
interaction with, time-sensitive information.

Products:

BackWeb
ProactivePortal Server

In September 2001, we introduced the BackWeb
ProactivePortal Server, which enables mobile users to access Web
applications and content, including portal environments, when a
user is disconnected or poorly

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connected to a network. The BackWeb
ProactivePortal Server is comprised of three major components:
the Polite Integration System; the BackWeb Portal Management
Server; and the BackWeb Polite Communication System.




| |   |                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Portal Integration Systemis a new component of the
    ProactivePortal Server that is designed for highly scalable Web
    content acquisition from corporate portals. The Portal
    Integration System includes: Content Retrieval, Content
    Transformation, Content Consolidation and Differencing, and
    Content Packaging.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Content Retrieval.On an on-going basis, the BackWeb ProactivePortal Server logs in
    as individual portal users and retrieves HTML pages from the
    portal by using standard HTTP or HTTPS protocols (either secure
    or non-secure). Each portal page links to more Web pages or
    documents that are retrieved once the links are identified.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Content Transformation and OTML
    Tags.Content transformation and OTML
    tags parse the portal HTML pages and create an offline
    equivalent of the page that is sent to users. The Content
    Acquisition Manager retrieves additional pages when it
    identifies links to more portal pages, external documents or Web
    pages. Since the presentation of portal content sometimes
    changes, it is necessary to keep the content transformation
    correct regardless of visual presentation changes. Content
    transformation is accomplished by embedding OTML tags in the
    portal page, which tags control the optimized transformation of
    the pages for offline viewing. OTML is an extension to HTML and
    applications other than ProactivePortal software, such as the
    browser, will ignore the HTML tags.
|
| |  | Content Consolidation and
    Differencing.Although portals include
    both personalized and non-personalized content, our
    ProactivePortal Server acquires content in the context of
    individual users and creates a single personalized information
    package for each user. Because a large portion of the content is
    shared among many users and because that content may be very
    large, it is necessary to consolidate shared information so that
    it can be retrieved and stored once for all targeted users. The
    ProactivePortal Server stores content, including documents and
    Web pages, in separate information packages that are sent to
    more than one user.                                                                                                                                          
|
| |  | Content Packaging.Once content has been acquired, transformed and consolidated, it
    is packaged for offline delivery into units called InfoPaks.
    Such packaging includes the creation of database records for
    targeting, delivery tracking, user interaction reporting and
    version control of the content; calculating byte-level
    differences between versions of the content, critical when only
    a small portion of a document is modified; and optimized storage
    and communication with users plug-ins.                                                                                                                                                                                                                                                                                                            



| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The BackWeb Portal Management
    Serveris a management engine that
    manages the delivery of the content packages to the end users/
    subscribers. The Portal Management Server contains:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A Content Targeting Manager stores
    targeting information about acquired content in the database and
    dispatches the content for delivery to the end users.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | A BackWeb Subscription Manager that
    manages users subscriptions to portal content, enabling
    portal developers and administrators to define which portal
    components (or portlets) should be made available offline. Users
    can then subscribe to portlets for offline access and for
    notification of critical content. The subscription manger stores
    all users subscription information.                                                                                                                                                                                            
|
| |  | A Content Tracking Manager that tracks who
    received what content and how they interacted with it. When a
    user clicks on a link that refers to a document in the offline
    view or on a notification, the interaction information is
    recorded by the plug-in and then forwarded to the server when
    the plug-in reconnects to the server. This information is stored
    in the server database and can be queried to create offline
    interaction reports, which can be viewed and exported to the
    portals reporting system and merged with online portal
    click-through reports.



| |   |                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The BackWeb Polite Communication
    Systemis a highly scalable content
    delivery engine for desktops and laptops that enables offline
    access to portal content via BackWeb plug-ins and the BackWeb
    Polite Communication Server. The BackWeb Polite Communications
    System is designed to manage the

7



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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | delivery of thousands of gigabytes of data every
    day to end users. The server consults the BackWeb
    ProactivePortal Server database to find out whether there is new
    content relevant to the corresponding user. The BackWeb plug-in
    then begins downloading InfoPaks incrementally via the Polite
    Communications Server to ensure scalable content delivery. The
    Polite Communication System includes several key features:



| |   |                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Interruptible content
    deliverythat activates only when the
    network connection is idle;                                                                                                                                            
|
| |  | Byte-level
    differentiationthat determines which
    content has been modified based on the content already stored on
    the users computer and ensures the delivery of only the
    changes rather than the entire content item; and
|
| |  | Polite Neighborcastwhich distributes content over a LAN using the distributed
    client-based caching system, thereby reducing the amount of WAN
    traffic.                                                                            

BackWeb
e-Accelerator

In December 1998, we introduced BackWeb Sales
Accelerator, which we now refer to as BackWeb e-Accelerator, our
first packaged application built on BackWeb Foundation. The
BackWeb e-Accelerator application allows companies to equip
their extended enterprise with the most up-to-date documents,
market information and management announcements by automating
the collection, delivery and dissemination of business critical
information. This application is targeted at companies that need
to communicate to geographically dispersed employees, resellers,
partners and customers to accelerate their business execution
and response time to critical changes affecting their business.
The application contains several modules that a customer may
select:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Enterprise Video Communications Module
    leverages existing IT infrastructure investments in streaming
    media, Webcasting and network upgrades, extending its reach with
    a broad application framework for managing rich content
    distribution.                                                                                                                                                                                                                                                      
|
| |  | The Market Intelligence Module
    automatically monitors, collects and organizes information from
    Internet or intranet sites to keep users abreast of the latest
    industry news, competitive announcements and customer
    information.                                                                                                                                                                                                                                                                     
|
| |  | The Priority Publishing Module, which we
    previously referred to as Strategic Publishing, enables users to
    publish and direct the immediate attention of their constituents
    to time-sensitive and business-critical information. Editorial
    rights, publishing and access rights are centrally controlled.
    The published information can be disseminated to users
    desktops using our Flash Alert technology.                                                                                  
|
| |  | The Rapid Survey Module enables companies
    to acquire feedback from its users through interactive surveys
    that collect and analyze information. Companies can publish
    these surveys through a Web-based interface and create questions
    that have one response, multiple responses or text answers.
    Users can respond to these surveys quickly, even when they are
    offline, generally increasing the response rate and decreasing
    the response time as compared to other survey techniques.
|
| |  | The Automated Encyclopedia Module enables
    a company to create a library of documents or files to which
    extended enterprise users can subscribe. These documents and
    files, and all subsequent updates, are automatically delivered
    to users once they have subscribed to the service.                                                                                                                                                                                                                



| |                   
| | ------------------
| | BackWeb Foundation

Our infrastructure software platform, BackWeb
Foundation, is based on a set of flexible components that enable
an organization to capture information from most data sources,
including websites, file servers, databases, applications and
legacy systems, and efficiently and reliably deliver the
information throughout its extended enterprise. One of the major
components to Foundation is the BackWeb Polite Communication
Server that communicates with BackWeb plug-ins, is capable of
receiving digital data from various sources, such as the
Internet, intranet sites, databases, applications and legacy
systems, and automatically distributes that data to BackWeb
plug-ins. The BackWeb Polite Communication Server is highly
scalable and designed

8



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to support a large number of plug-ins
concurrently. BackWeb Development Tools are used to customize
the BackWeb Foundation solution. Components of BackWeb
Development Tools include: the BackWeb Server Extension API,
which is an application programming interface that allows
companies to integrate the BackWeb Polite Communication Server
with any digital data source, enabling automated publishing of
content or files from any source to the BackWeb Polite
Communication Server; the BackWeb Automation SDK and Automation
Editor, which includes application programming interfaces and a
library of BackWeb supplied programs that perform tasks between
the BackWeb Polite Communication Server and external data
source; our BackWeb Authoring Language Interface, or BALI,
Editor that is used by companies to create and modify Flash
Alerts; and our BackWeb plug-in, our software program operating
on personal computer or workstations, which operates in the
background and communicates with designated BackWeb Polite
Communication Servers during the idle time of a users
network connection, enabling the user to receive data
transparently and without disruption while using other
applications.


BackWeb Foundation also includes add-on
components:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The BackWeb Enhanced Security Module
    provides encrypted communications between the BackWeb Polite
    Communication Server and BackWeb plug-in and certificate
    authentication of data packages. This module incorporates
    industry standard technologies from RSA Data Security and
    VeriSign, Inc.                                                                                                                                 
|
| |  | The BackWeb AutoFile Update Manager
    enables the automatic replication of files or file directories
    from any directory accessible to the BackWeb Polite
    Communication Server, and allows the placement of the replicated
    files in any location on the users system. The BackWeb
    AutoFile Update Manager also allows management to have greater
    flexibility over the organization of information on the
    users desktop.
|
| |  | The BackWeb Polite Upstream enables
    BackWeb plug-ins to deliver digital data to BackWeb Polite
    Communication Servers, such as completed questionnaires or
    surveys.                                                                                                                                                                                                                                                                    

Customers

We sell our products to customers from a variety
of industries. Our customers include industry leaders, such as
A.C. Nielsen Co., British Telecommunications plc, Check
Point Software Technologies Ltd., Cisco Systems, Inc., Eastman
Kodak Company, Fidelity Investments Institutional Services,
General Inc., Guidant Corporation, Hewlett-Packard Company,
Information Services International Inc. (M&M Mars),
International Business Machines Corporation, or IBM,
International Monetary Fund, Lam Research Corp., Logitech,
National Broadcasting Company, or NBC, Owens-Illinois and
Siemens AG, as well as the United States Social Security
Administration.

SAP AG accounted for 20% and Hewlett-Packard
Company for 11% of our revenue in 2002. Our OEM contract with
SAP AG expired in 2002. We have signed a new reseller agreement
with SAP AG, but the agreement does not require SAP AG to
purchase any product from us. As a result, we cannot assure you
that we will derive revenue from this reseller agreement in the
future.

For a more complete discussion of customer
transactions by geography, please refer to Note 14 to
Consolidated Financial Statements appearing elsewhere in this
Annual Report. For a more complete discussion of related party
transactions and their effect on the Company, please refer to
Note 8 to Consolidated Financial Statements.

Alliances with Business Partners

In order to accelerate the acceptance of our
products, we have developed cooperative alliances with leading
portal framework vendors, technology vendors, OEMs, applications
vendors and Internet-based solutions providers. During 2002, we
signed new agreements for business alliances with SAP, IBM and
Plumtree. We believe that these alliances can provide additional
marketing and sales channels for our products, help enable us to
position position BackWeb as the offline vendor of choice, and
help facilitate broad market acceptance for BackWebs
products.

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Marketing and Sales

Marketing

In 2002, BackWebs marketing efforts focused
on the portal market with the goal of establishing itself as the
leading provider of offline Web infrastructure software. During
this time, BackWeb has worked to educate industry analysts,
portal framework vendors and integrators, and portal customers
about our ProactivePortal technology.

BackWebs marketing strategy is designed to
promote offline access as a must-have technology for
portal implementations and to position BackWeb as the leading
offline access vendor of choice. Our marketing efforts are
directed at creating market awareness and generating leads for
our ProactivePortal technology. Marketing activities include:
Web seminars, e-mail campaigns, telemarketing, and attendance at
industry trade show events and conferences. In addition, our
public relations programs are designed to build market awareness
by establishing and maintaining relationships with key trade
press, business press and industry analysts.

Sales

In 2002, we began to shift our sales strategy to
pursue opportunities with large accounts and industry leaders
and to penetrate various targeted market segments through
indirect distribution channels and strategic partnerships. We
partner and actively seek relationships with large applications
vendors, portal framework vendors and systems integrators that
serve our target markets. Through these strategic partnerships,
we believe that we will be able to expand our installed base as
our products are incorporated into the vendors products
and systems integrators custom-developed applications.
This installed base can, in turn, be leveraged by us and our
partners to develop and market BackWeb ProactivePortal
technology and other additional BackWeb-based applications and
products. We are building these channels and currently have
entered into written agreements with a number of companies.
However, we cannot assure you that such distribution and
strategic partners will devote adequate resources to selling our
products. We also may not be able to enter into additional
agreements or establish relationships with additional desired
strategic and distribution partners on a timely basis or at all.

We also maintain sales personnel in the United
States, the United Kingdom and Germany. Our sales force consists
of sales representatives and sales engineers.

We typically have very little backlog and,
accordingly, generate substantially all of our revenue for a
given quarter in that quarter.

Customer Service and Support

We have a comprehensive service and support
organization designed to ensure that customers receive the
highest quality of service. Our services are primarily comprised
of maintenance, consulting and training. Our technical support
group provides post-sales support through renewable annual
maintenance contracts. Our support contracts provide for
technical and emergency support as well as software upgrades, on
an if and when available basis. When our technical
support organization is unable to solve a problem, our engineers
and product developers work with the support personnel to
resolve the problem. We believe that strong customer support
organization is crucial to both the initial marketing of our
products and maintaining customer satisfaction, which in turn
can enhance our reputation and generate repeat orders. In
addition, we believe that the customer interaction and feedback
involved in our ongoing support functions provide us with
information on market trends and customer requirements that is
critical to future product development efforts

Our professional services organization provides
consulting, training and on-site implementation services,
offering our customers the expertise, knowledge, and practices
to help implement successfully an enterprise-wide IT strategy.
We expect to expand our range of services, both directly and
through third-party relationships, in order to meet the growing
needs of our customers.

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Research and Development

Since our inception in 1995, we have made
substantial investments in research and product development. We
believe that strong product development capabilities are
essential to enhancing our core technology, developing
additional applications, and maintaining the competitiveness of
our product and service offerings. We have invested significant
time and resources in creating a structured process for
undertaking all product development projects.

Our research and development group is located in
Ramat Gan, Israel. We believe that performing research and
development in Israel offers a number of strategic advantages
because Israel offers a pool of highly qualified technology
engineers, as well as a lower cost structure than the
U.S. Operating in Israel has also allowed us to enjoy tax
incentives from the government of Israel. Our Israeli engineers
typically hold advanced degrees in computer-related disciplines.

In addition, we have actively recruited computer
scientists, engineers and software developers and have
complemented these individuals by hiring senior management with
backgrounds in the commercial software development industries.
Our research and development expenses, net totaled
$6.1 million for the year ended December 31, 2002,
$9.2 million for the year ended December 31, 2001 and
$8.7 million for the year ended December 31, 2000.

Competitive Landscape

We compete in markets that are new, intensely
competitive, highly fragmented and rapidly changing. We have
experienced, and expect to continue to experience, increased
competition from current and potential competitors. Many of our
competitors have greater name recognition, longer operating
histories, larger customer bases and significantly greater
financial, technical, marketing, public relations, sales,
distribution and other resources. In addition, some of our
potential competitors are among the largest and most well
capitalized software companies in the world. We expect to face
competition from these and other competitors, including:



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | companies attempting to address the needs of
    mobile or disconnected Web users such as Lotus Domino, iOra and
    Covigo;                              
|
| |  | companies addressing certain other segments of
    our BackWeb Foundation market, such as Marimba and Tibco;                                              
|
| |  | sales force automation and enterprise resource
    planning, or ERP, vendors that may introduce products
    competitive to our packaged applications; and
|
| |  | communications and information management
    platform companies.                                                                                         

Additional competition could come from operating
system vendors, online service providers, plug-in or server
applications and tools vendors, multimedia companies, document
management companies and network management vendors. If any of
our competitors were to become the industry standard or were to
enter into or expand relationships with significantly larger
companies through mergers, acquisitions or otherwise, our
business and operating results could be seriously harmed. In
addition, potential competitors may bundle their products or
incorporate functionality into existing products in a manner
that discourages users from purchasing our products.

Many of our existing and potential customers
evaluate on an on-going basis whether to develop their own
software or purchase it from outside suppliers. In addition, our
partners have significant research and development capabilities
and are continually evaluating the efficacy of internal software
development. As a result, we must, on an on-going basis, educate
existing and potential customers on the advantages of our
software over internally developed software, as well as our
competitors products. However, we cannot assure you that
our existing or potential customers or partners will not
internally develop products similar to our own.

Our existing and potential customers often have a
pre-set budget for which we compete. We currently compete
primarily on the basis of the following factors: functionality;
product features and effectiveness; ease of installation and
use; and price. We believe that we currently compete favorably
with respect to each of these

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factors. However, the market for our products is
still rapidly evolving, and we may not be able to compete
successfully against present or future competitors, which could
harm our operating results.


In addition, emerging technologies, such as
wireless fidelity or WiFi, that take a different approach to
offline Web access by, for example, re-engineering platforms and
applications, may pose a competitive challenge.

We expect that competition will increase in the
near term and that our primary long-term competitors may not
have entered the market yet. Increased competition could result
in price reductions, fewer customer orders, reduced gross margin
and loss of market share, any of which could cause our business
to suffer.

Intellectual Property and Proprietary
Rights

Our success and ability to compete are dependent
on our ability to develop, maintain and protect the proprietary
aspects of our technology. We rely on a combination of patent,
trademark, trade secret and copyright laws and contractual
restrictions to protect the proprietary aspects of our
technology.

We have been issued several U.S. patents
with respect to certain aspects of our products. In addition, we
have filed other U.S. and foreign patent applications on various
elements of our products. Our policy is to apply for patents or
for other appropriate statutory protection when we develop
valuable new or improved technology. The status of any patent
involves complex legal and factual questions, and the breadth of
claims that may be allowed is uncertain. Accordingly, we cannot
assure you that any patent application filed by us will result
in a patent being issued, or that our patents, and any patents
that may be issued in the future, will afford adequate
protection against competitors with similar technology, nor can
we assure you that patents issued to us will not be infringed or
designed around by others.

We have been issued registered trademarks in the
U.S. covering certain goods or services for
BackWeb, the BackWeb logo design,
Polite, Polite Agent, Polite
Neighborcast, Polite Proxy, Polite
Upstream, and ProactivePortal. In addition,
the trademark BackWeb is registered in Australia,
the European Community and Japan.

We seek to protect our source code for our
software, documentation and other written materials under trade
secret and copyright law. We license our software to our
customers under signed license agreements and under electronic
(shrink-wrap) agreements that restrict the customers use
of our software to its own business operations and prohibit
disclosure to third parties. The enforceability of shrink-wrap
licenses is unproven in certain jurisdictions. Finally, we seek
to avoid disclosure of our intellectual property by requiring
employees and consultants with access to our proprietary
information to execute confidentiality and assignment of
invention agreements with us and by restricting access to our
source code. However, we have not signed confidentiality
agreements in every case.

Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Policing unauthorized
use of our products is difficult, and the steps we have taken
might not prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect
our proprietary rights as fully as do the laws of the U.S.

Thus, while we rely on patent, copyright, trade
secret and trademark law to protect our technology, we believe
that factors such as the technological and creative skills of
our personnel, new product developments, frequent product
enhancements and reliable product maintenance are more essential
to establishing and maintaining a technology leadership
position. Others may develop technologies that are similar or
superior to our technology.

Our products and services operate in part by
making copies of material available on the Internet and other
networks and making this material available to end-users from a
central location. This creates the potential for claims to be
made against us, either directly or through contractual
indemnification provisions with customers, including defamation,
negligence, copyright or trademark infringement, personal
injury, invasion of privacy or other legal theories based on the
nature, content or copying of such materials. In the past, these
claims have been brought, and sometimes successfully pressed
against, companies such as online service providers in the

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past. It is also possible that if any such
information, or information that is copied and stored by
customers that have deployed our products, contains errors,
third parties could make claims against us for losses incurred
in reliance on such information. Although we carry general
liability and directors and officers insurance, our insurance
may not cover potential claims of this type or may not be
adequate to indemnify us for all liability that may be imposed.


Substantial litigation regarding intellectual
property rights exists in the software industry. We expect that
software products may be increasingly subject to third-party
infringement claims as the number of competitors in our industry
segments grows and the functionality of products in different
industry segments overlaps. We believe that many of our
competitors have filed or intend to file patent applications
covering aspects of their technology that they may claim our
technology infringes. Third parties may claim infringement by us
with respect to our products and technology. Any such claims,
with or without merit, could:



| |   |                                                              
| | - | -------------------------------------------------------------
| |  | be time-consuming to defend;                                 
|
| |  | result in costly litigation;                                 
|
| |  | divert managements attention and resources;                 
|
| |  | cause product shipment delays; or                            
|
| |  | require us to enter into royalty or licensing
    agreements.

Royalty or licensing agreements, if required, may
not be available on acceptable terms, if at all. A successful
claim of product infringement against us and our failure or
inability to license the infringed or similar technology could
harm our business.

Employees

As of December 31, 2002, we had a total of
84 employees, of which 36 were engaged in research and
development, 15 in sales, marketing and business development, 15
in professional services and technical support and 18 in
finance, administration and operations. Our future performance
depends in part upon the continued service of our key technical,
sales and senior management personnel, none of whom is bound by
an employment agreement requiring service for any defined period
of time. The loss of the services of one or more of our key
employees could have a material adverse effect on our business,
financial condition and results of operations. Our future
success also depends on our continuing ability to attract, train
and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense, and we may
not be able to retain our key personnel in the future. None of
our employees is represented by a labor union. We have not
experienced any work stoppages and consider our overall
relations with our employees to be good.

We have 45 of our 84 employees located in Israel.
Israeli law and certain provisions of the nationwide collective
bargaining agreements between the Histadrut, which is the
General Federation of Labor in Israel, and the Coordinating
Bureau of Economic Organization, which is the Israeli federation
of employers organizations, apply to our Israeli
employees. These provisions principally concern the maximum
length of the work day and the work week, minimum wages,
contributions to a pension fund, insurance for work-related
accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment. Furthermore,
pursuant to such provisions, the wages of most of our employees
are subject to cost of living adjustments, based on changes in
the Israeli Consumer Price Index. The amounts and frequency of
such adjustments are modified from time to time. Israeli law
generally requires the payment of severance pay upon the
retirement or death of an employee or upon termination of
employment by the employer or, in certain circumstances, by the
employee. We currently fund our ongoing severance obligations
for our Israeli employees by making monthly payments for
insurance policies to cover these obligations.

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RISK FACTORS

You should consider the following factors, as
well as other information set forth in this Annual Report, in
connection with any investment in our Ordinary Shares. If any of
the risks described below occurs, our business, results of
operations and financial condition could be adversely affected.
In such cases, the price of our Ordinary Shares could decline,
and you could lose part or all of your investment.

Risks Relating to Our Business



| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The economic outlook has adversely
    affected, and may continue to adversely affect, the demand for
    our current products and our results of operations

Current predictions for the general economy
indicate continued uncertain economic conditions. Weak economic
conditions may continue to cause a reduction in information
technology spending generally. In addition, some of our
customers continue to operate based on Internet-centric business
models, and these companies have been more acutely affected by
the continuing economic slowdown and have encountered
significant difficulties in raising additional capital. If our
customers experience financial difficulties, it could have an
adverse impact on the demand for our products, which would
adversely affect our results of operations. In addition,
predictions regarding economic conditions have a low degree of
certainty, and further predicting the effects of the changing
economy is even more difficult. We may not accurately gauge the
effect of the general economy on our business. As a result, we
may not react to changing conditions in a timely manner, which
could adversely impact our business and results of operations
and cause the price of our Ordinary Shares to decline.



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business is difficult to evaluate
    because our operating history is limited, and we have recently
    changed our strategic focus and repositioned our product
    line

We have a limited operating history generally and
an even more limited history operating our business as currently
conducted. We cannot be certain that our business strategy will
be successful. We were incorporated on August 31, 1995, and
did not begin generating revenue until December 1996. In early
1998, we changed our strategic focus from a consumer-oriented to
an enterprise-oriented Internet communications company. In 2001,
we re-positioned our products to focus on the portal market.
These changes required us to adjust our business processes and
make a number of significant personnel changes. We do not know
if our new strategic and product focus will be successful, and,
to date, we have only generated very limited revenue from such
business. To the extent we do not succeed in generating revenue
from licensing our new products, particularly ProactivePortal
Server, our business, operating results and financial conditions
will suffer.



| |                                                            
| | -----------------------------------------------------------
| | We have a history of losses and we expect
    future losses

We have not achieved profitability and expect to
continue to incur net losses for at least the fiscal year 2003.
We incurred net losses of $24.9 million for the year ended
December 31, 2002, $34.7 million for the year ended
December 31, 2001, and $19.2 million for the year
ended December 31, 2000. As of December 31, 2002, we
had an accumulated deficit of $127.8 million. We expect to
continue to incur significant sales and marketing, product
development and administrative expenses during 2003. As a
result, we will need to generate significant revenue to achieve
and maintain profitability.



| |                                                                
| | ---------------------------------------------------------------
| | Our quarterly operating results are subject
    to fluctuations

Our operating results are difficult to predict.
Our revenue and operating results have fluctuated in the past
and may, in the future, vary significantly from quarter to
quarter due to a number of factors, including:



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | demand for our products and services;                                                           
|
| |  | internal budget constraints and approval
    processes of our current and prospective customers;
|
| |  | the timing and mix of revenue generated by
    product licenses and professional services;      
|
| |  | the length and unpredictability of our sales
    cycle;                                         

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| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | loss of customers;                                                                                  
|
| |  | delays in introducing new products and services;                                                    
|
| |  | new product introductions by competitors;                                                           
|
| |  | changes in our pricing policies or the pricing
    policies of our competitors;                     
|
| |  | costs related to acquisitions of technology or
    businesses; and                                  
|
| |  | economic conditions generally, as well as those
    specific to the Internet and related industries.

Due to the foregoing factors, we believe that
quarter-to-quarter comparisons of our operating results are not
a good indication of our future performance. We incur expenses
based predominantly on operating plans and estimates of future
revenue. Our expenses are to a large extent fixed and we may not
be able to adjust them quickly to meet a shortfall in revenue
during any particular quarter. Any significant shortfall in
revenue in relation to our expenses would decrease our net
income or increase our operating losses and would also harm our
financial condition. In some recent quarters our operating
results have been below the expectations of public market
analysts and investors. It is likely that in some future
quarters, our operating results may also be below such
expectations, which would likely cause our stock price to
decline.



| |                                                                          
| | -------------------------------------------------------------------------
| | Failure to develop key strategic
    relationships could limit our growth

We believe that our success in penetrating our
target markets depends significantly on our ability to develop
and maintain strategic relationships with portal framework
vendors, key independent software vendors, resellers,
distribution partners and customers. Because we expect to
generate a large portion of our revenue from sales through these
relationships, if we fail to develop these strategic
partnerships, our growth would likely be limited. As of
December 31, 2002, we had entered into various alliances,
remarketing and partnership agreements with certain portal
framework vendors, which we consider key to our success, and
seek to expand the number of such relationships in 2003. We do
not know if these will prove to be successful relationships in
the future or if we will derive material revenue from them.

We depend on strategic relationships,
partnerships and business alliances for the continued growth of
our business. If we fail to continue developing these
relationships, our growth could be limited. These business
relationships often consist of cooperative marketing programs,
joint customer seminars, lead referrals and cooperation in
product development. Some of these relationships are not
contractual and depend on the continued voluntary cooperation of
each party with us. Even where there are written agreements in
place, divergence in strategy or change in focus by, or
competitive product offerings developed or acquired by, any of
these companies may interfere with our ability to develop,
market, sell or support our products, which in turn could harm
our business. Further, if these companies enter into strategic
alliances with other companies or are acquired, they could
reduce their support of our products. Our existing relationships
may be jeopardized if we enter into alliances with competitors
of our strategic partners. In addition, one or more of these
companies may use the information they gain from their
relationship with us to develop or market competing products.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Our quarterly operating results may depend
    on a small number of large orders

We typically derive a significant portion of our
product license revenue in each quarter from a small number of
relatively large orders. Our operating results for a particular
fiscal quarter could be materially are adversely affected if we
are unable to complete one or more substantial license sales
forecasted for that quarter. Additionally, we also offer
volume-based pricing, which may adversely affect our operating
margins. We typically have very little backlog and, accordingly,
generate substantially all of our revenue for a given quarter in
that quarter.



| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | If we lose a major customer, our revenue
    could suffer because of our customer concentration

We have historically generated a substantial
portion of our revenue from a limited number of customers, and
we expect this to continue for the foreseeable future. As a
result, if we lose a major customer, or if there is a decline in
end-users in any of our customers licenses, our revenue
would be adversely affected. In 2002, our

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three largest customers represented approximately
40% of our total revenue, with one OEM customer, whose contract
with us terminated in early 2002, accounting for 20% of our
total revenue. In the years ended December 31, 2001 and
December 31, 2000, this same OEM customer accounted for 52%
and 27%, respectively, of our revenue. We have signed a new
reseller agreement with this customer, but the agreement does
not require the customer to purchase any product from us. As a
result, we cannot assure you that we will derive revenue from
this reseller agreement in the future, and the failure to derive
significant revenue from this agreement could adversely affect
our business.




| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on increased business from new
    customers, as well as additional business from existing
    customers, and if we fail to grow our customer base or generate
    repeat business, our operating results could be
    harmed

Our business model generally depends on the sale
of our products to new customers as well as expanded use of our
products within our existing customers organizations. If
we fail to grow our customer base or to generate repeat and
expanded business from our current and future customers, our
business and operating results will be seriously harmed. In some
cases, our customers initially make a limited purchase of our
products and services for trials, pilot or proof of concept
programs. These customers might not choose to acquire additional
licenses to expand their use of our products.

In addition, as we have introduced new versions
of our products or new products, such as our ProactivePortal
Server, we have experienced a decline in licensing revenue
generated from our older products, such as Foundation and
e-Accelerator, and we anticipate future declines in licensing
revenue from these products. However, it is also possible that
our current customers might not require the functionality of our
new products and might not ultimately license these products.
Because the total amount of maintenance and support fees we
receive in any period depends, in large part, on the size and
number of licenses that we have previously sold, any downturn in
our software license revenue would negatively affect our future
maintenance and support revenue. In addition, if customers elect
not to renew their maintenance agreements, our services revenue
could decline significantly. Further, some of our customers are
telecom or information technology companies, which have been
forced to significantly reduce their operations in light of
limited access to sources of financing and the current national
and global economic slowdown. If customers are unable to pay for
their current products or are unwilling to purchase additional
products, our revenue will decline, which would likely
materially and adversely affect our revenue, operating results
and stock price.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Our business will suffer if our target
    customers do not accept Internet solutions

Our future revenue and profits, if any, depend
upon the widespread acceptance and use of the Internet as an
effective medium of business and communication by our customers.
Rapid growth in the use of, and interest in, the Internet has
occurred only recently. As a result, acceptance and use may not
continue to develop at historical rates, and a sufficiently
broad base of consumers may not adopt, and continue to use, the
Internet and other online services as a medium of commerce and
communication. Our success will depend, in large part, on the
acceptance of the Internet in the commercial marketplace and on
the ability of third parties to provide a reliable Internet
infrastructure network with the speed, data capacity, security
and hardware necessary for reliable Internet access and
services. To the extent that the Internet continues to
experience increased numbers of users, increased frequency of
use or increased bandwidth requirements, the Internet
infrastructure may not be able to support the demands placed on
it and the performance or reliability of the Internet could
suffer.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Rapid technological changes could cause our
    products to become obsolete

The Internet communications market is
characterized by rapid technological change, frequent new
product introductions, changes in customer requirements and
evolving industry standards. If we are unable to develop and
introduce products or enhancements in a timely manner to meet
these technological changes, we may not be able to successfully
compete. In addition, our products may become obsolete, in which
event we may not be a viable business.

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Our market is susceptible to rapid changes due to
technology innovation, evolving industry standards, and frequent
new service and product introductions. New services and products
based on new technologies or new industry standards expose us to
risks of technical or product obsolescence. If we do not use
leading technologies effectively, continue to develop our
technical expertise and enhance our existing products on a
timely basis, we may be unable to compete successfully in this
industry, which would adversely affect our business and results
of operations.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | Our inability to integrate our products
    with other third-party software could adversely affect market
    acceptance of our products

Our ability to compete successfully depends on
the continued compatibility and interoperability of our products
with products and systems sold by various third parties, such as
portal framework vendors. Currently, these vendors have open
applications program interfaces, which facilitate our ability to
integrate with their systems. These vendors have also been
willing to license to us rights to build integrations to their
products and use their development tools. If any one of them
were to close their programs interface or fail to grant us
necessary licenses, our ability to provide a close integration
of our products could become more difficult and could delay or
prevent our products integration with future systems.



| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Failure to successfully develop versions
    and updates of our products that run on the operating systems
    used by our current and prospective customers could reduce our
    sales

Many of our products run on the Microsoft Windows
NT, Microsoft Windows 2000 or certain versions of the Sun
Solaris Unix operating systems, and some require the use of
third party software. Any change to our customers
operating systems could require us to modify our products and
could cause us to delay product releases. In addition, any
decline in the market acceptance of these operating systems we
support may require us to ensure that all of our products and
services are compatible with other operating systems to meet the
demands of our customers. If potential customers do not want to
use the Microsoft or Sun Solaris operating systems we support,
we will need to develop more products that run on other
operating systems adopted by our customers. If we cannot
successfully develop these products in response to customer
demands, our business could be adversely impacted. The
development of new products in response to these risks would
require us to commit a substantial investment of resources, and
we might not be able to develop or introduce new products on a
timely or cost-effective basis, or at all, which could lead
potential customers to choose alternative products.

In addition, our products may face competition
from operating system software providers that may elect to
incorporate similar technology into their own products.



| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we require additional financing for our
    future capital needs but are not able to obtain it, we may be
    unable to develop or enhance our products, expand operations or
    respond to competitive pressures

In the future, we might need to raise additional
capital to fund expansion, product development, acquisitions or
working capital. This need may arise sooner than we anticipate
if our revenue does not grow in line with our expectations, if
our costs are higher than we expect or if we change our
strategic plans. If we were required to raise additional funds,
it could be difficult to obtain additional financing on
favorable terms, or at all. In the event that we obtain
additional financing by issuing Ordinary Shares or equity or
debt securities that are convertible into Ordinary Shares, the
interests of existing stockholders would be diluted. If we
cannot raise needed funds on acceptable terms, or at all, we may
not be able to develop or enhance our products, respond to
competitive pressures or grow our business.



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Competition in the Internet communications
    market may reduce the demand for, or price of, our
    products

The Internet communications market is intensely
competitive and rapidly changing. We expect that competition
will intensify in the near-term because there are very limited
barriers to entry. Our primary long-term competitors may not
have entered the market yet because the Internet communications
market is relatively new. Competition could impact us through
price reductions, fewer customer orders, reduced gross

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margin and loss of market share, any of which
could cause our business to suffer. Many of our current and
potential competitors have greater name recognition, longer
operating histories, larger customer bases and significantly
greater financial, technical, marketing, public relations,
sales, distribution and other resources than we do. Some of our
potential competitors are among the largest and most
well-capitalized software companies in the world. As a result,
we may not be able to compete successfully, and competitive
pressures may harm our business.




| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | The loss of our right to use software
    licensed to us by third parties could harm our
    business

We license technology that is incorporated into
our products from third parties, including security and
encryption software. Any interruption in the supply or support
of any licensed software could disrupt our operations and delay
our sales, unless and until we can replace the functionality
provided by this licensed software. Because our products
incorporate software developed and maintained by third parties,
we depend on these third parties to deliver and support reliable
products, enhance their current products, develop new products
on a timely and cost-effective basis and respond effectively to
emerging industry standards and other technological changes.



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Our growth may suffer because of the
    difficulties in implementing our products

The use of our products by our customers often
requires implementation services. Although we currently provide
implementation services sufficient to meet our current business
level, our growth will be limited in the event we are unable to
expand our implementation services personnel or subcontract
these services to qualified third parties. In addition,
customers could delay product implementations. Implementation
typically involves working with sophisticated software,
computers and communications systems. If we experience
difficulties with implementation or do not meet project
milestones in a timely manner, we could be obligated to devote
more customer support, engineering and other resources to a
particular project.



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Factors outside our control may cause the
    timing of our license revenue to vary from quarter-to-quarter,
    possibly adversely affecting our operating results

We generally recognize revenue from a customer
sale when persuasive evidence of an agreement exists, the
product has been delivered, the arrangement does not involve
significant customization of the software, the license fee is
fixed or determinable and collection of the fee is probable. If
an arrangement requires acceptance testing or customization
services, recognition of the associated license and service
revenue would be delayed. The timing of the commencement and
completion of the these services is subject to factors that may
be beyond our control, such as access to the customers
facilities and coordination with the customers personnel
after delivery of the software. If new or existing customers
have difficulty deploying our products or require significant
amounts of our professional services support for customized
features, our revenue recognition could be further delayed and
our costs could increase, causing increased variability in our
operating results.



| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | Our long and unpredictable sales cycle
    depends on factors outside our control and may cause license
    revenue to vary significantly

To date, our customers have taken a long time to
evaluate our products before making their purchase decisions.
The long, and often unpredictable, sales and implementation
cycles for our products may cause our license revenue and
operating results to vary significantly from period to period.
Sales of licenses and implementation schedules are subject to a
number of risks over which we have little or no control,
including customer budgetary constraints, customer internal
acceptance reviews, the success and continued internal support
of customers own development efforts, the sales and
implementation efforts of businesses with which we have
relationships, the nature, size and specific needs of a customer
and the possibility of cancellation of projects by customers.
Along with our distributors, we spend significant time educating
and providing information to our prospective customers regarding
the use and benefits of our products. In addition, our customers
often begin by purchasing our products on a pilot basis before
they decide whether or not to purchase additional licenses for
full deployment. For example, even after purchase, our customers
tend to deploy our ProactivePortal solution slowly, depending
upon the skill set of the customer, the size of the

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deployment, the stage of the customers
deployment of a portal, the complexity of the customers
network environment and the quantity of hardware and the degree
of hardware configuration necessary to deploy the products.




| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Failure to expand our sales and marketing
    organizations could limit our growth

If we fail to substantially expand our direct
sales and marketing operations in our existing markets, we will
have difficulties in growing our revenue. We are currently
constrained from expanding our sales and marketing organization
by budget and cost considerations. Moreover, even though we
expect to expand our sales and marketing organization, we might
not be able to hire or retain the kind and number of sales and
marketing personnel that could be required because competition
for qualified sales and marketing personnel is intense.



| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not meet our restructuring
    objectives or if the economic slowdown continues, we may have to
    implement additional plans in order to reduce our operating
    costs

As a result of the economic slowdown, in the
third quarter of 2002, we announced a restructuring plan to
reduce our operating costs to match the current business
environment, which plan was implemented in the fourth quarter of
2002. We also previously implemented a restructuring plan in
July 2001. If we do not meet our restructuring objectives or if
the economic slowdown continues, we may have to implement
additional plans to reduce our operating costs, which could
cause us to incur additional restructuring charges. Further,
these plans may not achieve our desired goals due to such
factors as significant costs or restrictions that may be imposed
in some international locales on workforce reductions and a
potential adverse affect on employee morale that could harm our
efficiency and our ability to act quickly and effectively in the
rapidly changing technology markets in which we sell our
products. Moreover, as a result of the restructuring, we have
excess office space and are negotiating to restructure our
leases for our main offices in San Jose, California and Ramat
Gan, Israel. If these negotiations are not successful,
continuing lease obligations could have an adverse effect on our
ongoing efforts to reduce costs.

We may experience tax liabilities in
connection with the liquidation of wholly owned subsidiaries
that have ceased trading

As a result of the restructuring plans we
announced on July 1, 2001 and September 30, 2002, we
ceased commercial operations of the following wholly owned
subsidiaries: BackWeb Technologies B.V., BackWeb Technologies
(U.K.) Ltd., BackWeb Technologies G.m.b.H., BackWeb Technologies
S.a.r.l., BackWeb Technologies A.B., BackWeb Canada Inc. and
BackWeb K.K. Ltd. We have decided to further streamline our
operations and to simplify the legal entity structure of the
BackWeb group to liquidate these companies. We do not anticipate
any issues upon the liquidation of these companies, but we
cannot assure you that we will not have any termination
liability issues with the appropriate tax authorities in each
jurisdiction. If such termination liability issues were to arise
and we did not prevail, we might experience a material adverse
effect on our cash and earnings. We cannot assure you that we
would prevail with respect to any such issue(s).



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | We may experience difficulties managing our
    expected growth and geographic dispersion

Our ability to successfully offer products and
services and to implement our business plan in the rapidly
evolving Internet communications market requires an effective
planning and management process. These factors, together with
our anticipated future operations and geographic dispersion,
will continue to place a significant strain on our management
systems and resources. We expect that we will need to continue
to improve our financial and managerial controls and reporting
systems and procedures, and expand, train and manage our work
force worldwide.

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| |                                                                 
| | ----------------------------------------------------------------
| | Our international operations are subject to
    additional risks

Revenue from customers outside the United States
represented approximately $2.9 million, or 46% of our total
revenue, for the year ended December 31, 2002. Our
international operations will continue to be subject to a number
of risks, including, but not limited to:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | laws and business practices favoring local
    competition;                                          
|
| |  | compliance with multiple, conflicting and
    changing laws and regulations;                         
|
| |  | longer sales cycles;                                                                                 
|
| |  | greater difficulty or delay in accounts
    receivable collection;                                   
|
| |  | import and export restrictions and tariffs;                                                          
|
| |  | difficulties in staffing and managing foreign
    operations;                                        
|
| |  | difficulties in investing in foreign operations
    at appropriate levels to compete effectively; and
|
| |  | political and economic instability.                                                                  

Our international operations also face
foreign-currency-related risks. To date, substantially all of
our revenue has been denominated in U.S. dollars, but we
believe that in the future, an increasing portion of our revenue
may be denominated in foreign currencies, including the NIS,
Euro Dollar and British Pound. Fluctuations in the value of
foreign currencies may cause further volatility in our operating
results, reduce the accuracy of our financial forecasts and
could have a material adverse effect on our business, operating
results and financial condition.



| |                                                                    
| | -------------------------------------------------------------------
| | Our efforts to protect our proprietary
    rights may be inadequate

To protect our proprietary rights, we rely
primarily on a combination of patent, copyright, trade secret
and trademark laws, confidentiality agreements with employees
and third parties, and protective contractual provisions such as
those contained in license agreements with customers,
consultants and vendors. However, these parties could breach
such confidentiality agreements and other protective contracts.
In addition, we have not signed confidentiality agreements in
every case. Despite our efforts to protect our proprietary
rights, unauthorized parties may copy aspects of our products
and obtain and use information that we regard as proprietary. We
may not become aware of, or have adequate remedies in the event
of, such breaches.

We pursue the registration of some of our
trademarks and service marks in the United States and in certain
other countries, but we have not secured registration of all our
marks. We license certain trademark rights to third parties.
Such licensees may not abide by compliance and quality control
guidelines with respect to such trademark rights and may take
actions that would adversely affect our trademarks.

We do not conduct comprehensive patent searches
to determine whether the technology used in our products
infringes patents held by third parties. Product development is
inherently uncertain in a rapidly evolving technological
environment in which there may be numerous patent applications
pending, which are confidential when filed, with regard to
potentially similar technologies. We expect that software
products may be increasingly subject to third-party infringement
claims as the number of competitors in our industry segment
grows and the functionality of products in different industry
segments overlaps. Although we believe that our products do not
infringe the proprietary rights of any third parties, third
parties could assert infringement claims against us in the
future. The defense of any such claims would require us to incur
substantial costs and would divert managements attention
and resources, which could materially and adversely affect our
financial condition and operations. If a party succeeded in
making such a claim we could be liable for substantial damages,
as well as injunctive or equitable relief that could effectively
block our ability to sell our products and services. Royalty or
licensing agreements, if required, may not be available on
acceptable terms, if at all. Any such outcome could have a
material adverse effect on our business, financial condition,
operating results and stock price.

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| |                                                                  
| | -----------------------------------------------------------------
| | Our products may be used in an unintended
    and negative manner

Our products are used to transmit information
through the Internet. Our products could be used to transmit
harmful applications, negative messages, unauthorized
reproduction of copyrighted material, inaccurate data or
computer viruses to end-users in the course of delivery. Any
such transmission could damage our reputation or could give rise
to legal claims against us. We could spend a significant amount
of time and money defending against these legal claims.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | We may not have sufficient insurance to
    cover all potential product liability and warranty
    claims

Our products are integrated into our
customers networks. The sale and support of our products
may entail the risk of product liability or warranty claims
based on damage to these networks. In addition, the failure of
our products to perform to customer expectations could give rise
to warranty claims. Although we carry general liability and
errors and omissions insurance, our insurance may not cover
potential claims of this type or may not be adequate to protect
us from all liability that may be imposed.



| |                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not have sufficient insurance to
    cover all potential claims against our directors and officers
    nor may we be able to renew our directors and officers
    (D&O) insurance policy at a reasonable rate or
    obtain sufficient coverage

Our D&O insurance may not cover all potential
claims against our directors and officers. Our D&O insurance
policy expires August 1, 2003, and we cannot assure you
that we will be able to renew our D&O policy after this time
at a reasonable rate or at all. As a result, it may be difficult
to retain or attract qualified directors or officers.



| |                                                                       
| | ----------------------------------------------------------------------
| | Our business could suffer if we lose the
    services of key personnel

If we fail to attract qualified personnel for our
open positions or retain current employees, including, our
executive officers and other key employees, our revenue may not
increase and could decline and our operations in general could
be impacted. None of our officers or key employees is bound by
an employment agreement for any specific term. Our relationships
with these officers and key employees are at will. Moreover, we
do not have key person life insurance policies
covering any of our employees.

Risks Relating to Our Location in
Israel



| |                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Any major developments in the political or
    economic conditions in Israel could cause our business to suffer
    because we are incorporated in Israel and have important
    facilities and resources located in Israel

We are incorporated under the laws of the State
of Israel. Our research and development facilities, as well as
one of our executive offices, are located in Israel. Although
substantial portions of our sales are currently made to
customers outside of Israel, any major hostilities involving
Israel or the interruption or curtailment of trade between
Israel and its present trading partners could significantly harm
our business. Since September 2000, a continuous armed conflict
with the Palestinian Authority has been taking place. We cannot
predict the effect on BackWeb of the increase in the degree of
violence by Palestinians against Israel or of any possible
military action elsewhere in the Middle East, such as the war in
Iraq. If Israels economy is impaired by a high inflation
rate or if the timing of the devaluation of the NIS against the
U.S. dollar were to lag considerably behind inflation, our
operations and financial condition may be negatively impacted to
the extent that the inflation rate exceeds the rate of
devaluation of the NIS against the U.S. dollar.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Any future profitability may be diminished
    if tax benefits from the State of Israel are reduced or
    withheld

Pursuant to the Law for the Encouragement of
Capital Investments, the Israeli Government has granted
Approved Enterprise status to our existing capital
investment programs. Consequently, we are eligible for tax
benefits for the first several years in which we generate
taxable income. Our future profitability may be diminished if
all or portions of these tax benefits are reduced or eliminated.
These tax benefits may be cancelled if we fail to comply with
requisite conditions and criteria. Currently the most
significant conditions

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that we must continue to meet include making
specified investments in fixed assets, maintaining the
development and production nature of our facilities, and
financing at least 30% of these investments through the issuance
of capital stock. In addition, the law and regulations
prescribing the benefits provide for an expiration date for the
grant of new benefits. The expiration date has been extended
several times in the past. The expiration date currently in
effect is May 2003, and no new benefits will be granted after
that date unless the expiration date is again extended. There is
a committee that is reviewing the benefits program under the
law. There can be no assurance that new benefits will be
available after May 2003 or that the benefits will be continued
in the future at their current levels or at any level.




| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | Israeli regulations may limit our ability
    to engage in research and development and export our
    products

Under Israeli law, we are required to obtain an
Israeli government license to engage in research and development
and the export of the encryption technology incorporated in our
products. Our current government license to engage in these
activities expires in May 2003. Our research and development
activities in Israel, together with our ability to export our
products out of Israel, would be limited if the Israeli
government revokes our current license, our current license is
not renewed, our license fails to cover the scope of the
technology in our products, or Israeli law regarding research
and development or export of encryption technologies were to
change.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | Israeli courts might not enforce judgments
    rendered outside of Israel that may make it difficult to collect
    on judgments rendered against us

Some of our directors and executive officers are
not residents of the United States and some of their assets and
our assets are located outside the United States. Service of
process upon these directors and executive officers, and
enforcement of judgments obtained in the United States against
us, and these directors and executive officers, may be difficult
to obtain within the United States. BackWeb Technologies, Inc.,
our U.S. subsidiary, is the U.S. agent authorized to
receive service of process in any action against us in any
federal or state court arising out of our initial public
offering or any related purchase or sale of securities. We have
not given consent for this agent to accept service of process in
connection with any other claim.

We have been informed by our legal counsel in
Israel, Naschitz, Brandes & Co., that there is doubt as
to the enforceability of civil liabilities under
U.S. securities laws in original actions instituted in
Israel. However, subject to certain time limitations, an Israeli
court may declare a foreign civil judgment enforceable if it
finds that:



| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the judgment was rendered by a court which was,
    according to the laws of the state of the court, competent to
    render the judgment;                                                                            
|
| |  | the judgment is no longer appealable;                                                                                                                                                                                 
|
| |  | the obligation imposed by the judgment is
    enforceable according to the rules relating to the
    enforceability of judgments in Israel and the substance of the
    judgment is not contrary to public policy; and
|
| |  | the judgment is executory in the state in which
    it was given.                                                                                                                                                     

Even if the above conditions are satisfied, an
Israeli court will not enforce a foreign judgment if it was
given in a state whose laws do not provide for the enforcement
of judgments of Israeli courts (subject to exceptional cases) or
if its enforcement is likely to prejudice the sovereignty or
security of the State of Israel. An Israeli court also will not
declare a foreign judgment enforceable if:



| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | the judgment was obtained by fraud;                                                                                                  
|
| |  | there was no due process;                                                                                                            
|
| |  | the judgment was rendered by a court not
    competent to render it according to the laws of private
    international law in Israel;

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| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the judgment is at variance with another judgment
    that was given in the same matter between the same parties and
    which is still valid; or                       
|
| |  | at the time the action was brought in the foreign
    court a suit in the same matter and between the same parties was
    pending before a court or tribunal in Israel.



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have adopted anti-takeover provisions
    that could delay or prevent an acquisition of BackWeb, even if
    an acquisition would be beneficial to our
    shareholders

Provisions of Israel corporate and tax law and of
our articles of association may have the effect of delaying,
preventing or making more difficult a merger or other
acquisition of BackWeb, even if an acquisition would be
beneficial to our shareholders.

Israeli corporate law regulates acquisitions of
shares through tender offers, requires special approvals for
transactions involving significant shareholders and regulates
other matters that may be relevant to these types of
transactions. Furthermore, Israeli tax considerations may make
potential transactions unappealing to us or to some of our
shareholders. In addition, our articles of association provide
for a staggered board of directors.



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | The new tax reform in Israel may reduce our
    tax benefit, which might adversely affect our
    profitability

On January 1, 2003, a comprehensive tax
reform took effect in Israel. We have performed an initial
analysis of the likely implications of the new tax reform
legislation on our results and operations. Our initial
evaluation concludes that the impact of the tax reform on both
the corporate and income tax framework of the Company is not
expected to have a material effect on the results and operations
of the Company. This initial evaluation is in part based on the
assumptions that there will no expansion of the BackWeb group of
companies beyond the countries in which we already operate and
that the Company will remain in a net operating loss for tax
purposes for at least the next three years. We cannot provide
assurances that these assumptions will be met, and the tax
reform will not materially and adversely affect our results and
operations.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | Our results of operations may be negatively
    affected by the obligation of key personnel to perform military
    service

Certain of our officers and employees are
currently obligated to perform annual reserve duty in the Israel
Defense Forces and are subject to being called for active
military duty at any time. Although we have operated effectively
under these requirements since our inception, we cannot predict
the effect of these obligations on the Company in the future.
Our operations could be disrupted by the absence, for a
significant period, of one or more of our officers or key
employees due to military service. Such military requirement
could be increased in the event of war or military action
involving Israel, which may be more likely in light of the
United States initiation of military action against Iraq.

Risks Relating to Our Ordinary
Shares



| |                                                                        
| | -----------------------------------------------------------------------
| | Our stock price has been volatile and could
    fluctuate in the future

The market price of our Ordinary Shares has been
volatile. We expect our stock price to continue to fluctuate:



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | in response to quarterly variations in operating
    results;                                                                                             
|
| |  | in response to announcements of technological
    innovations or new products by us or our competitors or partners;                                       
|
| |  | because of market conditions in the enterprise
    software or portal industry;                                                                           
|
| |  | in reaction to changes in financial estimates by
    securities analysts, and our failure to meet or exceed the
    expectations of analysts or investors;

23



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| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | in response to our announcements of strategic
    relationships or joint ventures; and
|
| |  | in response to sales of our Ordinary Shares                                           

In the past, following periods of volatility in
the market price of a particular companys securities,
securities class action litigation has often been brought
against that company. We are currently subject to a securities
class action described in Part I, Item 3 Legal
Proceedings of this Annual Report, and the volatility of
our stock price could make us a target for additional suits.
Securities class action litigation could result in substantial
costs and a diversion of our managements attention and
resources.



| |                                                                
| | ---------------------------------------------------------------
| | Our continued Nasdaq SmallCap Market
    listing is not assured

On August 13, 2002, we received a letter
from The Nasdaq Listing Qualifications Staff, advising us that
our Ordinary Shares had been trading below the $1.00 per share
requirement for continued inclusion on The Nasdaq National
Market and that we had not regained compliance with this
requirement during the previous ninety days. As a result, the
Staff advised us that it would delist our Ordinary Shares from
The Nasdaq National Market at the opening of business on
August 21, 2002, unless we applied to transfer our
securities to The Nasdaq SmallCap Market or requested a hearing
to appeal the Staffs determination to a Listing
Qualification Panel. We initially requested a hearing to appeal
the Staffs determination to a Listing Qualifications
Panel. Subsequently, the Company applied to transfer its
Ordinary Shares to The Nasdaq SmallCap Market. That application
was approved and the Companys Ordinary Shares began
trading on The Nasdaq SmallCap Market on September 23,
2002. We have met the initial and continued listing criteria for
The Nasdaq SmallCap Market as a foreign company and will remain
eligible to be quoted on The Nasdaq SmallCap Market, subject to
our compliance with the continued listing requirements. However,
we cannot assure you that we will be able to maintain the
continued listing requirements, and, as a result, may be
delisted from trading on The Nasdaq SmallCap Market. Delisting
could reduce the ability of our shareholders to purchase or sell
shares as quickly and as inexpensively as they have done
historically. This situation would be exacerbated if we were
unable to obtain listing on another market or exchange, as this
would likely make it more difficult for traders to sell our
securities. Broker-dealers may be less willing or able to sell
or make a market in our Ordinary Shares. Not maintaining a
listing on a major stock market may:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | result in a decrease in the trading price of our
    Ordinary Shares;                   
|
| |  | lessen interest by institutions and individuals
    in investing in our Ordinary Shares;
|
| |  | make it more difficult to obtain analyst
    coverage; and                              
|
| |  | make it more difficult for us to raise capital in
    the future.                       

In addition, current and prospective customers
and strategic partners may limit or cease their business
relationships with us because of concerns or perceptions
regarding our listing status and future liquidity.



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Holders of our Ordinary Shares who are
    United States residents face income tax risks

We believe that we will be classified as a
passive foreign investment company, or PFIC, for
U.S. federal income tax purposes. Our treatment as a PFIC
could result in a reduction in the after-tax return to the
holders of our Ordinary Shares and may cause a reduction in the
value of such shares. For U.S. federal income tax purposes,
we will be classified as a PFIC for any taxable year in which
either (i) 75% or more of our gross income is passive
income, or (ii) at least 50% of the average value of all of
our assets for the taxable year produce or are held for the
production of passive income. For this purpose, cash is
considered to be an asset, which produces passive income.
Passive income also includes dividends, interest, royalties,
rents, annuities and the excess of gains over losses from the
disposition of assets, which produce passive income. As a result
of our substantial cash position and the decline in the value of
our stock, we might be considered a PFIC under a literal
application of the asset test that looks solely to market value.
If we are a PFIC for U.S. federal income tax purposes,
holders of our Ordinary Shares who are residents of the United
States (U.S. Holders) would be required, in
certain circumstances, to pay an interest charge together with
tax calculated at maximum rates on certain excess
distributions, including any gain on the sale of Ordinary
Shares.

24



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##### Table of Contents



The consequences described above can be mitigated
if the U.S. Holder makes an election to treat us as a
qualified electing fund, or QEF. A shareholder making the QEF
election is required for each taxable year to include in income
a pro rata share of the net capital gain of the QEF as long-term
capital gain, subject to a separate election to defer payment of
taxes, which deferral is subject to an interest charge. We have
agreed to supply U.S. Holders with the information needed
to report income and gain pursuant to a QEF election. The QEF
election is made on a shareholder-by-shareholder basis and can
be revoked only with the consent of the Internal Revenue
Service, or IRS.

As an alternative to making the QEF election, the
U.S. Holder of PFIC stock which is publicly traded could
mitigate the consequences of the PFIC rules by electing to mark
the stock to market annually, recognizing as ordinary income or
loss each year an amount equal to the difference as of the close
of the taxable year between the fair market value of the PFIC
stock and the U.S. Holders adjusted tax basis in the
PFIC stock. Losses would be allowed only to the extent of net
mark-to-market gain previously included by the U.S. Holder
under the election for prior taxable years.

All U.S. Holders are advised to consult
their own tax advisers about the PFIC rules generally and about
the advisability, procedures and timing of their making any of
the available tax elections, including the QEF or mark-to-market
elections.



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Our officers, directors and affiliated
    entities own a large percentage of BackWeb and could
    significantly influence the outcome of actions

Our executive officers, directors and entities
affiliated with them, in the aggregate, beneficially own
approximately 37.8% of our outstanding Ordinary Shares as of
December 31, 2002. These shareholders, if acting together,
would be able to significantly influence all matters requiring
approval by our shareholders, including the election of
directors and the approval of mergers or other business
combination transactions.




Item 2.  Properties

As of December 31, 2002, BackWeb leased
approximately 8,500 square feet in a single office building
located in Ramat Gan, Israel; approximately 34,000 square feet
in a single office building located in San Jose, California; and
approximately 10,000 square feet in a single office building in
Toronto, Canada. The office space in Ramat Gan, Israel is leased
pursuant to a lease that terminates in May 2004. The office
space in San Jose, California is leased pursuant to a lease that
expires in March 2007. The office space in Toronto, Canada is
leased pursuant to a lease that expires in August 2006. In
addition to these facilities, BackWeb also rents a small office
in Hamburg, Germany with a lease that expires in October 2003.

As part of the restructuring that began in the
third and fourth quarter 2002, the Company entered into
negotiations with its various landlords to renegotiate its lease
obligations in San Jose, California, Ramat Gan, Israel and
Toronto, Canada. The Company has reached agreements in principle
with the landlords in San Jose, California and Ramat Gan,
Israel, whereby it may be able to mitigate its lease obligations
by, among other things, buying out certain of its obligations,
subletting space or reducing rent, or a combination of these.
However, there can be no assurance that the Company will be
successful in entering into written agreements reflecting these
various agreements in principle or that it will be able to
mitigate its lease obligations. For a more complete discussion
of the Companys lease obligations, please refer to
Note 9 to Notes of Consolidated Financial Statements
elsewhere in this Annual Report.

As part of the restructuring, BackWeb has also
relinquished other office space it had acquired through
short-term leases or on a month-to-month basis in various parts
of the United States. We believe that our remaining facilities
will be adequate to meet our needs for the foreseeable future.




Item 3.  Legal
Proceedings

BackWeb, six of its officers and directors, and
various underwriters for BackWebs initial public offering
were named as defendants in a consolidated action captioned
In re BackWeb Technologies Ltd. Initial Public Offering
Securities Litigation, Case No. 01-CV-10000, a
purported securities class action lawsuit filed in the

25



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##### Table of Contents



United States District Court, Southern District
of New York. Similar cases have been filed alleging violations
of the federal securities laws in the initial public offerings
of more than 300 other companies, and these cases have been
coordinated for pretrial proceedings as In re Initial Public
Offering Securities Litigation, 21 MC 92. A
consolidated amended complaint filed in the BackWeb case asserts
that the prospectus from our June 8, 1999 initial public
offering failed to disclose certain alleged improper actions by
the underwriters for the offering, including the receipt of
excessive brokerage commissions and agreements with customers
regarding aftermarket purchases of shares of our stock. The
complaint alleges violations of Sections 11 and 15 of the
Securities Act of 1933, Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and Rule 10b-5 promulgated
under the Securities Exchange Act of 1934. On or about
July 15, 2002, an omnibus motion to dismiss was filed in
the coordinated litigation on behalf of defendants, including
BackWeb, on common pleadings issues. In October 2002, the Court
dismissed all six individual defendants from the litigation
without prejudice, pursuant to a stipulation. On
February 19, 2003, the Court denied the motion to dismiss
with respect to the claims against BackWeb. No trial date has
yet been set.


We believe we have meritorious defenses and
intend to defend this action vigorously; however, the results of
any litigation are inherently uncertain and can require
significant management attention, and we could be forced to
incur substantial expenditures, even if we ultimately prevail.
In the event there were an adverse outcome, our business could
be harmed. Thus, we cannot assure you that this lawsuit will not
materially and adversely affect our business, results of
operations or our share price.

From time to time we are involved in litigation
incidental to the conduct of our business. Apart from the
litigation described above, we are not party to any lawsuit or
proceeding that, in our opinion, is likely to seriously harm our
business.




Item 4.  Submission of
Matters to a Vote of Security Holders

There were no matters submitted to a vote of the
shareholders during the fourth quarter of the fiscal year ended
December 31, 2002.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Our Ordinary Shares are traded on The Nasdaq
SmallCap Market under the symbol BWEB. We
transferred the trading in our Ordinary Shares to The Nasdaq
SmallCap Market as of September 23, 2002. Prior to this
time, and since our initial public offering on June 8,
1999, our Ordinary Shares had been traded on The Nasdaq National
Market. Prior to that, there was no public market for our
Ordinary Shares. The following table sets forth The Nasdaq
National or SmallCap Market (as applicable) low and high sales
price of our Ordinary Shares for the periods indicated below:

|     |                |          |   |           |  |  |   |      | 
|---- | -------------- | -------- | - | --------- |  |  | - | ---- | 
|     |                | Low Sale |   | High Sale
|     |                | Price    |   | Price    
|     |                |          |   |          
|2002 |                |          |   |           |  |  |   |     
|     | Fourth Quarter |          | $ | 0.15      |  |  | $ | 0.45 | 
|     | Third Quarter  |          | $ | 0.20      |  |  | $ | 0.63 | 
|     | Second Quarter |          | $ | 0.50      |  |  | $ | 1.10 | 
|     | First Quarter  |          | $ | 1.00      |  |  | $ | 1.75 | 
|2001 |                |          |   |           |  |  |   |     
|     | Fourth Quarter |          | $ | 0.64      |  |  | $ | 1.99 | 
|     | Third Quarter  |          | $ | 0.43      |  |  | $ | 1.60 | 
|     | Second Quarter |          | $ | 1.37      |  |  | $ | 3.33 | 
|     | First Quarter  |          | $ | 1.44      |  |  | $ | 6.75 | 

26



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##### Table of Contents



Our transfer agent is American Stock
Transfer & Trust Company (AST), 59 Maiden Lane,
New York, NY 10038. ASTs telephone number for
shareholder services is 1-800-937-5449.

According to the records of AST, we had
approximately 184 shareholders of record as of March 3,
2003. Because many of our Ordinary Shares are held by brokers
and other institutions on behalf of shareholders, we are unable
to estimate the total number of shareholders represented by
these record holders.

Our policy is to reinvest earnings to fund future
growth. Accordingly, we have not paid dividends and do not
anticipate declaring dividends on our Ordinary Shares in the
foreseeable future.

If we were to distribute cash dividends out of
income that had been exempt from tax because of our investment
programs Approved Enterprise status (for description of
such status please refer to the section entitled Effective
Corporate Tax Rate in the Managements Discussion and
Analysis of Financial Condition and Results of Operations or
MD&A section below) such income would become
subject to Israeli corporate tax.

If we were to declare dividends in the future, we
would declare those dividends in NIS but pay those dividends to
our non-Israeli shareholders in U.S. dollars. Because
exchange rates between NIS and the dollar fluctuate
continuously, a U.S. shareholder would be subject to currency
fluctuation between the date when the dividends were declared
and the date the dividends were paid.

In 1998, the Israeli currency control regulations
were liberalized significantly, and since January 1, 2003,
all exchange control restrictions have been removed, although
there are still reporting requirements for foreign currency
transactions. There are no longer Israeli currency control
restrictions on remittances of dividends on the Ordinary Shares
(after deduction of withholding tax) or the proceeds from the
sale of the Ordinary Shares, and shareholders may freely convert
these amounts into non-Israeli currencies and remit these
amounts abroad. However, legislation remains in effect, pursuant
to which currency controls can be imposed by administrative
action at any time.






|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

The selected consolidated financial data set
forth below should be read in conjunction with
Managements Discussion and Analysis of Financial
Conditions and Results of Operations, the Consolidated
Financial Statements of the Company and Notes thereto, and other
financial information included elsewhere in this Report.
Historical results are not necessarily indicative of the results
to be expected in the future.




BackWeb Technologies Ltd.

Consolidated Statements of
Operations

|                 |         |                                       |       |       |       |      |        |        |        |      |        |        |        |  |        |        |        |  |       |       |       | 
|---------------- | ------- | ------------------------------------- | ----- | ----- | ----- | ---- | ------ | ------ | ------ | ---- | ------ | ------ | ------ |  | ------ | ------ | ------ |  | ----- | ----- | ----- | 
|                 |         |                                      
|                 |         | Years Ended December 31,             
|                 |         |                                      
|                 |         | 2002                                  |       | 2001  |       | 2000 |        | 1999   |        | 1998
|                 |         |                                       |       |       |       |      |        |        |        |     
|                 |         |                                      
|                 |         | (In thousands, except per share data)
|Revenue:         |         |                                       |       |       |       |      |        |        |        |      |        |        |        |  |        |        |        |  |       |      
|                 | License |                                       | $     | 2,119 |       |      | $      | 13,807 |        |      | $      | 29,294 |        |  | $      | 18,514 |        |  | $     | 7,980 |      
|                 | Service |                                       |       | 4,228 |       |      |        | 6,831  |        |      |        | 9,052  |        |  |        | 4,749  |        |  |       | 1,557 |      
|                 |         |                                       |       |       |       |      |        |        |        |      |        |        |        |  |        |        |        |  |       |      
|                 |         | Total revenue                         |       |       | 6,347 |      |        |        | 20,638 |      |        |        | 38,346 |  |        |        | 23,263 |  |       |       | 9,537 | 
|Cost of revenue: |         |                                       |       |       |       |      |        |        |        |      |        |        |        |  |        |        |        |  |       |      
|                 | License |                                       |       | 213   |       |      |        | 443    |        |      |        | 249    |        |  |        | 266    |        |  |       | 266   |      
|                 | Service |                                       |       | 3,050 |       |      |        | 5,238  |        |      |        | 6,051  |        |  |        | 3,911  |        |  |       | 1,353 |      
|                 |         |                                       |       |       |       |      |        |        |        |      |        |        |        |  |        |        |        |  |       |      
|                 |         | Total cost of revenue                 |       |       | 3,263 |      |        |        | 5,681  |      |        |        | 6,300  |  |        |        | 4,177  |  |       |       | 1,619 | 
|                 |         |                                       |       |       |       |      |        |        |        |      |        |        |        |  |        |        |        |  |       |      
|Gross profit     |         |                                       | 3,084 |       |       |      | 14,957 |        |        |      | 32,046 |        |        |  | 19,086 |        |        |  | 7,918 |      
|                 |         |                                       |       |       |       |      |        |        |        |      |        |        |        |  |        |        |        |  |       |      

27



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|                                                                                                |                                                                                                        |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |        |        | 
|----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                                |                                                                                                        |                                      
|                                                                                                |                                                                                                        | Years Ended December 31,             
|                                                                                                |                                                                                                        |                                      
|                                                                                                |                                                                                                        | 2002                                  |         | 2001   |        | 2000 |         | 1999   |        | 1998
|                                                                                                |                                                                                                        |                                       |         |        |        |      |         |        |        |     
|                                                                                                |                                                                                                        |                                      
|                                                                                                |                                                                                                        | (In thousands, except per share data)
|Operating expenses:                                                                             |                                                                                                        |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                                                | Research and development, net                                                                          |                                       |         | 6,059  |        |      |         | 9,230  |        |      |         | 8,672  |        |   |         | 5,519  |        |   |         | 4,555  |       
|                                                                                                | Sales and marketing                                                                                    |                                       |         | 10,298 |        |      |         | 22,882 |        |      |         | 28,479 |        |   |         | 18,876 |        |   |         | 13,182 |       
|                                                                                                | General and administrative                                                                             |                                       |         | 4,557  |        |      |         | 10,494 |        |      |         | 7,480  |        |   |         | 4,480  |        |   |         | 3,182  |       
|                                                                                                | Restructuring charge                                                                                   |                                       |         | 4,678  |        |      |         | 2,825  |        |      |         |       |        |   |         |       |        |   |         |       |       
|                                                                                                | Write-off of intellectual property and other
    intangibles                                           |                                       |         | 1,764  |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |       |       
|                                                                                                | Amortization of goodwill, intellectual property,
    other intangibles and deferred stock compensation |                                       |         | 1,782  |        |      |         | 3,806  |        |      |         | 11,377 |        |   |         | 3,640  |        |   |         | 1,824  |       
|                                                                                                |                                                                                                        |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                                                |                                                                                                        | Total operating expenses              |         |        | 29,138 |      |         |        | 49,237 |      |         |        | 56,008 |   |         |        | 32,515 |   |         |        | 22,743 | 
|                                                                                                |                                                                                                        |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Loss from operations                                                                            |                                                                                                        |                                       | (26,054 | )      |        |      | (34,280 | )      |        |      | (23,962 | )      |        |   | (13,429 | )      |        |   | (14,825 | )     
|Finance and other income (expense), net                                                         |                                                                                                        |                                       | 1,172   |        |        |      | 2,037   |        |        |      | 4,749   |        |        |   | 1,940   |        |        |   | 218     |       
|Write down of an equity investment                                                              |                                                                                                        |                                       |        |        |        |      | (2,500  | )      |        |      |        |        |        |   |        |        |        |   |        |       
|                                                                                                |                                                                                                        |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Net loss                                                                                        |                                                                                                        | $                                     | (24,882 | )      |        | $    | (34,743 | )      |        | $    | (19,213 | )      |        | $ | (11,489 | )      |        | $ | (14,607 | )     
|                                                                                                |                                                                                                        |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Basic and diluted net loss per share                                                            |                                                                                                        | $                                     | (0.63   | )      |        | $    | (0.91   | )      |        | $    | (0.52   | )      |        | $ | (0.59   | )      |        | $ | (6.07   | )     
|                                                                                                |                                                                                                        |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Weighted average number of shares used in
    computing basic and diluted net loss per share(1) |                                                                                                        |                                       | 39,284  |        |        |      | 38,225  |        |        |      | 37,205  |        |        |   | 19,575  |        |        |   | 2,408   |       
|                                                                                                |                                                                                                        |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       

|                                                        |  |              |        |      |  |                |        |      |  |      |        |  |  |  |        |  |  |  |         |  
|------------------------------------------------------- |  | ------------ | ------ | ---- |  | -------------- | ------ | ---- |  | ---- | ------ |  |  |  | ------ |  |  |  | ------- | -
|                                                        |  |             
|                                                        |  | December 31,
|                                                        |  |             
|                                                        |  | 2002         |        | 2001 |  | 2000           |        | 1999 |  | 1998
|                                                        |  |              |        |      |  |                |        |      |  |     
|                                                        |  |              |        |      |  |                |        |     
|                                                        |  |              |        |      |  | (In thousands) |        |     
|Condensed Consolidated Balance Sheet
    Data:          |  |              |        |      |  |                |        |      |  |      |        |  |  |  |        |  |  |  |         |  
|Cash, cash equivalents and short-term investments       |  |              | 23,757 |      |  |                | 41,824 |      |  |      | 64,734 |  |  |  | 75,607 |  |  |  | 6,449   |  
|Working capital                                         |  |              | 20,334 |      |  |                | 37,905 |      |  |      | 63,916 |  |  |  | 71,323 |  |  |  | 1,596   |  
|Total assets                                            |  |              | 29,409 |      |  |                | 56,512 |      |  |      | 90,374 |  |  |  | 86,049 |  |  |  | 12,701  |  
|Long-term obligations, net of current                   |  |              |       |      |  |                |       |      |  |      |       |  |  |  |       |  |  |  | 327     |  
|Redeemable convertible preferred stock                  |  |              |       |      |  |                |       |      |  |      |       |  |  |  |       |  |  |  | 37,304  |  
|Total shareholders equity (net capital
    deficiency) |  |              | 22,521 |      |  |                | 46,581 |      |  |      | 78,430 |  |  |  | 73,129 |  |  |  | (33,178 | )



---



|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the calculation of the number of shares,
    please see Note 2 of the Notes to Consolidated Financial
    Statements, Net Loss Per Share.

28



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis should
be read in conjunction with, and is qualified by, the
Selected Consolidated Financial Data and our
Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report, as well as the section on
Risk Factors that is set forth in Item 1 of
Part I of this Form 10-K. In addition, this discussion
contains forward-looking statements and is, therefore, subject
to the overall qualification on forward-looking statements that
appears at the beginning of this Form 10-K.

Overview

BackWeb provides offline Web infrastructure
software and application-specific software that enable companies
to extend the reach of their Web assets to the mobile community
of their customers, partners and employees. The Companys
products address the need of mobile users who are disconnected
from a network to access and transact with critical enterprise
Web content and applications, such as sales tools, forecast
management, contact lists, service repair guides, expense report
updates, pricing data, time sheets, collaboration sessions, work
orders and other essential documents and applications.

BackWeb ProactivePortalTM is designed
to extend the reach of corporate portals to mobile or
disconnected users and users who need to be notified of critical
new content, which helps increase usage of the portal and
critical communications, which can increase companies
return on investment from their enterprise portals. Our BackWeb
e-AcceleratorTM application allows an extended
enterprise or geographically dispersed organization to manage
and deliver pertinent information and alerts without the use of
a portal. This enables sales and service organizations, partners
and resellers, and call centers using our products to collect
and distribute up-to-date, key data to customers, partners, and
employees, enabling users to interact with the data through
alerts and notification features. Our core infrastructure
software, BackWeb FoundationTM, is a platform that
allows organizations to efficiently target and deliver sizeable
digital data of any format to users desktops throughout
the extended enterprise.

Since our inception, we have derived revenue
primarily from licensing our products and, to a lesser extent,
from maintenance, consulting and training services. The rate of
growth of our service revenue is not commensurate with the costs
of service revenue such as salaries and related expenses of our
customer support and consulting organizations and the cost of
third party contractors to provide consulting services.
Accordingly, our gross margins on service revenue are
significantly lower than our gross margins on license revenue.
Our products are marketed worldwide through a combination of the
direct sales force, reseller channel and OEMs.

Critical Accounting Policies

Our critical accounting policies are as follows:



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue recognition;                                                                                                                     
|
| |  | Estimating valuation allowances and accrued
    liabilities, specifically the trade receivable allowances for
    doubtful debts;        
|
| |  | Reviewing goodwill, intellectual property and
    other intangible assets arising on capitalized purchased
    technology for impairment;
|
| |  | Review of equity investments for impairment; and                                                                                         
|
| |  | Forward exchange contracts                                                                                                               



| |                    
| | -------------------
| | Revenue recognition

We derive our revenue from licensing of our
products, and by providing maintenance service, customer
training and consulting services. We generally sell our products
through our direct sales force and, indirectly,

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though resellers and OEMs. As described below,
management estimates must be made and used in connection with
the revenue we recognize in any accounting period.


We recognize software license revenue in
accordance with Statement of Position 97-2 Software
Revenue Recognition (SOP 97-2), as
amended. SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements to be
allocated to each element based on the relative fair value of
the elements. We have also adopted SOP 98-9,
Modification of SOP 97-2, Software Revenue
Recognition with Respect to Certain Transactions
(SOP 98-9), for all transactions entered into
after January 1, 2000. SOP 98-9 requires that revenue
be recognized under the Residual Method when vendor
specific objective evidence (VSOE) of fair value
exists for all undelivered elements and no VSOE exists for the
delivered elements.

We license our products on a perpetual and on a
term basis. We recognize license revenue arising from the sale
of perpetual licenses and multi-year term licenses in the
accounting period that the official order form and sale occurs.
For term licenses with a contract period of less than one year,
revenue arising is recognized on a monthly basis.

A license sale is deemed to have occurred when
persuasive evidence exists of an agreement exists, delivery has
occurred, the fee is fixed and determinable and the collection
of the resulting receivable is reasonably assured. Delivery
generally occurs when the product is delivered to a common
carrier.

At the time of the transaction, we assess whether
the fee associated with our license sale is fixed and
determinable. If the fee is not fixed or determinable, we
recognize revenue as payments become due from the customer
provided that all other revenue recognition criteria have been
met. We determine the fee associated with a license sale by
reference to a price list, and if a discount from the price list
is applicable, we assess whether the discount is in accordance
with what management believes to be generally acceptable
discount. The principal factors we take into account when giving
a discount are the volume of licenses in the transaction, the
strategic nature of the deal and customer and the future
likelihood of further transactions with the same customer. In
addition, we assess whether or not collection is reasonably
assured. Our license agreements generally provide for payment
within 30 to 90 days from the official order form
date. In cases where we do not establish reasonable assurance of
collection, revenue is recognized only on the receipt of
payment. If we agree to payment terms that are outside of these
parameters, we generally recognize revenue as the fees become
due.

We assess the likelihood of collection based on a
number of factors, including past transaction history, the
credit worthiness of the customer and, in some instances, a
review of the customers financial statements. We do not
request collateral from our customers. If credit worthiness
cannot be established at the time the official order form is
signed, we defer the fee and recognize revenue at the time
collection is made, which is generally upon the receipt of cash.

For all sales made through our direct sales
force, we use a Software License Service Agreement
(SLSA) and an official order form. For sales made
through a reseller, we enter into a standard reseller agreement
and evidence of orders from customers must be supplied before we
recognize revenue.

We recognize maintenance revenue over the
contractual period for the maintenance, which is generally one
year. We provide maintenance at multiple levels of support, and
we price this service as a percentage of the related license
revenue. For those agreements where the maintenance and license
is quoted as one fee, we value the maintenance as an undelivered
element at standard rates and defer this revenue over the
contractual maintenance period. A customer may elect whether to
buy a maintenance contract.

Our arrangements do not generally include
acceptance. However if such an acceptance provision exists, then
we defer revenue recognition until we receive written acceptance
of the product from the customer. All agreements we enter into
are non-refundable and non-cancelable.

We also recognize revenue from consulting
activities, which is generally evidenced by a signed Statement
of Work (SOW). We generally charge for our
consulting activities on a time and materials basis, and, in
such cases, recognize revenue when we invoice the customer. If
an acceptance clause is contained in the SOW, we defer revenue
until we obtain written acceptance from the customer. We also
sometimes charge a

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fixed fee for our consulting activities.
Management interprets fixed bids in a similar manner to a SOW
containing an acceptance clause and defers revenue recognition
until the customer supplies a certificate of work completion, at
which time we recognize the revenue.


We determine the appropriate revenue recognition
for training to customers when we provide the customer with the
training

Deferred revenue includes amounts billed to
customers and cash received from customers for which revenue has
not been recognized.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | Estimating valuation allowances and accrued
    liabilities, specifically the trade receivable allowance for
    doubtful debts

Management continually reviews the collectibility
of trade accounts receivable and the adequacy of the allowance
for doubtful debts against the trade accounts receivable.
Management specifically analyzes customer accounts, account
receivable aging reports, history of bad debts and the business
or industry sector to which they belong, customer
concentrations, customer credit-worthiness, current economic
trends and any other pertinent factors. Generally, we make a
provision for doubtful accounts when a trade receivable becomes
90 days past due. In exceptional cases, we will waive a
provision after a trade receivable is 90 days or more past
due when in the judgment of management, after conducting due
diligence with the management of the customer, the receivable is
still collectible and the customer has demonstrated that payment
is forthcoming. During 2002 and 2001, management provided for
approximately $205,000 and $2.9 million, respectively, of
doubtful debts arising primarily from
Internet-centric businesses in the business to
consumer market that arose primarily as a result of
certain customers no longer being able to continue business due
to the prevailing economic conditions. Management is able to
make reasonably objective judgments on the adequacy of other
provisions relating to trade accruals. We have not made any
provision for contingent liabilities, which has involved
significant management judgment that either we will prevail in
the case of material litigation or that we have sufficient
insurance to cover any adverse outcome. In these cases
management has accrued for the appropriate deductible in respect
of the legal expenses in the financial statements. A discussion
of our outstanding material litigation is contained in
Part I, Item 3 Legal Proceedings of this
Form 10-K.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | Reviewing goodwill, intellectual property
    and other intangible assets arising on capitalized purchased
    technology for impairment

We assess the impairment of long-lived assets and
related goodwill, intellectual property and other intangibles
whenever an event occurs that indicates that the carrying value
of these assets may not be recoverable. The factors we consider
important in this assessment include, but are not limited to,
the following:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | Significant changes in the manner of our use of
    the acquired assets or the strategy of our company;
|
| |  | Significant negative industry or economic trends.                                                      

The determination that the carrying value of
intangibles, long-lived assets and goodwill arising on the
purchase of intellectual property may not be recoverable is
based upon the existence of one or more of the above factors. We
assess whether impairment exists by conducting an impairment
review in which we compare the carrying value of the assets to
their fair value in accordance with SFAS 142.

As discussed in Note 2 to the Consolidated
Financial Statements, the Company adopted SFAS 144 in
January 2002. In conjunction with the restructuring we
implemented during the third quarter of 2002, which included a
reduction-in-force of 61 employees (see Note 9 of the
Notes to the Consolidated Financial Statements), the Company
changed its internal allocation of resources. The Company now
believes that it is unlikely that any future value will be
realized from the wireless technology that was acquired from
Mobix. As of June 30, 2002, the carrying value of the
wireless technology, which was recorded as intangibles, was
$1.8 million. Based on SFAS No. 144, the
Companys intangible assets carrying value of
$1.8 million was in excess of its fair value of zero.
Therefore, the Company wrote-off the $1.8 million remaining
carrying value of

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its intangible assets during the three months
ended September 30, 2002. Net intangible assets at
December 31, 2002 were zero.




| |                                                
| | -----------------------------------------------
| | Review of equity investments for
    impairment

We have made equity investments in other
companies that we believed were in the best interests of the
Company and its strategic objectives. Before an investment is
executed, the Companys executive management and Board of
Directors approve them. Generally, management designates an
executive staff member to either serve on the Board of Directors
of the company in which we invested as a voting member or as an
observer. This process serves management to monitor the
investment and to determine when an impairment review of the
investment may be needed. Management performs a review of equity
investments on a quarterly basis to determine if a provision for
impairment is required. This process, while based on reasonably
objective evidence supplied by the company in which we invested,
is combined with analysis of general economic trends and
indicators. During 2001, management carried out such reviews and
accounted for an impairment charge against one of its equity
investments for the full $2.5 million amount of the equity
investment. Management reviews during 2002 demonstrated that no
further impairment provisions were required against other equity
investments. Significant management judgment is involved in
conducting these reviews and future developments to this company
may result in the impairment provision becoming a write-off.



| |                           
| | --------------------------
| | Forward exchange contracts

We participate in hedging certain forecasted
committed expenses that are payable in New Israeli Shekels, or
NIS to minimize the companys exposure to fluctuations in
the exchange rate between the NIS and the US $. We compare
budgeted NIS exchange rates to the forward contract rates
for the NIS for various periods of time into the future where we
are reasonable confident that we can forecast a stable stream of
expenses payable in NIS. Taking all industry specific and macro
economic indicators into account, in order to protect ourselves
from fluctuating exchange rates we enter into forward contacts.
The contracts are generally monthly and timed in the month to
mature when we incur most of our expenses in NIS, which are the
payroll and related expenses. We take out a number of forward
contracts at a time for future months, depending on how
confident we feel about both our forecasted NIS expenses
and our visibility into future exchange rate movement.

Statement of Financial Accounting Standard
No. 133 Accounting for Derivative Instruments and
Hedging Activities (SFAS No. 133)
requires that all derivatives be recorded on the balance sheet
at fair value and such anticipated transactions are designated
and documented at inception as cash flow hedges and
are evaluated for effectiveness, at least quarterly. If the
derivative meets the definition of a hedge and is so designated,
changes in the fair value of the derivatives will either be
offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is
recognized in earnings. Changes in the fair value of derivatives
that are not designated, or are not effective as hedges, must be
recognized in earnings. All amounts accumulated in Other
Comprehensive Income at year-end will be reclassified to
earnings when the forecasted expense underlying the forward
contract has been made.

Results of Operations



| |        
| | -------
| | Revenue

We derive revenue from license, maintenance,
consulting and training services for BackWeb Foundation, BackWeb
e-Accelerator Suite and BackWeb Proactive Portal. Total revenue
for the twelve months ended December 31, 2002 was
$6.3 million, a decrease of approximately
$14.3 million, or 69.2%, from $20.6 million in the
twelve months ended December 31, 2001. Total revenue
decreased approximately $17.7 million, or 46.2%, during
2001 as compared to 2000. The decrease in 2002 was due primarily
to a $9.4 million decrease in revenue from one OEM
customer, whose contract ended during 2002. We have negotiated a
new reseller agreement with this customer and we are still in
the business objective and strategy setting process. We are not
able to quantify the amount of revenue that may be generated in
future periods from the new agreement. The

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remaining $4.9 million decrease was due to
the decrease in the volume and average size of license and
consulting service deals. The decrease in 2001 was due to the
decrease in the volume of both license and consulting services
deals. The Company believes that these decreases in revenue
during each of the last two years were due, in large part, to
the continuing slowdown in companies information
technology spending due to global economic conditions, and to a
lesser extent the re-positioning of the company to a new product
offering of the BackWeb Proactive Portal. We have limited
visibility to forecast revenue for 2003 and therefore we are
unable to quantify the future behavior of our revenue.


License revenue was $2.1 million, or 33.4%
of total revenue, in the twelve months ended December 31,
2002 compared to $13.8 million, or 66.9% of total revenue,
and $29.3 million, or 76.4% of total revenue, in the twelve
months ended December 31, 2001 and 2000, respectively. The
$11.7 million decrease in license revenue in 2002 as
compared with 2001 was primarily due to the $9.0 million
decrease of license revenue from the OEM customer whose contract
terminated during 2002, and the remaining $2.7 million
decrease was due to a decrease in the volume and average size of
our license deals. The $15.5 million decrease in license
revenue in 2001 as compared with 2000 was primarily due to a
decrease in the volume and average size of our license deals.
During 2002 we have been transitioning to our new product, the
BackWeb Proactive Portal. Our license revenue during 2002 has
been largely dependent on our older products, especially the
BackWeb Foundation product. During 2003 we expect the revenue
from the BackWeb Proactive Portal to increase both in absolute
terms and as a percentage of the overall product portfolio. We
expect too continue to generate license revenue from our older
products, in particular the BackWeb Foundation product but we
expect this to decrease as a percentage of the overall product
mix portfolio.

Service revenue, which includes maintenance,
consulting and training services, was $4.2 million, or
66.6% of total revenue, in the twelve months ended
December 31, 2002 compared to $6.8 million, or 33.1%
of total revenue, and $9.1 million, or 23.6% of total
revenue, in the twelve months ended December 31, 2001 and
2000, respectively. The decrease in service revenue was
primarily related to the decrease in our maintenance revenue,
which was directly attributable to the reduction in our license
revenue, a decrease in professional consulting services revenue
directly related to the volume reduction of license revenue
deals and to a lesser extent a decrease in maintenance renewals
due to global economic conditions.

In 2002, 2001 and 2000, one OEM customer
accounted for $1.3 million, or 20% of total revenue,
$10.7 million, or 52% of total revenue, and
$10.4 million, or 27% of total revenue, respectively. In
addition, two customers accounted for an aggregate of 20% of
total revenue in 2002, and two customers accounted for an
aggregate of 11% of total revenue in 2001. We expect that a
small number of customers will continue to account for a
substantial portion of our total revenue for the foreseeable
future and revenue from one or more of these customers may
represent more than 10% of our total revenue in future years.

Customers outside of the United States accounted
for 46.3%, 70.1% and 48.8% of our total revenue in the twelve
months ended December 31, 2002, 2001 and 2000,
respectively. The variations in the mix of revenue generated in
the United States as compared to the revenue generated outside
of the United States fluctuates significantly due to the reduced
number of deals closed in these periods, as each individual deal
had a greater impact on the composition of our revenue and the
significant variability in the value of these deals. To a lesser
extent the overall increase from 2000 to 2001 and the decline
from 2001 to 2002 of revenue generated outside of the United
States was also attributable to the geographical distribution of
revenue that was associated with the OEM agreement that ended
during 2002.

Cost of Revenue

Cost of revenue was $3.3 million, or 51.4%
of total revenue, for the twelve months ended December 31,
2002 compared to $5.7 million, or 27.5% of total revenue,
and $6.3 million, or 16.4% of total revenue, for the twelve
months ended December 31, 2001 and 2000, respectively. In
2002 and 2001, the increase in cost of revenue was due to a
shift in the revenue produced from the higher gross margin
license deals to the lower gross margin service revenue deals.
The decrease in cost of revenue in absolute dollars was
primarily due to the reduction in run-rate expenses as a result
of both the 2001 and 2002 restructuring that was undertaken. The

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expenses affected by the restructuring were
across the board, including, but not limited to payroll and
related expenses and general overhead expenses of the company.


Cost of license revenue consists primarily of
expenses related to media duplication, packaging of products and
royalty payables to OEM vendors. Cost of license revenue was
$213,000, or 10.1% of license revenue, for the twelve months
ended December 31, 2002 compared to $443,000, or 3.2% of
license revenue, for the twelve months ended December 31,
2001 and $249,000, or 0.9% of license revenue, for the twelve
months ended December 31, 2000. The cost of license revenue
is higher in percentage terms in the twelve months ended
December 2002 compared to the twelve months ended
December 31, 2001 and 2000 due to the fixed cost elements
of the royalty payables for embedded third party software.

Cost of service revenue consists primarily of
expenses related to salaries and the overhead of our customer
support and professional service organizations, including
related expenses of BackWeb consultants, third party consultants
and contractors. Cost of service revenue was $3.1 million,
or 72.1% of service revenue, in the twelve months ended
December 31, 2002 compared to $5.2 million, or 76.7%
of service revenue, in the twelve months ended December 31,
2001 and $6.1 million, or 66.8% of service revenue, in the
twelve months ended December 31, 2000. The decrease in cost
of service revenue in 2002 and 2001 was primarily due to the
reduced level of payroll and related expenses together with
overhead expenses that resulted from the reorganizations that
occurred in both 2002 and 2001. We expect the cost of service
revenue to increase marginally in line with service revenues;
the increase is not directly variable due to the relative fixed
cost of the customer technical support operation.

Operating Expenses



| |                              
| | -----------------------------
| | Research and Development, net

Research and development expenses, net consist of
personnel costs, equipment and supply costs for our development
efforts. We charge these expenses to operations as they are
incurred. We have research and development facilities in Israel.
Research and development expenses, net were $6.1 million,
$9.2 million and $8.7 million for the twelve months
ended December 31, 2002, 2001 and 2000, respectively. The
decrease in research and development expenses, net during 2002
was primarily due to the reduction in our headcount from 60 to
37 full-time employees that resulted from the
reduction-in-force we implemented on October 1, 2002. Our
research and development expenses, net also decreased in 2002
due to more effective cost management and the restructuring of
the underlying fixed cost element, principally the office lease
costs in Israel, following the reorganization. Other influential
factors are the devaluation of the NIS against the
U.S. dollar and the credit resulting from cash flow hedging
under forward exchange contracts of approximately $131,000. The
increase in research and development expenses, net during 2001
was partly due to a $150,000 research and development grant that
we received in 2000 which was credited against operational
expenses and substantial investment in research and development
personnel and related costs towards the end of 2000, which
peaked during the first six months of 2001. We were not entitled
to receive any research and development grant in 2001. This was
partially offset by the reduction in research and development
costs following the reduction-in-force we implemented on
July 1, 2001,although there was some underlying investment
and growth remaining after the reorganization. Research and
development expenses, net were 95.5%, 44.7% and 22.6% of total
revenue in the twelve months ended December 31, 2002, 2001
and 2000, respectively. The increase in research and development
expenses, net as a percentage of revenue during each of the last
two years was due to a larger percentage decrease in total
revenue as compared with research and development, net expenses.
We expect our research and development, net expenses will
decrease on an absolute basis in 2003 due to the restructuring
that we carried out in 2002 and more effective cost management.



| |                    
| | -------------------
| | Sales and Marketing

Sales and marketing expenses consist of personnel
and related costs for our direct sales force, product
management, marketing, business development and operations
management employees, together with the costs of marketing
programs, including trade shows and other related direct expense
and general overhead. As of December 31, 2002, we had sales
personnel in offices located in the United States and Europe.
Sales and

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marketing expenses were $10.3 million;
$22.9 million and $28.5 million for the twelve months
ended December 31, 2002, 2001 and 2000, respectively. The
decrease in sales and marketing expenses during each of the last
two years was due to numerous factors, one of which was the
reduced level of headcount and related costs as a result of the
reorganizations that occurred in both 2002 and 2001. We reduced
the sales and marketing organization in the October 2002
reorganization from 52 to 26 full-time employees. Other
significant factors were lower commission earned which is
directly related to the lower levels of revenue and reduced
advertising and marketing program expense as well as underlying
fixed overhead. Sales and marketing expenses were 162.2%, 110.9%
and 74.3% of total revenue for the twelve months ended
December 31, 2002, 2001 and 2000, respectively. The
increase in sales and marketing expenses as a percentage of
total revenue during each of the last two years was due to a
larger percentage decrease in total revenue as compared with
sales and marketing expenses. We expect that sales and marketing
expenses will decrease on an absolute basis during 2003 as a
consequence of the reorganization that took place in 2002. This
reduction may be partially offset by increased commissions
earned to the extent revenue levels increase over those of 2002.




| |                           
| | --------------------------
| | General and Administrative

General and administrative expenses consist
primarily of personnel and related costs and outside services
for general corporate functions, including finance, accounting,
general management, human resources, information services, legal
and the provision for bad and doubtful debts. General and
administrative expenses were $4.6 million;
$10.5 million and $7.6 million in the twelve months
ended December 31, 2002, 2001, and 2000, respectively.
Excluding the provision for bad and doubtful debt of $205,000,
$2.9 million and $731,000 in the twelve months ended
December 31, 2002, 2001 and 2000, respectively; general and
administrative expenses were $4.4 million,
$7.5 million, and $6.8 million. The decrease in
general and administrative expenses during 2002, excluding the
provision for bad and doubtful debts, was primarily decreased
payroll and related expense as well as reductions in underlying
fixed overhead following the reduction in our headcount from 29
to 16 full-time employees, resulting from the
reorganization in 2002. We expect general and administrative
expenses, excluding the provision for bad and doubtful debts,
will decrease on an absolute basis over the next year due to the
2002 reorganization and more effective cost management.

During 2002 and 2001, our provision for bad and
doubtful debts were primarily attributable to
Internet-centric businesses in the business to
consumer market, as worsening economic conditions caused
certain customers to no longer be able to continue business. We
do not expect to have increased provisions for bad and doubtful
debt during 2003.



| |                     
| | --------------------
| | Restructuring Charge

During the three months ended September 30,
2002, the Company announced a restructuring plan, which it
implemented in the three months ended December 31, 2002.
The restructuring plan included reducing the workforce by
61 employees, vacating some facilities, canceling office
service leases and writing-down fixed assets as a result of
employee terminations and office consolidation. During the
three-month period ended September 30, 2002, we recorded a
restructuring charge of $4.7 million, which included
$1.6 million of severance and benefit costs,
$2.7 million of facility costs, $200,000 related to the
write-down of fixed assets and $200,000 related to other
restructuring costs. For further information related to this
restructuring, see Note 9 of the Notes to the Consolidated
Financial Statements.

During the three months ended September 30,
2001, the Company approved a restructuring plan to reduce its
workforce by 63 employees, vacate certain facilities, canceling
office service leases and writing-down fixed assets. We recorded
a restructuring charge of $2.8 million, which included
$1.3 million related to severance and benefits costs,
$1.4 million related to facility costs, and $100,000 of
other related restructuring costs. For further information
related to this restructuring, see Note 9 of the Notes to the
Consolidated Financial Statements.

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| |                                                                   
| | ------------------------------------------------------------------
| | Write-off of Intellectual Property and
    Other Intangible Assets

In conjunction with the Companys
restructuring that it implemented during 2002, the Company
changed its internal allocation of resources. As of
June 30, 2002, the Company believed that it was unlikely
that any future value would be realized from the wireless
technology that it acquired from Mobix Communications Ltd. This
wireless technology was recorded as intangibles on June 27,
2000 and had a carrying value of $1.8 million as of
June 30, 2002. Based on SFAS 144 in the Critical
Accounting Policies, the Companys intangible assets
carrying value of $1.8 million was in excess of its fair
value of zero. Therefore, the Company wrote-off the
$1.8 million remaining carrying value of these intangibles
during the three months ended September 30, 2002.

Amortization of goodwill, intellectual property,
other intangible assets and deferred stock compensation consists
of amortization of goodwill and other intangibles associated
with our acquisition of Lanacom in August 1997, deferred stock
compensation in 1999, the initial write-off of the acquisition
of intellectual property from Mobix Communications Ltd. in June
2000 and amortization of intellectual property and other
intangibles associated with the acquisition of intellectual
property from Mobix. Deferred stock compensation represents the
aggregate differences between the respective exercise price of
options at their dates of grant and the deemed fair market value
of our Ordinary Shares for accounting purposes. Goodwill,
intellectual property and other intangibles are being amortized
on a straight-line basis over the estimated useful life,
generally two to three years. Deferred stock compensation is
presented as a reduction of shareholders equity and is
amortized over the vesting period of the underlying options
based on an accelerated vesting method. The total amortization
expense related to a one-time write-off of in-process research
and development in June 2000 was $8.4 million. Amortization
expense was $1.8 million for the twelve months ended
December 31, 2002 compared to $3.8 million and
$11.4 million in the twelve months ended December 31,
2001 and 2000, respectively.



| |                              
| | -----------------------------
| | Finance and Other Income, net

Finance and other income, net includes interest
income earned on our cash, cash equivalents and short-term
investments offset by interest expense and the effects of
exchange gains and losses arising from the re-measurement of
transactions in foreign currencies. For the twelve months ended
December 31, 2002, finance and other income and expenses,
net was $1.2 million compared to $2.0 million and
$4.7 million in the twelve months ended December 31,
2001 and 2000, respectively. The decrease in finance and other
income, net during 2002 and 2001 was due to the decrease in our
cash, cash equivalents and short-term investments due to our
operating losses and reduced interest rates. The increase in
finance and other income during 2000 was due to interest income
generated from the proceeds of our initial public offering in
July 1999. We expect finance and other income, net to continue
to decrease during 2003 as the Company forecasts that it will
continue to use cash during 2003 and, as a result, the Company
expects to earn less investment and interest income.



| |                                       
| | --------------------------------------
| | Write-Down of an Equity
    Investment

In 2000, the Company invested an aggregate of
$3.0 million in certain development-stage companies
operating Internet-centric businesses in which the Company
believed it had a significant strategic interest. However, due
to the economic slowdown and the significant decline in capital
available to, and in the valuations of, the privately funded
Internet-centric businesses, the Company determined that its
investment in 3Path, Inc. had become impaired. Accordingly, in
the three months ended June 30, 2001, the Company recorded
a charge of $2.5 million to reflect impairment of these
assets below their recorded cost to represent what the
Companys management considered to be fair value. No
impairment charge was recorded during the year ended
December 31, 2002.



| |             
| | ------------
| | Income Taxes

As of December 31, 2002, we had
approximately $82.0 million of Israeli net operating loss
carry forwards and $5.0 million of U.S. federal net
operating losses carry forwards available to offset future
taxable income.

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The U.S. net operating loss carry forwards
expires in varying amounts between the years 2011 and 2022. The
Israeli net operating loss carry forwards have no expiration
date.




| |                                    
| | -----------------------------------
| | Liquidity and Capital
    Resources

As of December 31, 2002, the Company had
$23.8 million of cash, cash equivalents and short-term
investments as compared to $41.8 million as of
December 31, 2001.

Net cash used in operating activities was
$18.4 million and $22.2 million for the twelve months
ended December 31, 2002 and 2001, respectively. Cash
provided by investing activities was $18.6 million for the
twelve months ended December 31, 2002, and primarily
represents the net proceeds from the purchases and sales of
short-term investments. Cash provided by investing activities
was $17.1 million for the twelve months ended
December 31, 2001, and primarily represents the net
proceeds from the purchases and sales of short-term investments,
partially offset by the purchase of property and equipment. Cash
provided by financing activities was $807,000 and
$1.2 million for the twelve months ended December 31,
2002 and 2001, respectively, and consisted primarily of proceeds
from the issuance of Ordinary Shares and proceeds from
shareholders note receivables.

As of December 31, 2002, the Company had no
material commitments for capital expenditures. Our capital
requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to
developing, marketing, selling and supporting our products and
the timing and extent of establishing additional operations. We
believe that our current cash balances will be sufficient to
fund our operations for at least the next 12 months from
the date of this report. However, we might need to raise
additional funds prior to the expiration of this period if we
are not successful in generating significant revenue from our
products, particularly from licensing the ProactivePortal
Server, if we fail to develop key strategic relationships or if
our operating expenses exceed our expectations. If we were
required to raise additional funds, it could be difficult to
obtain additional financing on favorable terms, if at all. We
may try to obtain additional financing by issuing Ordinary
Shares or debt securities, which could dilute our existing
shareholders. If we cannot raise needed funds on acceptable
terms, or at all, we may not be able to develop or enhance our
products, respond to competitive pressures or grow our business.

BackWeb leases its office facilities under
cancelable and non-cancelable operating leases. Future rental
payments on a fiscal year basis under non-cancelable operating
leases with initial terms in excess of one year are as follows
(in thousands):

|               |  |   |       | 
|-------------- |  | - | ----- | 
|2003           |  | $ | 896   | 
|2004           |  |   | 727   | 
|2005           |  |   | 618   | 
|2006           |  |   | 600   | 
|2007 and after |  |   | 46    | 
|               |  |   |       | 
|               |  | $ | 2,887 | 
|               |  |   |       | 

As part of the restructuring plan that began in
the three months ended September 30, 2002, the Company
entered into negotiations with its various landlords to
renegotiate its lease obligations. The Company has reached
agreement in principle with its landlords in San Jose, CA
and Ramat Gan, Israel whereby it may be able to mitigate its
lease obligations by, among other things buying out certain of
its obligations, subletting space or reducing rent or a
combination of these. The amounts reflected in the table above
assume that the agreements in principle are reflective of the
final executed agreements.

Effective Corporate Tax Rates

Our tax rate reflects a mix of the U.S. statutory
tax rate on our U.S. income, versus European country tax rates
on our individual European country income and the Israeli tax
rate discussed below. We expect that most of our taxable income
will be generated in Israel. Israeli companies are generally
subject to income tax at a rate of 36% of taxable income. The
majority of our income, however, is derived from our capital
investment

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program with Approved Enterprise
status under the Law for the Encouragement of Capital
Investments, and is eligible therefore for tax benefits. As a
result of these benefits, we expect to have a tax exemption on
income derived during the first two years in which this
investment program produces taxable income, provided that we do
not distribute such income as a dividend, and a reduced tax rate
of 10%  25% for the following 5 to 8 years,
depending upon the proportion of foreign ownership of the
Company.


All of these tax benefits are subject to various
conditions and restrictions. See Note 13 
Income Taxes  Israeli Income Taxes  Tax
Benefits under the Law for the Encouragement of Capital
Investments, 1959. We cannot assure you that we will
obtain approval for additional Approved Enterprise Programs, or
that the provisions of the law will not change.

Since we have incurred tax losses through
December 31, 2002, we have not yet used the tax benefits
for which we are eligible. See Item 1,
Business  Risk Factors.

Impact of Inflation and Currency
Fluctuations

Most of the Companys sales are denominated
in U.S. dollars. However, we incur a large portion of our
costs from our operations in Israel. A substantial portion of
our operating expenses, primarily our research and development
costs, are denominated in NIS. Costs not denominated in
U.S. dollars are translated to U.S. dollars, when
recorded, at prevailing rates of exchange. This is done for the
purposes of our financial statements and reporting. Costs not
denominated in U.S. dollars will increase if the rate of
inflation in Israel exceeds the devaluation of the Israeli
currency as compared to the U.S. dollar or if the timing of
such devaluations lags considerably behind inflation.
Consequently, we are, and will be, affected by changes in the
prevailing NIS/U.S. dollar exchange rate. We might also be
affected by the U.S. dollar exchange rate to the major
European currencies due to the fact that we do business in
Europe.

The annual rate of inflation in Israel was 6.5%,
in 2002, 1.0% in 2001 and 0% in 2000. The NIS was devalued
against the U.S. dollar by approximately 7.3% in 2002, 9.3%
in 2001 and (2.7)% in 2000. The representative dollar exchange
rate for converting the NIS to U.S. dollars, as reported by
the Bank of Israel, was NIS 4.737 for one U.S. dollar on
December 31, 2002.

Recently Issued Accounting
Pronouncements

The FASB recently issued SFAS No. 146
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146). SFAS 146
addresses financial accounting and reporting for costs
associated with exit or disposal activities and replaces
Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS 146 improves
financial reporting by requiring that a liability for a cost
associated with an exit or disposal activity be recognized and
measured initially at fair value only when the liability is
incurred. The provisions of SFAS 146 are effective for exit
or disposal activities that are initiated after
December 31, 2002. Adoption of SFAS 146 is not expected to
have a material effect on the Companys financial position
or operating results.

In December 2002, the FASB issued SFAS 148,
Accounting for Stock Based Compensation Transmission and
Disclosure, which amended FASB Statement No. 123
(SFAS 148). The transition guidance and annual
disclosure provisions of SFAS 148 are effective for fiscal
years ending after December 15, 2002. SFAS 148 has
been adopted and the additional disclosure requirements have
been reflected in Note 2 of the Notes to the Consolidated
Financial Statements.

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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    about Market Risk

We develop products in Israel and sell them in
U.S., Canada, Europe and Israel. As a result, our financial
results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign
markets. As most of our sales are currently made in
U.S. dollars, a strengthening of the dollar could make our
products less competitive in foreign markets. Our interest
income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our
investments are in short-term instruments. We regularly assess
these risks and have established policies and business practices
to protect against the adverse effects of these and other
potential exposures. As a result, the Company does not
anticipate material losses in these areas. Due to the nature of
our short-term investments, we have concluded that there is no
material market risk exposure. Therefore, no quantitative
tabular disclosures are required.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data



| |                   
| | ------------------
| | Supplementary Data




Unaudited Quarterly Financial Data for 2002
and 2001

The following are summaries of quarterly
financial data for the years ended December 31, 2002 and
2001 as reported by the Company:

|     |                                      |                                       |  |        |   |       |  |         |   |  |  |         |   |  |  |        |  
|---- | ------------------------------------ | ------------------------------------- |  | ------ | - | ----- |  | ------- | - |  |  | ------- | - |  |  | ------ | -
|     |                                      | First                                 |  | Second |   | Third |  | Fourth 
|     |                                      | Qtr                                   |  | Qtr    |   | Qtr   |  | Qtr    
|     |                                      |                                       |  |        |   |       |  |        
|     |                                      |                                      
|     |                                      | Unaudited                            
|     |                                      | (In thousands, except per share data)
|2002 |                                      |                                       |  |        |   |       |  |         |   |  |  |         |   |  |  |       
|     | Revenue                              |                                       |  | 2,311  |   |       |  | 1,791   |   |  |  | 902     |   |  |  | 1,343  |  
|     | Gross profit                         |                                       |  | 1,172  |   |       |  | 825     |   |  |  | 43      |   |  |  | 1,044  |  
|     | Net loss                             |                                       |  | (5,652 | ) |       |  | (5,540  | ) |  |  | (11,300 | ) |  |  | (2,390 | )
|     | Basic and diluted net loss per share |                                       |  | (0.15  | ) |       |  | (0.14   | ) |  |  | (0.29   | ) |  |  | (0.06  | )
|2001 |                                      |                                       |  |        |   |       |  |         |   |  |  |         |   |  |  |       
|     | Revenue                              |                                       |  | 7,221  |   |       |  | 4,575   |   |  |  | 4,481   |   |  |  | 4,361  |  
|     | Gross profit                         |                                       |  | 5,373  |   |       |  | 3,065   |   |  |  | 3,287   |   |  |  | 3,232  |  
|     | Net loss                             |                                       |  | (7,936 | ) |       |  | (11,607 | ) |  |  | (9,245  | ) |  |  | (5,955 | )
|     | Basic and diluted net loss per share |                                       |  | (0.21  | ) |       |  | (0.30   | ) |  |  | (0.24   | ) |  |  | (0.15  | )



|    |                     
|--- | --------------------
|(b) | Financial Statements

The following consolidated financial statements
and the related notes thereto of BackWeb Technologies Ltd. and
the Report of Independent Auditors are filed as a part of this
Form 10-K.

Report of Kost Forer & Gabbay, a member
of Ernst & Young Global, Independent Auditors

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Shareholders
Equity

Consolidated Statements of Cash Flows

Notes to the Consolidated Financial Statements

40



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REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

BackWeb Technologies Ltd.


We have audited the accompanying consolidated
balance sheets of BackWeb Technologies Ltd. (the
Company) and its subsidiaries as of
December 31, 2002 and 2001, and the related consolidated
statements of operations, changes in shareholders equity
and cash flows for each of the three years in the period ended
December 31, 2002. Our audits also included the financial
statement schedules listed at Item 15(a)2. These financial
statements and schedules are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedules based on our
audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of BackWeb
Technologies Ltd. and its subsidiaries as of December 31,
2002 and 2001 and the consolidated results of their operations
and cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion,
the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set
forth therein.



| |                                 
| | --------------------------------
| | KOST FORER & GABBAY             
| | A Member of Ernst & Young Global

Tel-Aviv, Israel

February 4, 2003


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BACKWEB TECHNOLOGIES LTD.

CONSOLIDATED BALANCE SHEETS

|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                 |                                            |          |         |        |       |          |         |        | 
|-------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------- | ------- | ------ | ----- | -------- | ------- | ------ | 
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                
|                                                               |                                                                                                                                            | December 31,                                                                                                                                                                                                                   
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                
|                                                               |                                                                                                                                            | 2002                                                                                                                                                                                                                            |                                            | 2001    
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                 |                                            |         
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                
|                                                               |                                                                                                                                            | (In thousands, except                                                                                                                                                                                                          
|                                                               |                                                                                                                                            | share and per share data)                                                                                                                                                                                                      
|ASSETS                                                        
|Current assets:                                                |                                                                                                                                            |                                                                                                                                                                                                                                 |                                            |          |         |        |       |         
|                                                               | Cash and cash equivalents                                                                                                                  |                                                                                                                                                                                                                                 | $                                          | 18,272   |         |        | $     | 17,209   |        
|                                                               | Short-term investments                                                                                                                     |                                                                                                                                                                                                                                 |                                            | 5,485    |         |        |       | 24,615   |        
|                                                               | Trade accounts receivable, net of allowance for
    doubtful accounts of $2,046 and $2,957 at December 31, 2002
    and 2001, respectively |                                                                                                                                                                                                                                 |                                            | 1,659    |         |        |       | 3,529    |        
|                                                               | Other accounts receivables and prepaid expenses                                                                                            |                                                                                                                                                                                                                                 |                                            | 1,523    |         |        |       | 2,015    |        
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                 |                                            |          |         |        |       |         
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                 | Total current assets                       |          |         | 26,939 |       |          |         | 47,368 | 
|Long-term investments and other long term assets               |                                                                                                                                            |                                                                                                                                                                                                                                 | 1,387                                      |          |         |        | 2,458 |         
|Property and equipment, net                                    |                                                                                                                                            |                                                                                                                                                                                                                                 | 1,083                                      |          |         |        | 3,356 |         
|Intellectual property and other purchased
    intangibles, net |                                                                                                                                            |                                                                                                                                                                                                                                 |                                           |          |         |        | 3,330 |         
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                 |                                            |          |         |        |       |         
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                 | Total assets                               |          | $       | 29,409 |       |          | $       | 56,512 | 
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                 |                                            |          |         |        |       |         
|                                                              
|LIABILITIES AND SHAREHOLDERS
    EQUITY                      
|Current liabilities:                                           |                                                                                                                                            |                                                                                                                                                                                                                                 |                                            |          |         |        |       |         
|                                                               | Accounts payable and accrued liabilities                                                                                                   |                                                                                                                                                                                                                                 | $                                          | 5,340    |         |        | $     | 7,192    |        
|                                                               | Deferred revenue                                                                                                                           |                                                                                                                                                                                                                                 |                                            | 1,265    |         |        |       | 2,271    |        
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                 |                                            |          |         |        |       |         
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                 | Total current liabilities                  |          |         | 6,605  |       |          |         | 9,463  | 
|                                                               | Accrued severance pay, net                                                                                                                 |                                                                                                                                                                                                                                 |                                            | 114      |         |        |       | 240      |        
|                                                               | Long-term deferred revenue                                                                                                                 |                                                                                                                                                                                                                                 |                                            | 169      |         |        |       | 228      |        
|                                                               | Commitments and contingencies                                                                                                              |                                                                                                                                                                                                                                 |                                            |          |         |        |       |          |        
|                                                               | Shareholders equity:                                                                                                                      |                                                                                                                                                                                                                                 |                                            |          |         |        |       |          |        
|                                                               |                                                                                                                                            | Series E Preferred shares, nominal value
    NIS 0.01 per share; zero and one share authorized and
    issued and outstanding at December 31, 2002 and
    December 31, 2001, respectively                                      |                                            |          |        |        |       |          | 3,454   |       
|                                                               |                                                                                                                                            | Ordinary Shares, nominal value NIS 0.03 per
    share; 150,067,829 shares authorized at December 31,
    2002 and 2001; 39,772,254 and 38,613,328 shares issued and
    outstanding at December 31, 2002 and 2001, respectively |                                            |          | 150,867 |        |       |          | 147,114 |       
|                                                               | Notes receivable from shareholders                                                                                                         |                                                                                                                                                                                                                                 |                                            | (506     | )       |        |       | (1,235   | )      
|                                                               | Deferred stock compensation                                                                                                                |                                                                                                                                                                                                                                 |                                            |         |         |        |       | (216     | )      
|                                                               | Accumulated other comprehensive income (loss)                                                                                              |                                                                                                                                                                                                                                 |                                            | (22      | )       |        |       | 400      |        
|                                                               | Accumulated deficit                                                                                                                        |                                                                                                                                                                                                                                 |                                            | (127,818 | )       |        |       | (102,936 | )      
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                 |                                            |          |         |        |       |         
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                 | Total shareholders equity                 |          |         | 22,521 |       |          |         | 46,581 | 
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                 |                                            |          |         |        |       |         
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                 | Total liabilities and shareholders equity |          | $       | 29,409 |       |          | $       | 56,512 | 
|                                                               |                                                                                                                                            |                                                                                                                                                                                                                                 |                                            |          |         |        |       |         

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

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BACKWEB TECHNOLOGIES LTD.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                             |                                                                                                                                       |                                       |         |        |        |      |         |        |        |   |         |        |        | 
|-------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                             |                                                                                                                                       |                                      
|                                                                                             |                                                                                                                                       | Year Ended December 31,              
|                                                                                             |                                                                                                                                       |                                      
|                                                                                             |                                                                                                                                       | 2002                                  |         | 2001   |        | 2000
|                                                                                             |                                                                                                                                       |                                       |         |        |        |     
|                                                                                             |                                                                                                                                       |                                      
|                                                                                             |                                                                                                                                       | (In thousands, except per share data)
|Revenue:                                                                                     |                                                                                                                                       |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                             | License                                                                                                                               |                                       | $       | 2,119  |        |      | $       | 13,807 |        |   | $       | 29,294 |       
|                                                                                             | Service                                                                                                                               |                                       |         | 4,228  |        |      |         | 6,831  |        |   |         | 9,052  |       
|                                                                                             |                                                                                                                                       |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                             |                                                                                                                                       | Total revenue                         |         |        | 6,347  |      |         |        | 20,638 |   |         |        | 38,346 | 
|                                                                                             |                                                                                                                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Cost of revenue:                                                                             |                                                                                                                                       |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                             | License                                                                                                                               |                                       |         | 213    |        |      |         | 443    |        |   |         | 249    |       
|                                                                                             | Service                                                                                                                               |                                       |         | 3,050  |        |      |         | 5,238  |        |   |         | 6,051  |       
|                                                                                             |                                                                                                                                       |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                             |                                                                                                                                       | Total cost of revenue                 |         |        | 3,263  |      |         |        | 5,681  |   |         |        | 6,300  | 
|                                                                                             |                                                                                                                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Gross profit                                                                                 |                                                                                                                                       |                                       | 3,084   |        |        |      | 14,957  |        |        |   | 32,046  |       
|                                                                                             |                                                                                                                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Operating expenses:                                                                          |                                                                                                                                       |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                             | Research and development, net                                                                                                         |                                       |         | 6,059  |        |      |         | 9,230  |        |   |         | 8,672  |       
|                                                                                             | Sales and marketing                                                                                                                   |                                       |         | 10,298 |        |      |         | 22,882 |        |   |         | 28,479 |       
|                                                                                             | General and administrative                                                                                                            |                                       |         | 4,557  |        |      |         | 10,494 |        |   |         | 7,480  |       
|                                                                                             | Restructuring and other charges                                                                                                       |                                       |         | 4,678  |        |      |         | 2,825  |        |   |         |       |       
|                                                                                             | Write-off of intellectual property and other
    purchased intangible assets                                                          |                                       |         | 1,764  |        |      |         |       |        |   |         |       |       
|                                                                                             | In-process research and development write-off and
    amortization of goodwill, intellectual property and other
    intangible assets |                                       |         | 1,566  |        |      |         | 3,132  |        |   |         | 10,163 |       
|                                                                                             | Amortization of deferred stock compensation                                                                                           |                                       |         | 216    |        |      |         | 674    |        |   |         | 1,214  |       
|                                                                                             |                                                                                                                                       |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                             |                                                                                                                                       | Total operating expenses              |         |        | 29,138 |      |         |        | 49,237 |   |         |        | 56,008 | 
|                                                                                             |                                                                                                                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Loss from operations                                                                         |                                                                                                                                       |                                       | (26,054 | )      |        |      | (34,280 | )      |        |   | (23,962 | )     
|Finance and other income, net                                                                |                                                                                                                                       |                                       | 1,172   |        |        |      | 2,037   |        |        |   | 4,749   |       
|Write down of an equity investment                                                           |                                                                                                                                       |                                       |        |        |        |      | (2,500  | )      |        |   |        |       
|                                                                                             |                                                                                                                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Net loss                                                                                     |                                                                                                                                       | $                                     | (24,882 | )      |        | $    | (34,743 | )      |        | $ | (19,213 | )     
|                                                                                             |                                                                                                                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Basic and diluted net loss per share                                                         |                                                                                                                                       | $                                     | (0.63   | )      |        | $    | (0.91   | )      |        | $ | (0.52   | )     
|                                                                                             |                                                                                                                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Weighted average number of shares used in
    computing basic and diluted net loss per share |                                                                                                                                       |                                       | 39,284  |        |        |      | 38,225  |        |        |   | 37,205  |       
|                                                                                             |                                                                                                                                       |                                       |         |        |        |      |         |        |        |   |         |       

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

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BACKWEB TECHNOLOGIES LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY


|                                                                                                                       |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | -- | --------------- |  | ---------- | ------ | -------- |  | ------------- | ---------- | ------------ |  | ------------- | ------- | ------------- |  | ------------- | ------ | ------ |  | - | ------ | - |  | - | ---- | - |  | - | -------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                                       |  |                                  
|                                                                                                                       |  | Shareholders Equity             
|                                                                                                                       |  |                                  
|                                                                                                                       |  |                                   |    | Accumulated     |  |           
|                                                                                                                       |  |                                   |    |                 |  | Notes      |        |          |  | Other         |            |             
|                                                                                                                       |  | Preferred Shares                  |    | Ordinary Shares |  | Receivable |        | Deferred |  | Comprehensive |            |              |  | Total        
|                                                                                                                       |  |                                   |    |                 |  | From       |        | Stock    |  | Income/       |            | Accumulated  |  | Comprehensive |         | Shareholders
|                                                                                                                       |  | Shares                            |    | Amount          |  | Shares     |        | Amount   |  | Shareholders  |            | Compensation |  | (Loss)        |         | Deficit       |  | Income/(Loss) |        | Equity
|                                                                                                                       |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |       
|                                                                                                                       |  |                                  
|                                                                                                                       |  | (In thousands, except share data)
|Balance at December 31, 1999                                                                                           |  |                                   | 1  |                 |  | $          | 3,454  |          |  |               | 35,153,402 |              |  | $             | 124,301 |               |  | $             | (3,316 | )      |  | $ | (2,104 | ) |  | $ | (226 | ) |  | $ | (48,980  | ) |  |   |        |   |  | $ | 73,129  |  
|Issuance of Ordinary Shares, net of $4,688 of
    issuance costs                                                       |  |                                   |   |                 |  |            |       |          |  |               | 458,000    |              |  |               | 14,779  |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   | 14,779  |  
|Issuance of Ordinary Shares upon exchange of
    Series E preferred shares                                             |  |                                   |   |                 |  |            |       |          |  |               | 932,770    |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   |        |  
|Issuance of Ordinary Shares pursuant to options
    and warrants exercised and ESPP                                    |  |                                   |   |                 |  |            |       |          |  |               | 1,468,153  |              |  |               | 4,130   |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   | 4,130   |  
|Issuance of shares and stock options in respect
    of intellectual property acquisition                               |  |                                   |   |                 |  |            |       |          |  |               | 155,914    |              |  |               | 4,000   |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   | 4,000   |  
|Forfeiture of restricted shares                                                                                        |  |                                   |   |                 |  |            |       |          |  |               | (120,501   | )            |  |               | (459    | )             |  |               | 459    |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   |        |  
|Repayment of notes receivable from shareholders                                                                        |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               | 371    |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   | 371     |  
|Amortization of deferred stock compensation                                                                            |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   | 1,214  |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   | 1,214   |  
|Comprehensive loss:                                                                                                    |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |   |  |   |         |  
|Net loss                                                                                                               |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   | (19,213  | ) |  | $ | (19,213 | ) |  |   | (19,213 | )
|Unrealized income on available for sale
    marketable securities                                                      |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   | 20   |   |  |   |         |   |  |   | 20      |   |  |   | 20      |  
|                                                                                                                       |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |   |  |   |         |  
|Total comprehensive loss                                                                                               |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  | $ | (19,193 | ) |  |   |        |  
|                                                                                                                       |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2000                                                                                           |  |                                   | 1  |                 |  |            | 3,454  |          |  |               | 38,047,738 |              |  |               | 146,751 |               |  |               | (2,486 | )      |  |   | (890   | ) |  |   | (206 | ) |  |   | (68,193  | ) |  |   |        |   |  |   | 78,430  |  
|Issuance of Ordinary Shares pursuant to options
    exercised, ESPP and exchange of Series E preferred shares,
    net |  |                                   |   |                 |  |            |       |          |  |               | 642,669    |              |  |               | 601     |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   | 601     |  
|Forfeiture of restricted shares                                                                                        |  |                                   |   |                 |  |            |       |          |  |               | (77,079    | )            |  |               | (238    | )             |  |               | 238    |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   |        |  
|Repayment of notes receivable from shareholders                                                                        |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               | 1,013  |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   | 1,013   |  
|Amortization of deferred stock compensation                                                                            |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   | 674    |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   | 674     |  
|Comprehensive loss:                                                                                                    |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |   |  |   |         |  
|Net loss                                                                                                               |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   | (34,743  | ) |  | $ | (34,743 | ) |  |   | (34,743 | )
|Unrealized income on available for sale
    marketable securities                                                      |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   | 606  |   |  |   |         |   |  |   | 606     |   |  |   | 606     |  
|                                                                                                                       |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |   |  |   |         |  
|Total comprehensive loss                                                                                               |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  | $ | (34,137 | ) |  |   |        |  
|                                                                                                                       |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2001                                                                                           |  |                                   | 1  |                 |  |            | 3,454  |          |  |               | 38,613,328 |              |  |               | 147,114 |               |  |               | (1,235 | )      |  |   | (216   | ) |  |   | 400  |   |  |   | (102,936 | ) |  |   |        |   |  |   | 46,581  |  
|Issuance of Ordinary Shares pursuant to options
    exercised and ESPP                                                 |  |                                   |   |                 |  |            |       |          |  |               | 736,714    |              |  |               | 299     |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   | 299     |  
|Exchange of Series E preferred shares                                                                                  |  |                                   | (1 | )               |  |            | (3,454 | )        |  |               | 422,212    |              |  |               | 3,454   |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   |        |  
|Forgiveness of shareholder loan                                                                                        |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               | 221    |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   | 221     |  
|Repayment of notes receivable from shareholders                                                                        |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               | 508    |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   | 508     |  
|Amortization of deferred stock compensation                                                                            |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   | 216    |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   | 216     |  
|Comprehensive loss:                                                                                                    |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |   |  |   |         |  
|Net loss                                                                                                               |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   | (24,882  | ) |  | $ | (24,882 | ) |  |   | (24,882 | )
|Unrealized loss on available for sale marketable
    securities                                                        |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   | (382 | ) |  |   |         |   |  |   | (382    | ) |  |   | (382    | )
|Unrealized loss on forward exchange contracts                                                                          |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   | (40      | ) |  |   | (40     | ) |  |   | (40     | )
|                                                                                                                       |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |   |  |   |         |  
|Total comprehensive loss                                                                                               |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  | $ | (25,304 | ) |  |   |        |  
|                                                                                                                       |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2002                                                                                           |  |                                   |   |                 |  | $          |       |          |  |               | 39,772,254 |              |  | $             | 150,867 |               |  | $             | (506   | )      |  | $ |       |   |  | $ | (22  | ) |  | $ | (127,818 | ) |  |   |         |   |  | $ | 22,521  |  
|                                                                                                                       |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |   |  |   |         |  

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

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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                          |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |        |        |         |  
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------------------------------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | ------- | ------ | ------ | ------- | -
|                                                                                          |                                                                                                                                       |                                                                            
|                                                                                          |                                                                                                                                       | Year Ended December 31,                                                    
|                                                                                          |                                                                                                                                       |                                                                            
|                                                                                          |                                                                                                                                       | 2002                                                                        |                                                            | 2001  |        | 2000   
|                                                                                          |                                                                                                                                       |                                                                             |                                                            |       |        |        
|                                                                                          |                                                                                                                                       |                                                                            
|                                                                                          |                                                                                                                                       | (In thousands)                                                             
|Operating activities                                                                      |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       
|Net loss                                                                                  |                                                                                                                                       | $                                                                           | (24,882                                                    | )     |        | $       | (34,743 | )     |        | $       | (19,213 | )     
|Adjustments to reconcile net loss to net cash
    used in operating activities:           |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       
|Write-off of intellectual property and other
    intangibles                              |                                                                                                                                       |                                                                             | 1,764                                                      |       |        |         |        |       |        |         |        |       
|                                                                                          | In-process research and development write-off and
    amortization of goodwill, intellectual property and other
    intangible assets |                                                                             |                                                            | 1,566 |        |         |         | 3,132 |        |         |         | 10,163 |       
|                                                                                          | Amortization of deferred stock compensation and
    premium on investments                                                            |                                                                             |                                                            | 273   |        |         |         | 1,136 |        |         |         | 1,214  |       
|                                                                                          | Provision for bad and doubtful debts                                                                                                  |                                                                             |                                                            | 205   |        |         |         | 2,948 |        |         |         | 731    |       
|                                                                                          | Depreciation                                                                                                                          |                                                                             |                                                            | 2,262 |        |         |         | 2,235 |        |         |         | 906    |       
|                                                                                          | Loss on disposal of property and equipment                                                                                            |                                                                             |                                                            | 71    |        |         |         |      |        |         |         |       |       
|                                                                                          | Forgiveness of shareholder loan                                                                                                       |                                                                             |                                                            | 221   |        |         |         |      |        |         |         |       |       
|                                                                                          | Write down of an equity investment                                                                                                    |                                                                             |                                                            |      |        |         |         | 2,500 |        |         |         |       |       
|                                                                                          | Changes in operating assets and liabilities:                                                                                          |                                                                             |                                                            |       |        |         |         |       |        |         |         |        |       
|                                                                                          |                                                                                                                                       | Trade accounts receivable                                                   |                                                            |       | 1,665  |         |         |       | 1,923  |         |         |        | (2,989 | )      
|                                                                                          |                                                                                                                                       | Other accounts receivables, prepaid expenses and
    other long-term assets |                                                            |       | 1,523  |         |         |       | 280    |         |         |        | (1,265 | )      
|                                                                                          |                                                                                                                                       | Payable to related parties                                                  |                                                            |       |       |         |         |       |       |         |         |        | (50    | )      
|                                                                                          |                                                                                                                                       | Accounts payable and accrued liabilities                                    |                                                            |       | (1,852 | )       |         |       | (68    | )       |         |        | (1,316 | )      
|                                                                                          |                                                                                                                                       | Deferred revenue                                                            |                                                            |       | (1,065 | )       |         |       | (1,571 | )       |         |        | 749    |        
|                                                                                          |                                                                                                                                       | Accrued severance pay, net                                                  |                                                            |       | (126   | )       |         |       | (3     | )       |         |        | 93     |        
|                                                                                          |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       
|                                                                                          |                                                                                                                                       |                                                                             | Net cash used in operating activities                      |       |        | (18,375 | )       |       |        | (22,231 | )       |        |        | (10,977 | )
|                                                                                          |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       
|Investing activities                                                                      |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       
|Purchases of property and equipment                                                       |                                                                                                                                       |                                                                             | (60                                                        | )     |        |         | (1,566  | )     |        |         | (3,300  | )     
|Purchases of short-term investments                                                       |                                                                                                                                       |                                                                             | (6,656                                                     | )     |        |         | (27,581 | )     |        |         | (21,725 | )     
|Proceeds from sales of short-term investments                                             |                                                                                                                                       |                                                                             | 25,347                                                     |       |        |         | 46,768  |       |        |         | 34,876  |       
|Purchase of Mobix intellectual property                                                   |                                                                                                                                       |                                                                             |                                                           |       |        |         |        |       |        |         | (12,444 | )     
|Purchases of long term investments                                                        |                                                                                                                                       |                                                                             |                                                           |       |        |         | (500    | )     |        |         | (3,000  | )     
|                                                                                          |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       
|                                                                                          |                                                                                                                                       |                                                                             | Net cash provided by or (used in) investing
    activities |       |        | 18,631  |         |       |        | 17,121  |         |        |        | (5,593  | )
|                                                                                          |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       
|Financing activities                                                                      |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       
|Repayment of shareholders loans                                                          |                                                                                                                                       |                                                                             |                                                           |       |        |         | (371    | )     |        |         | (452    | )     
|Proceeds from shareholders notes receivable                                              |                                                                                                                                       |                                                                             | 508                                                        |       |        |         | 1,013   |       |        |         | 371     |       
|Proceeds from issuance of Ordinary Shares
    pursuant to options exercised and ESPP      |                                                                                                                                       |                                                                             | 299                                                        |       |        |         | 601     |       |        |         | 18,909  |       
|                                                                                          |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       
|                                                                                          |                                                                                                                                       |                                                                             | Net cash provided by financing activities                  |       |        | 807     |         |       |        | 1,243   |         |        |        | 18,828  |  
|                                                                                          |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       
|Net increase or (decrease) in cash and cash
    equivalents                               |                                                                                                                                       |                                                                             | 1,063                                                      |       |        |         | (3,867  | )     |        |         | 2,258   |       
|Cash and cash equivalents at beginning of the year                                        |                                                                                                                                       |                                                                             | 17,209                                                     |       |        |         | 21,076  |       |        |         | 18,818  |       
|                                                                                          |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       
|Cash and cash equivalents at end of the year                                              |                                                                                                                                       | $                                                                           | 18,272                                                     |       |        | $       | 17,209  |       |        | $       | 21,076  |       
|                                                                                          |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       
|Supplemental Disclosure of non-cash Investing
    and Financing Transactions              |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       
|Exchange of Series E Preferred Stock to
    Ordinary Shares                               |                                                                                                                                       | $                                                                           | 3,454                                                      |       |        | $       |        |       |        | $       |        |       
|                                                                                          |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       
|Issuance of Ordinary Shares in respect of the
    purchase of Mobix intellectual property |                                                                                                                                       | $                                                                           |                                                           |       |        | $       |        |       |        | $       | 4,000   |       
|                                                                                          |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       
|Forfeiture of restricted shares                                                           |                                                                                                                                       | $                                                                           |                                                           |       |        | $       | 238     |       |        | $       | 459     |       
|                                                                                          |                                                                                                                                       |                                                                             |                                                            |       |        |         |         |       |        |         |         |       

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

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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Organization
and Basis of Presentation

BackWeb Technologies Ltd. was incorporated under
the laws of Israel in August 1995 and commenced operations in
November 1995. BackWeb Technologies Ltd. and its
subsidiaries (collectively, BackWeb or the
Company) is a provider of Web infrastructure
software and application-specific software that enable companies
to extend the reach of their Web assets to the mobile community
of their customers, partners and employees. The Companys
products address the need of mobile users to access and transact
with critical enterprise Web content and applications when they
are working outside an office and disconnected from a network,
such as sales tools, forecast management, contact lists, service
repair guides, expense report updates, pricing data, time
sheets, collaboration sessions, work orders and other essential
document and applications offline. BackWeb sells its products
primarily to end users from a variety of industries, including
the telecommunications, financial, computer industries; through
its direct sales force, resellers and OEMs.

During the year-end December 31, 2002 and
2001 the Company under went a restructuring of its operations.
For a more complete discussion of this refer to Note 9.

The BackWeb group of companies consists of wholly
owned subsidiaries operating as follows: BackWeb
Technologies, Inc., a U.S. corporation; BackWeb
Canada, Inc., a Canadian corporation; and BackWeb
Technologies Europe Limited, a United Kingdom corporation
with a branch in Germany.

Four subsidiaries ceased commercial operations in
January 2002 but continue to be wholly owned subsidiaries. These
subsidiaries are registered as BackWeb Technologies B.V., a
Netherlands corporation; BackWeb Technologies (U.K.) Ltd.,
a United Kingdom corporation; BackWeb Technologies GmbH, a
German corporation; and BackWeb Technologies S.a.r.l., a
French corporation. Two subsidiaries ceased commercial
operations in September 2001 but continue to be wholly owned
subsidiaries. These subsidiaries are registered as BackWeb
Technologies A.B., a Swedish corporation, and BackWeb
K.K. Ltd., a Japanese corporation

The consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles in the United States.

2.     Summary of
Significant Accounting Policies

The significant accounting policies followed in
the preparation of the consolidated financial statements,
applied on a consistent basis, are:

Use of
Estimates

The preparation of the financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these
estimates.

Financial
Statements in U.S. Dollars

BackWeb prepares its financial statements in
U.S. dollars, which is also BackWebs functional
currency. Most of the revenue generated is in U.S. dollars.
A significant portion of the Companys research and
development expenses are generated in New Israeli Shekels
(NIS); however most of the expenses are denominated
and determined in U.S. dollars. Since the U.S. dollar
is the primary currency in the economic environment in which
BackWeb conducts its operations, the U.S. dollar is the
functional and reporting currency of BackWeb
Technologies Ltd. and its subsidiaries.

Monetary accounts maintained in currencies other
than the U.S. dollar are re-measured using the foreign
exchange rate at the balance sheet date in accordance with
Statement of Financial Accounting Standard No. 52,
Foreign Currency Translations (SFAS
No. 52). Operational accounts and non-monetary balance

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

sheet accounts are measured and recorded in
current operations at the rate in effect at the date of the
transaction. The foreign currency re-measurement effect included
in financial and other income, net for the years ended
December 31, 2002, 2001 and 2000 was a gain of $22,000, a
loss of $201,000 and a gain of $305,000, respectively.



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements include the
accounts of BackWeb Technologies Ltd. and its wholly owned
subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation.



| |                 
| | ----------------
| | Cash Equivalents

Cash equivalents are short-term highly liquid
investments that are readily convertible to cash with original
maturities of three months or less.



| |                       
| | ----------------------
| | Short-Term Investments

The Company accounts for investments in debt and
equity securities in accordance with Statement of Financial
Accounting Standard No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS
No. 115).

Management determines the appropriate
classification of marketable debt and equity securities at the
time of purchase and evaluates such designation as of each
balance sheet date. To date, all debt securities have been
classified as available-for-sale and are carried at
fair market value, based on quoted market prices with all
unrealized gains and losses, reported in comprehensive loss, a
separate component of shareholders equity. Realized gains
and losses, declines in value of securities judged to be other
than temporary and amortization of premium are included in
finance and other income, net. Realized gains and losses and
declines in value of securities judged to be other than
temporary have not been material. The cost of securities sold is
based on the specific identification method.



| |                      
| | ---------------------
| | Long-Term Investments

Investments in non-marketable securities in which
the Company holds less than 20% of the capital stock of the
entity are recorded at the lower of cost or estimated fair
value, since the Company does not have the ability to exercise
significant influence over operating and financial policies of
the investee.

The Company periodically assesses the
recoverability of the carrying amount of long-term investments
and provides for any possible impairment loss based upon the
difference between the carrying amount and fair value of such
assets, in accordance with Accounting Principles Board Opinion
No. 18 The Equity method of Accounting for
Investments in Common Stock, (APB No. 18).
During 2001, based on a review of the Companys
investments, the Company recorded a non-cash charge of
$2.5 million to write-down an equity investment. During
2002 the carrying value of the Companys long-term
investments has not changed.



| |                       
| | ----------------------
| | Other Long-Term Assets

Other long-term assets are primarily comprised of
security deposits related to leased facilities presented at
their cost.

47



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                            
| | ---------------------------
| | Property and Equipment, Net

Property and equipment are stated at cost, net of
accumulated depreciation. Property and equipment are depreciated
on a straight-line basis over the estimated useful lives of the
assets, as follows:

|                                  |  |                                                        
|--------------------------------- |  | -------------------------------------------------------
|                                  |  | Years                                                  
|                                  |  |                                                        
|Computer and peripheral equipment |  | 2-3                                                    
|Office furniture and equipment    |  | 3                                                      
|Leasehold improvements            |  | Over the shorter of term of lease or estimated
    life

The Companys property and equipment are
reviewed for impairment in accordance with Statement of
Financial Accounting Standard No. 144 Accounting for
the Impairment or Disposal of Long- Lived Assets
(SFAS No. 144) whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to the future undiscounted cash flows expected to be generated
by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

During 2002 the Company recorded losses from
write-off of property and equipment, which it ceased to use, in
the amount of $575,000 of which $375,000 was recorded in
research and development, net and $200,000 related to the
restructuring charge discussed in Note 9. As of
December 31, 2002 no further impairment losses have been
identified.



| |                                                                
| | ---------------------------------------------------------------
| | Intellectual Property and Other Purchased
    Intangible Assets

Intellectual property and other purchased
intangible assets subject to amortization arose from
acquisitions prior to July 1, 2001, were amortized on a
straight-line basis over their useful lives of the assets
between two to three years in accordance with APB Opinion
No. 17 Intangible Assets (APB
No. 17).

The Companys intellectual property and
other purchased intangible assets are reviewed for impairment in
accordance with Statement of Financial Accounting Standard
No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144) whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to the future undiscounted cash
flows expected to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Based on SFAS
No. 144 the Companys intangible assets carrying value
of $1.8 million was in excess of its fair value of zero.
Therefore, the Company wrote-off the $1.8 million remaining
carrying value of its intangibles during the year ended
December 31, 2002. As of December 31, 2002, the
carrying value of the intellectual property and other purchased
intangible assets was zero.



| |                    
| | -------------------
| | Revenue Recognition

To date, the Company has derived its revenue from
license fees of its products, maintenance, training and
rendering of consulting services. The Company sells its products
primarily through its direct sales force, resellers and OEMs.

The Company recognizes software license revenue
in accordance with Statement of Position 97-2,
Software Revenue Recognition, as amended
(SOP 97-2). SOP 97-2 generally requires
revenue earned on software arrangements involving multiple
elements to be allocated to each element based on the relative
fair value of the elements. The Company has also adopted
SOP 98-9, Modification of SOP 97-2, Software

48



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Revenue Recognition with Respect to Certain
Transactions (SOP 98-9), for all
transactions entered into after January 1, 2000.
SOP 98-9 requires that revenue be recognized under the
Residual Method when vendor specific objective
evidence (VSOE) of fair value exists for all
undelivered elements and no VSOE exists for the delivered
elements. Under the Residual Method any discounts in
the arrangement are allocated to the delivered element.

Revenue from license fees is recognized when
persuasive evidence of an arrangement exists, delivery of the
product has occurred, no significant obligations with regard to
implementation remain, the fee is fixed or determinable, and
collectibility is probable. The Company does not generally grant
a right of return to its customers. When a right of return
exists, the Company defers revenue until the right of return
expires, at which time revenue is recognized provided that all
other revenue recognition criteria have been met. If the fee is
not fixed or determinable, revenue is recognized as payments
become due from the customer provided that all other revenue
recognition criteria have been met.

When contracts contain multiple elements wherein
VSOE of fair value exists for all undelivered elements, the
Company accounts for the delivered elements in accordance with
the Residual Method prescribed by SOP 98-9.
Maintenance revenue included in these arrangements is deferred
and recognized on a straight-line basis over the term of the
maintenance agreement. The VSOE of fair value of the undelivered
elements (maintenance, training and consulting services) is
determined based on the price charged for the undelivered
element when sold separately.

The Company licenses its products on a perpetual
and on a term basis. The Company recognizes license revenue
arising from the sale of perpetual licenses in the accounting
period in which the sale occurs. The Company recognizes license
revenue arising from term license over the contractual term of
the license. Management defines a term license as one whose term
is less than one year from the effective date of the official
order form.

The Company derives revenue primarily from
contracts with corporate customers, resellers and OEMs
royalty fees earned upon delivery of products, that incorporate
the Companys software. Revenue derived from contracts with
resellers is not recognized until the software is sold through
to the end-user. Royalty revenue is recognized when reported to
the Company after delivery of the related products. In addition,
royalty revenue can arise from the right to use the
companys products.

Service revenue is primarily comprised of revenue
from standard maintenance agreements, consulting and training
fees. Customers licensing products generally purchase the
standard annual maintenance agreement for the products. The
Company recognizes revenues from maintenance over the
contractual period of the maintenance agreement; which is
generally one year. Maintenance is available at multiple levels
of support and is priced as a percentage of the license revenue.
For those agreements where the maintenance and license is quoted
as one fee, we value the maintenance as an undelivered element
at standard rates and defer this over the contractual
maintenance period for revenue recognition purposes. It is
optional whether a customer chooses to buy a maintenance
contract. Consulting services are billed at an agreed upon rate,
plus out-of-pocket expenses and training services are billed on
a per session basis. The Company recognizes service revenue from
consulting and training when provided to the customer.

Deferred revenue includes amounts billed to
customers or cash received from customers for which revenue has
not been recognized.



| |                              
| | -----------------------------
| | Research and Development, Net

Research and development expenditures are charged
to operations as incurred. Statement of Financial Accounting
Standard No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed,
(SFAS No. 86) requires capitalization of
certain software development costs subsequent to the
establishment of technological feasibility. Based on
BackWebs product development

49



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

process, technological feasibility is established
upon the completion of a working model. BackWeb generally does
not incur any significant costs between the completion of the
working model and the point at which the product is ready for
general release. Through December 31, 2002 BackWeb had
recognized all software development costs to research and
development expense in the period incurred.



| |                  
| | -----------------
| | Advertising Costs

BackWeb accounts for advertising costs as expense
in the period in which the costs are incurred. Advertising
expense for the years ended December 31, 2002, 2001 and
2000 were $0, $48,000 and $1,849,000, respectively.



| |                              
| | -----------------------------
| | Finance and Other Income, Net

Interest and other income were $1,345,000,
$2,420,000 and $4,952,000 for the twelve months ended
December 31, 2002, 2001 and 2000, respectively. Interest
and other expense was $173,000, $383,000 and $203,000 for the
twelve months ended December 31, 2002, 2001 and 2000,
respectively.



| |             
| | ------------
| | Income Taxes

BackWeb accounts for income taxes in accordance
with SFAS No. 109, Accounting for Income Taxes,
(SFAS No. 109). This Statement prescribes the
use of the liability method whereby deferred tax assets and
liability account balances are determined based on differences
between the financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws
that will be in effect when the differences are expected to
reverse. BackWeb provides a valuation allowance, if necessary,
to reduce deferred tax assets to their estimated realizable
value.



| |                           
| | --------------------------
| | Forward Exchange Contracts

The Company accounts for derivatives and hedging
based on Statement of Financial Accounting Standard No. 133
Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133), and requires
that all derivatives be recorded on the balance sheet at fair
value. If the derivative meets the definition of a hedge and is
so designated, changes in the fair value of the derivatives will
either be offset against the change in fair value of the hedged
assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income or loss until the
hedged item is recognized in earnings. The ineffective portion
of a derivative change in fair value is recognized in earnings.
During 2002 gains or losses related to hedge ineffectiveness
were immaterial. Changes in the fair value of derivatives that
are not designated, or are not effective as hedges, must be
recognized in earnings.

The Company hedges certain forecasted committed
expenses payable in New Israeli Shekels, or NIS. In accordance
with SFAS No. 133, hedges of such anticipated transactions
are designated and documented at inception as cash flow
hedges and are evaluated for effectiveness, excluding time
value, at least quarterly. The Company records effective changes
in the fair value of these cash flow hedges in accumulated other
comprehensive income (OCI) until the transaction
occurs, at which time the changes are reclassified to expense in
the same line item associated with the forecasted transaction in
the same period during which the hedged transaction affects
expenses. All amounts accumulated in OCI at year-end will be
reclassified to earnings within the first nine months of 2003.
At December 31, 2002, the Company had forward foreign
exchange contracts outstanding with a notional face value of
$2.1 million. The amount of unrealized loss on these
contracts at December 31, 2002 was $40,000. During the
twelve-months ended December 31, 2002, the Company had
entered into $6.4 million of forward exchange contracts and
satisfied its obligations on forward contracts with a notional
face value of approximately $4.3 million and the remaining
$2.1 million will mature in the first nine months of 2003.
The realized gain recognized from these forward contracts in the
year ended December 31, 2002 was $131,000.

50



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Concentration
of Credit Risk

Financial instruments, which potentially subject
BackWeb to concentrations of credit risk, consist of cash, cash
equivalents, short-term investments, forward exchange contracts
and trade accounts receivable. BackWebs cash and cash
equivalents and short-term investments generally consist of
money market funds with high credit quality financial
institutions and corporate securities of corporations, which
management believes are financially sound and are managed by
major banks in the United States. Such investments in the
United States may be in excess of insured limits and are
not insured in other jurisdictions. Management believes that the
financial institutions that hold the Companys investments
are financially sound and, accordingly, minimal credit risk
exists with respect to these investments. The Company has
established guidelines relative to credit ratings,
diversification and maturity that seek to maintain safety and
liquidity. At December 31, 2002 management believes that
the forward exchange contracts were conducted with financial
institutions that are financially sound and, accordingly,
minimal credit risk exists with respect to these investments.
Other than the forward exchange contracts noted in the previous
paragraph, the Company has no significant off-balance-sheet
concentration of credit risk such as option contracts or other
foreign hedging arrangements.

BackWeb sells its products to customers primarily
in North America and Europe. BackWeb performs ongoing credit
reviews of its customers financial condition and generally
does not require collateral. BackWeb maintains reserves to
provide for estimated credit losses. During 2001 and 2000 the
Company from time to time engaged in selling of receivables on a
non-recourse basis with established commercial banking
institutions. An allowance for doubtful accounts is determined
with respect to those amounts that the Company has determined to
be doubtful of collection and by a general reserve. Provision
for bad and doubtful debts in the years ended December 31,
2002, 2001 and 2000 were $205,000, $2,948,000 and $731,000,
respectively. Bad debt write-offs of accounts in the years ended
December 31, 2002, 2001 and 2000 totaled $1,116,000,
$1,029,000 and $612,000, respectively.

Net Loss Per
Share

Basic net loss per share is comprised of the
weighted average number of Ordinary Shares outstanding each
year. Diluted net loss per share is computed based on the
weighted average number of Ordinary Shares outstanding during
the year plus dilutive potential Ordinary Shares considered
outstanding during the year in accordance with
SFAS No. 128, Earnings per Share.

The following table presents the calculation of
the basic and diluted net loss per Ordinary Share (in thousands,
except per share data):

|                                                                  |                                                    |                         |         |        |   |      |         |        |   |   |         |        |  
|----------------------------------------------------------------- | -------------------------------------------------- | ----------------------- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                                                  |                                                    |                        
|                                                                  |                                                    | Year Ended December 31,
|                                                                  |                                                    |                        
|                                                                  |                                                    | 2002                    |         | 2001   |   | 2000
|                                                                  |                                                    |                         |         |        |   |     
|Net loss                                                          |                                                    | $                       | (24,882 | )      |   | $    | (34,743 | )      |   | $ | (19,213 | )     
|Basic and diluted:                                                |                                                    |                         |         |        |   |      |         |        |   |   |         |       
|                                                                  | Weighted-average shares                            |                         |         | 39,339 |   |      |         | 38,393 |   |   |         | 37,307 |  
|                                                                  | Less weighted-average shares subject to repurchase |                         |         | (55    | ) |      |         | (168   | ) |   |         | (102   | )
|                                                                  |                                                    |                         |         |        |   |      |         |        |   |   |         |       
|Shares used in computing basic and diluted net
    loss per share |                                                    |                         | 39,284  |        |   |      | 38,225  |        |   |   | 37,205  |       
|                                                                  |                                                    |                         |         |        |   |      |         |        |   |   |         |       
|Basic and diluted net loss per share                              |                                                    | $                       | (0.63   | )      |   | $    | (0.91   | )      |   | $ | (0.52   | )     
|                                                                  |                                                    |                         |         |        |   |      |         |        |   |   |         |       

All preferred stock, outstanding stock options
and warrants have been excluded from the calculation of the
diluted net loss per Ordinary Share because all such securities
are considered to be anti-dilutive for all periods presented in
the statements of operations. The total number of Ordinary
Shares related to preferred

51



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

stock, outstanding options and warrants excluded
from the calculations of diluted net loss per share were
8,772,774, 10,433,294 and 9,822,359 for the years ended
December 31, 2002, 2001 and 2000, respectively.

Accounting
for Stock-Based Compensation

BackWeb has elected to follow Accounting
Principles Board Opinion No. 25 Accounting for Stock
Issued to Employees (APB 25) and FASB
Interpretation No. 44 Accounting for Certain
Transactions Involving Stock Compensation (FIN
No. 44) in accounting for its employee stock options.
Under APB 25, when the exercise price of the Companys
stock options is less than the market price of the underlined
shares on the date of grant, compensation expense is recognized.

In December 2002, the FASB issued Statement of
Financial Accounting Standard No. 148, Accounting for
Stock Based Compensation Transmission and
Disclosure  an amendment of FASB Statement
No. 123 (SFAS 148). SFAS 148 permits
two additional transition methods for entities that adopt the
fair value based method of accounting for stock-based employee
compensation. The statement also requires new disclosures about
the ramp-up effect of stock-based employee compensation on
reported results. SFAS No. 148 also requires that those
effects be disclosed more prominently by specifying the form,
content, and location of those disclosures. The transition
guidance and annual disclosure provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002,
with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial
reports containing financial statements for interim periods
beginning after December 15, 2002. As at the balance sheet
date, the Company continues to apply APB25.

Pro forma information regarding the
Companys net loss and net loss per share is required by
Statement of Financial Accounting Standard No. 123
Accounting for Stock Based Compensation (SFAS
No. 123) and has been determined as if the Company
had accounted for its employee stock options under the fair
value method prescribed by SFAS No. 123.

The Company calculated the fair market value of
each option grant on the date of grant using the Black-Scholes
option-pricing model as prescribed by SFAS No. 123 and the
following assumptions:

|                          |  |              |     |      |  |      |     |   |  |  |     |  
|------------------------- |  | ------------ | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                          |  |             
|                          |  | Year Ended  
|                          |  | December 31,
|                          |  |             
|                          |  | 2002         |     | 2001 |  | 2000
|                          |  |              |     |      |  |     
|Risk-free interest rates  |  |              | 3.8 | %    |  |      | 4.2 | % |  |  | 6.0 | %
|Expected lives (in years) |  |              | 5   |      |  |      | 5   |   |  |  | 5   |  
|Dividend yield            |  |              | 0   | %    |  |      | 0   | % |  |  | 0   | %
|Expected volatility       |  |              | 121 | %    |  |      | 138 | % |  |  | 116 | %

Pro forma information under SFAS No. 123, is
as follows:

|                                                                                  |  |                                       |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                  |  |                                      
|                                                                                  |  | December 31,                         
|                                                                                  |  |                                      
|                                                                                  |  | 2002                                  |         | 2001 |  | 2000
|                                                                                  |  |                                       |         |      |  |     
|                                                                                  |  |                                      
|                                                                                  |  | (In thousands, except per share data)
|Net loss as reported                                                              |  | $                                     | (24,882 | )    |  | $    | (34,743 | ) |  | $ | (19,213 | )
|Less  stock based expense reported in
    net loss                               |  |                                       | 216     |      |  |      | 674     |   |  |   | 1,214   |  
|Add  stock based compensation expense
    determined under the fair value method |  |                                       | (3,685  | )    |  |      | (39,697 | ) |  |   | (32,727 | )
|                                                                                  |  |                                       |         |      |  |      |         |   |  |   |         |  
|Proforma net loss                                                                 |  | $                                     | (28,351 | )    |  | $    | (73,766 | ) |  | $ | (50,726 | )
|                                                                                  |  |                                       |         |      |  |      |         |   |  |   |         |  
|Proforma basic and diluted net loss per share                                     |  | $                                     | (0.72   | )    |  | $    | (1.93   | ) |  | $ | (1.36   | )
|                                                                                  |  |                                       |         |      |  |      |         |   |  |   |         |  
|Basic and diluted net loss per share                                              |  | $                                     | (0.63   | )    |  | $    | (0.91   | ) |  | $ | (0.52   | )
|                                                                                  |  |                                       |         |      |  |      |         |   |  |   |         |  

52



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Company applies SFAS 123 and Emerging Issues
Task Force (EITF) 96-18, Accounting for Equity
Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services with respect to options and warrants issued to
non-employees. SFAS 123 requires use of an option valuation
model to measure the fair value of the options at the commitment
date.



| |                  
| | -----------------
| | Government Grants

The Company received non-royalty bearing grants
from the Government of Israel for funding approved research and
development projects. The grants are recognized at the time the
Company is entitled to such grants, on the basis of the costs
incurred and included as a deduction of research and development
costs. Research and development grants amount to $0, $0, and
$150,000 in the years ending December 31, 2002, 2001 and
2000, respectively.



| |              
| | -------------
| | Severance Pay

BackWeb Technologies Ltd.s liability for
severance pay is calculated pursuant to Israeli severance pay
law based on the most recent salary of the employees multiplied
by the number of years of employment, as of the balance sheet
date. Israeli employees are entitled to one months salary
for each year of employment or a proportional part thereof for a
partial year of employment, after the first year of employment.
BackWeb Technologies Ltds. liability for all of its
Israeli employees is fully provided by monthly deposits with
insurance policies and by an accrual.

The funds deposited include profits accumulated
up to the balance sheet date. The deposited funds may be
withdrawn only upon fulfillment of the obligation pursuant to
Israeli severance pay law or labor agreements. The value of the
deposited funds is based on the cash surrendered value of these
policies and includes immaterial profits.

Severance expenses relating to Israeli employees
for the years ended December 31, 2002, 2001 and 2000
amounted to approximately $332,000 $856,000 and $671,000,
respectively.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The following methods and assumptions were used
by the Company and its subsidiaries in estimating the fair value
disclosures for financial instruments are;

The carrying amounts of cash and cash
equivalents, trade accounts receivable and trade accounts
payable approximate their fair value due to the short-term
maturity of such instruments.

The fair value for marketable securities is based
on quoted market prices (See Note 3).

Under SFAS 133, derivatives are carried on
the Balance Sheet at fair value. The fair value of foreign
currency forward contracts is estimated by obtaining current
quotes from appropriate financial institutions.



| |                                              
| | ---------------------------------------------
| | Recently Issued Accounting
    Pronouncements

The FASB recently issued SFAS No. 146
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146). SFAS 146 addresses
financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS 146 improves financial reporting by
requiring that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair
value only when the liability is incurred. The provisions of
SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. Adoption of SFAS 146 is
not expected to have a material effect on the Companys
financial position or operating results.

53



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In December 2002, the FASB issued SFAS 148,
Accounting for Stock Based Compensation Transmission and
Disclosure  an amendment of FASB Statement
No. 123 (SFAS 148). SFAS 148. The
transition guidance and annual disclosure provisions of
SFAS 148 are effective for fiscal years ending after
December 15, 2002. SFAS has been adopted and the additional
disclosure requirements have been reflected in Note 2.



| |                 
| | ----------------
| | Reclassification

Certain prior year amounts have been reclassified
to conform to the current year presentation.

3.     Short-Term
Investments

The following is a summary of the Companys
available-for-sale marketable securities (in thousands):

|                          |        |              |       |            |  |            |    |      |  |            |       |            |  |   |        |        |  |   |     |     |  |   |        |        | 
|------------------------- | ------ | ------------ | ----- | ---------- |  | ---------- | -- | ---- |  | ---------- | ----- | ---------- |  | - | ------ | ------ |  | - | --- | --- |  | - | ------ | ------ | 
|                          |        |             
|                          |        | December 31,
|                          |        |             
|                          |        |              |       |           
|                          |        | 2002         |       | 2001      
|                          |        |              |       |           
|                          |        |              |       | Unrealized |  | Estimated  |    |      |  | Unrealized |       | Estimated 
|                          |        | Cost         |       | Gains      |  | Fair Value |    | Cost |  | Gains      |       | Fair Value
|                          |        |              |       |            |  |            |    |      |  |            |       |           
|Money market funds        |        | $            |      |            |  | $          |   |      |  | $          |      |            |  | $ | 6,124  |        |  | $ |    |     |  | $ | 6,124  |       
|Corporate debt securities |        |              | 5,467 |            |  |            | 18 |      |  |            | 5,485 |            |  |   | 18,091 |        |  |   | 400 |     |  |   | 18,491 |       
|                          |        |              |       |            |  |            |    |      |  |            |       |            |  |   |        |        |  |   |     |     |  |   |        |       
|                          | Totals |              | $     | 5,467      |  |            | $  | 18   |  |            | $     | 5,485      |  |   | $      | 24,215 |  |   | $   | 400 |  |   | $      | 24,615 | 
|                          |        |              |       |            |  |            |    |      |  |            |       |            |  |   |        |        |  |   |     |     |  |   |        |       

At December 31, 2002, the total amounts of
investments due within one year and due after one year were
$5.5 million and $0, respectively.

For a discussion with regard to floating charges
refer to Note 10.

4.     Property and
Equipment, net

Property and equipment, net at cost consists of
the following (in thousands):

|                                  |  |              |        |      |  |   |        |  
|--------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                  |  |             
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2002         |        | 2001
|                                  |  |              |        |     
|Computer and peripheral equipment |  | $            | 3,856  |      |  | $ | 3,958  |  
|Office, furniture and equipment   |  |              | 2,604  |      |  |   | 2,611  |  
|Leasehold improvements            |  |              | 1,113  |      |  |   | 1,150  |  
|                                  |  |              |        |      |  |   |        |  
|                                  |  |              | 7,573  |      |  |   | 7,719  |  
|Less: accumulated depreciation    |  |              | (6,490 | )    |  |   | (4,363 | )
|                                  |  |              |        |      |  |   |        |  
|Property and equipment, net       |  | $            | 1,083  |      |  | $ | 3,356  |  
|                                  |  |              |        |      |  |   |        |  

Depreciation expense for the years ended
December 31, 2002, 2001 and 2000 was $2,262,000, $2,235,000
and $906,000, respectively. See Note 2 regarding impairment
of property and equipment.

For a discussion with regard to floating charges
refer to Note 10.

5.     Intellectual
Property and Other Purchased Intangible Assets

On June 27, 2000, the Company completed its
acquisition (the Acquisition) of the software and
intellectual property owned, licensed or developed by Mobix
Communications Ltd., a company incorporated under the laws of
the State of Israel (Mobix), for an aggregate amount
of $16.4 million pursuant to a Software and Asset Purchase
Agreement, dated June 4, 2000, among the Company, Mobix and
the principal shareholder of Mobix. As consideration in the
Acquisition, Mobix received (i) a cash payment of
$9.6 million,

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

and (ii) a number of Ordinary Shares of
BackWeb equal to $2.9 million in value (based on the
average daily closing price of BackWeb Ordinary Shares for the
15 consecutive trading days immediately preceding the closing of
the Acquisition) or 155,914 Ordinary Shares. Such shares
were deposited in escrow, together with an additional
$2.4 million in cash, to satisfy Mobixs and the
principal shareholders indemnification obligations and to
secure the retention of certain key employees of Mobix. BackWeb
also granted a number of stock options valued at
$1.1 million to retain two key employees from Mobix.
Acquisition costs amounted to $444,000.

BackWeb allocated the excess purchase price over
the fair value of net tangible assets acquired to the following
intangible assets: $8.4 million to in-process research and
development (IPR&D), $5.3 million to
intellectual property and $2.7 million to assembled work
force and to other intangibles. As of the acquisition date,
technological feasibility of the in-process technology had not
been established and the technology had no alternative future
use; therefore, BackWeb expensed the amount of the purchase
price allocated to IPR&D of approximately $8.4 million
as of the date of the Acquisition in accordance with generally
accepted accounting principles. The capitalized intangible
assets are being amortized on a straight-line basis over their
expected useful lives of two to three years.

In conjunction with the Companys third
quarter of 2002 restructuring that included a reduction-in-force
of 61 employees (see Note 9), the Company changed its
internal allocation of resources. The Company now believes that
it is unlikely that any future value will be realized from the
wireless technology that was acquired from Mobix. As of
June 30, 2002 the carrying value of the wireless
technology, which was recoded as intangibles, was
$1.8 million. Based on SFAS 144 the Companys
intangibles assets carrying value of $1.8 million was in
excess of its fair value of zero. Therefore, the Company
wrote-off the $1.8 million remaining carrying value of its
intangibles during the year ended December 31, 2002. Net
intangible assets at December 31, 2002 were $0.

Intellectual property and other purchased
intangibles consist of the following (in thousands):

|                      |       |             |   |                   |  |                   |       |              |  |     |        |        |   |              |        |        |   |   |   |   |  |   |       |       |  |   |        |        |   |   |       |       | 
|--------------------- | ----- | ----------- | - | ----------------- |  | ----------------- | ----- | ------------ |  | --- | ------ | ------ | - | ------------ | ------ | ------ | - | - | - | - |  | - | ----- | ----- |  | - | ------ | ------ | - | - | ----- | ----- | 
|                      |       |             |   |                   |  |                  
|                      |       |             |   | December 31, 2002 |  | December 31, 2001
|                      |       | Estimated   |   |                   |  |                  
|                      |       | Useful Life |   |                   |  | Accumulated       |       | Write-off of |  |     |        |        |   | Accumulated  |        |       
|                      |       | (In years)  |   | Gross             |  | Amortization      |       | Intangibles  |  | Net |        | Gross  |   | Amortization |        | Net   
|                      |       |             |   |                   |  |                   |       |              |  |     |        |        |   |              |        |       
|Intellectual property |       |             | 3 |                   |  | $                 | 5,525 |              |  | $   | (3,761 | )      |   | $            | (1,764 | )      |   | $ |  |   |  | $ | 5,525 |       |  | $ | (2,871 | )      |   | $ | 2,654 |      
|Assembled workforce   |       |             | 2 |                   |  |                   | 2,700 |              |  |     | (2,700 | )      |   |              |       |        |   |   |  |   |  |   | 2,700 |       |  |   | (2,024 | )      |   |   | 676   |      
|                      |       |             |   |                   |  |                   |       |              |  |     |        |        |   |              |        |        |   |   |   |   |  |   |       |       |  |   |        |        |   |   |       |      
|                      | Total |             |   |                   |  |                   | $     | 8,225        |  |     | $      | (6,461 | ) |              | $      | (1,764 | ) |   | $ |  |  |   | $     | 8,225 |  |   | $      | (4,895 | ) |   | $     | 3,330 | 
|                      |       |             |   |                   |  |                   |       |              |  |     |        |        |   |              |        |        |   |   |   |   |  |   |       |       |  |   |        |        |   |   |       |      

For a discussion with regard to floating charges
refer to Note 10.

6.     Long-Term
Investments

The Company was one of a group of lenders
(collectively, the Lenders) that entered into a
Convertible Loan Agreement, dated as of August 1, 2001, by
and between Emony Ltd., now called Red Bend Ltd., an Israeli
private company, and the Lenders pursuant to which the Lenders
granted Emony a convertible loan in the aggregate amount of
US$2,150,000 (the Loan Amount) for working capital
purposes. The Loan Amount bears interest at the LIBOR rate for
6 months loans as quoted by Bank Leumi LeIsrael Ltd. plus
1.5% per annum, compounded monthly, repayable, unless converted,
in full on September 20, 2002. The Loan Amount may not be
prepaid in whole or in part without the Lenders consent. In the
event that Emony closes a financing resulting in a net aggregate
cash proceeds of at least $5 million at a price of at least
US$1.34, the outstanding portion of the Loan Amount is
automatically converted into Series B1 Preferred Shares
(the Preferred Shares) of Emony at a conversion
price of US$1.34 per share. In addition, until such an
investment is received, any of the Lenders can demand through
the exercise of a warrant granted pursuant to the Loan Agreement
to convert its portion of the Loan Amount into such Preferred
Shares. The Companys

55



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

portion of the Loan Amount was $500,000, for
which the Company received the warrant described above and a
Promissory Note.

The first part of this two-part investment in
Emony Ltd. occurred on November 1, 2000, when the Company
acquired 483,600 shares of Series B Preferred Shares of
Emony Ltd. representing approximately 7% of its share
capital in exchange for payment of $500,000 under the Share
Purchase and Shareholders Agreement dated October 10, 2000
between Emony Ltd., the Company and various other investors.
Further, under such Share Purchase and Shareholders Agreement,
the Company was granted (a) a warrant to purchase
Series B Preferred Shares of Emony Ltd. in an amount as
maybe purchased in exchange for $500,000, based on a
pre-exercise valuation of Emony Ltd. of $10,000,000 on a
fully-diluted and as converted basis; and (b) a warrant to
purchase Series B Preferred Shares of Emony Ltd. in an
amount as may be purchased in exchange for $930,233, based on a
pre-exercise valuation of Emony Ltd. of $15,000,000 on a
fully-diluted and as converted basis.

On October 3, 2000, BackWeb acquired
1,197,679 shares of Series B Preferred Stock of 3Path,
Inc. (formerly DeliverEx, Inc.), representing approximately 12%
of its share capital, in exchange for payment of $2,500,000
under the Stock Purchase Agreement for Series B Convertible
Preferred Stock dated February 2, 2000 between 3Path, Inc.,
BackWeb and various other investors.

In July 2002, in connection with an investment of
US$1,700,000 in Red Bend by certain existing shareholders of Red
Bend, all Lenders agreed to exercise their warrants, agreeing to
convert the Loan Amount into Series B Preferred Shares par
value NIS 0.01 each, instead of Series B1 Preferred
Shares par values NIS 0.01 each as originally provided
under the Loan Agreement. As a result of this exercise and
conversion, the Company received 1,339,997 shares of
Series B Preferred Shares of Red Bend. In addition, the
Company, along with other investors in Red Bend, agreed to
cancel warrants it had received in connection with its earlier
investment in Red Bend.

Long-term investments are reviewed for impairment
whenever events or changes in circumstances indicate the
carrying amount of such investments may not be recoverable.
During 2001 due to the economic slowdown and the significant
decline in capital available to and in the valuations of the
privately funded Internet centric businesses, the Company
believed that a decrease in value which is other than a
temporary decrease occurred and accordingly recorded a non-cash
charge of $2.5 million to write-down the investment in
3Path, Inc., in accordance with APB No. 18.

7.     Accounts
Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist
of the following (in thousands):

|                                                   |  |              |       |      |  |   |       | 
|-------------------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                                                   |  |             
|                                                   |  | December 31,
|                                                   |  |             
|                                                   |  | 2002         |       | 2001
|                                                   |  |              |       |     
|Trade accounts payable                             |  | $            | 286   |      |  | $ | 461   | 
|Accrued employees compensation and related expense |  |              | 1,737 |      |  |   | 3,135 | 
|Sales and marketing events                         |  |              | 149   |      |  |   | 385   | 
|Restructuring accrual                              |  |              | 1,413 |      |  |   | 778   | 
|Other                                              |  |              | 1,755 |      |  |   | 2,433 | 
|                                                   |  |              |       |      |  |   |       | 
|                                                   |  | $            | 5,340 |      |  | $ | 7,192 | 
|                                                   |  |              |       |      |  |   |       | 

56



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

8.     Related
Parties



| |                    
| | -------------------
| | Shareholders Loans

In 1995, BackWeb signed an agreement
(Founding Agreement) with its early investors (the
Early Investors), according to which the Early
Investors provided BackWeb with loan (the loan)
financing in the amount of $500,000. The loan is denominated in
NIS and linked to the Israel consumer price index. The loan was
payable at a rate of 2.5% of cumulative consolidated revenue in
excess of $5,000,000. In addition, effective September 30,
1996, $748,000 of accounts payable to the Early Investors was
converted into a shareholders loan on the same terms as
the loan. As of December 31, 2000, the loan balance was
$371,000, re-stated for the Israeli consumer price index and
reflecting currency conversion adjustment and repayments. The
loan was fully paid during 2001.



| |                              
| | -----------------------------
| | Services from Related Parties

BackWeb reimbursed BRM Technologies Ltd.
(BRM), a related party, for technology and
administrative services on the basis of specific cost plus
markup and specifically identified expenses at cost. Amounts
incurred for these services were approximately $0, $0, and
$3,000 during the years ended December 31, 2002, 2001 and
2000, respectively.

BackWeb believes that the amounts charged in
connection with the services from the Early Investors and BRM
approximate the cost that would have been incurred if BackWeb
had incurred these costs internally.



| |              
| | -------------
| | Stock Options

Pursuant to the Founding Agreement, BackWeb
granted to its Early Investors the right to grant stock options
for up to 792,167 Ordinary Shares for any person or entity.
Through December 31, 2002 options for 792,167 Ordinary
Shares had been granted of which, 39,245 were granted during
2002. This pool of options was used by the Early Investors in
granting options to employees and consultants of BRM and other
related companies.

Certain shareholders and officers of BackWeb have
a controlling interest in BRM, another company deemed to be a
related party.



| |                             
| | ----------------------------
| | Revenue from Related Parties

During 2002, 2001 and 2000 the Company recognized
revenue of $189,000, $350,000, and $571,000, respectively,
related to products licensed to related parties. As of
December 31, 2002 and 2001, $0 and $0, respectively, is
included in trade accounts receivable.



| |                              
| | -----------------------------
| | Purchase with Related Parties

During 2002, 2001 and 2000 the Company purchased
software from a related party in the amount of $0, $500,000 and
$0 in the year ended December 31, 2002, 2001 and 2000,
respectively.

9.     Restructuring
and Other Charges

On September 30, 2002, the Company announced
a restructuring plan, which was implemented in the three months
ending December 31, 2002. The restructuring plan includes a
reduction in workforce, vacating certain facilities, canceling
of office service leases and impairment of fixed assets as a
result of employee terminations and office consolidation. In
accordance with EITF 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs in a Restructuring), and
Staff Accounting Bulletin No. 100, Restructuring and
Impairment Charges (SAB No. 100) the
Company recorded a charge of $4.7 million of which
approximately $1.4 million remains in the

57



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

accrued liabilities as of December 31, 2002.
The $4.7 million restructuring charge consisted of
$1.6 million of severance and benefit cost, which includes
forgiveness of a $221,000 shareholder note receivable to one
employee, $2.7 million of facility cost, $200,000 related
to the write-down of fixed assets and $200,000 related to other
related restructuring cost. The $1.6 million charge was
related to severance and benefits to terminate 61 employees
representing approximately 44% of the Companys global
workforce employed as of September 30, 2002. The
$2.7 million charge represents early termination penalties,
office restoration costs and an accrual of certain lease
commitments.

On July 2, 2001 the Company announced a
restructuring plan, which was implemented in the three-months
ended September 30, 2001. The restructuring plan included a
reduction in workforce, vacating certain facilities and
canceling of office service leases as a result of employee
terminations and office consolidation. In accordance with
EITF 94-3 and SAB No. 100, the Company
recorded a charge of $2.8 million of which approximately $0
remains in the accrued liabilities as of December 31, 2002.
The $2.8 million restructuring charge consisted of
$1.3 million of severance and benefit cost,
$1.4 million of facility cost and $100,000 related to other
related restructuring cost. The $1.3 million charge is
related to severance and benefits to terminate 63 employees
representing approximately 25% of the Companys global
workforce employed as of June 30, 2001. The
$1.4 million restructuring charge represents early
termination penalties, office restoration costs and an accrual
of certain lease commitments as a result of the restructuring
plan announced on July 2, 2001 related to the closure and
consolidation of offices in Europe, Japan and the United States.

10.     Commitments
and Contingencies



| |       
| | ------
| | Leases

BackWeb leases its office facilities under
cancelable and non-cancelable operating leases. Future rental
payments on a fiscal year basis under non-cancelable operating
leases with initial terms in excess of one year are as follows
(in thousands):

|               |  |   |       | 
|-------------- |  | - | ----- | 
|2003           |  | $ | 896   | 
|2004           |  |   | 727   | 
|2005           |  |   | 618   | 
|2006           |  |   | 600   | 
|2007 and after |  |   | 46    | 
|               |  |   |       | 
|               |  | $ | 2,887 | 
|               |  |   |       | 

As part of the restructuring plan that began in
the three months ended September 30, 2002, the Company
entered into negotiations with its various landlords to
renegotiate its lease obligations. The Company has reached
agreement in principle with its landlord in San Jose, CA and
Ramat Gan, Israel whereby it may be able to mitigate its lease
obligations by, among other things buying out certain of its
obligations, subletting space or reducing rent or a combination
of these. The amounts reflected in the table above assume that
the agreements in principle are reflective of the final executed
agreements.

Rent expense, net approximated $4,505,018,
$3,723,000 and $1,628,000 for the years ended December 31,
2002, 2001 and 2000, respectively.



| |              
| | -------------
| | Contingencies

From time to time, the Company may have certain
contingent liabilities that arise in the ordinary course of its
business activities. The Company accounts for contingent
liabilities when it is probable that future expenditures will be
made and such expenditures can be reasonably estimated.

58



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

BackWeb, six of its officers and directors, and
various underwriters for BackWebs initial public offering
were named as defendants in a consolidated action captioned
In re BackWeb Technologies Ltd. Initial Public Offering
Securities Litigation, Case No. 01-CV-10000, a
purported securities class action lawsuit filed in the United
States District Court, Southern District of New York. Similar
cases have been filed alleging violations of the federal
securities laws in the initial public offerings of more than 300
other companies, and these cases have been coordinated for
pretrial proceedings as In re Initial Public Offering
Securities Litigation, 21 MC 92. A consolidated
amended complaint filed in the BackWeb case asserts that the
prospectus from our June 8, 1999 initial public offering
failed to disclose certain alleged improper actions by the
underwriters for the offering, including the receipt of
excessive brokerage commissions and agreements with customers
regarding aftermarket purchases of shares of our stock. The
complaint alleges violations of Sections 11 and 15 of the
Securities Act of 1933, as amended (the
33 Act), Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, and Rule 10b-5. On or
about July 15, 2002, an omnibus motion to dismiss was filed
in the coordinated litigation on behalf of defendants, including
BackWeb, on common pleadings issues. In October 2002, the Court
dismissed all six individual defendants from the litigation
without prejudice, pursuant to a stipulation. On
February 19, 2003, the Court denied the motion to dismiss
with respect to the claims against BackWeb. No trial date has
been set.

We believe we have meritorious defenses and
intend to defend this action vigorously; however, the results of
any litigation are inherently uncertain and can require
significant management attention, and we could be forced to
incur substantial expenditures, even if we ultimately prevail.
In the event there were an adverse outcome, our business could
be harmed. Thus, we cannot provide assurances that this lawsuit
will not materially and adversely affect our business, results
of operations or our share price. As of December 31, 2001
the Company has accrued what it considers to be the appropriate
deductible under the insurance policy with regard to legal
expenses related for the pending class action.



| |                                                      
| | -----------------------------------------------------
| | Floating Charges, Guaranties and Letter of
    Credit

The Company has a floating charge on all of its
intellectual property, investments and various property and
equipment in favor of a financing institution.

The Company obtained bank guaranties in the
amount of $161,000 in favor of its lessor in Israel.

In February 2001 a thirty-day revolving letter of
credit of $300,000 in favor of Equity Office LLC (formerly
Speiker Properties LLC) was signed. The letter of credit is with
respect to a security deposit for leased offices in the Company
headquarters in San Jose, California. The letter of credit
extends to the end of the lease in February 2007.

11.     Shareholders
Equity



| |                
| | ---------------
| | Ordinary Shares

Ordinary Shares subject to future issuance are as
follows:

|                                                                                                                 |  |              |            |      |  |  |            | 
|---------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---- |  |  | ---------- | 
|                                                                                                                 |  |             
|                                                                                                                 |  | December 31,
|                                                                                                                 |  |             
|                                                                                                                 |  | 2002         |            | 2001
|                                                                                                                 |  |              |            |     
|Exchange of BWC (as defined below) shares
    (represented by Series E Preferred stock) into Ordinary
    Shares |  |              |           |      |  |  | 422,212    | 
|Exercise of outstanding options                                                                                  |  |              | 8,772,774  |      |  |  | 10,011,082 | 
|Ordinary Shares available for grant under stock
    option plans                                                 |  |              | 7,711,094  |      |  |  | 4,789,065  | 
|                                                                                                                 |  |              |            |      |  |  |            | 
|                                                                                                                 |  |              | 16,483,868 |      |  |  | 15,222,359 | 
|                                                                                                                 |  |              |            |      |  |  |            | 

59



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Holders of Ordinary Shares have one vote for each
Ordinary Share held on all matters submitted to a vote of
shareholders. Such voting rights may be affected by the grant of
any special voting rights to the holders of a class of shares
with preferential rights that may be authorized in the future.
The Company under current Israeli law can not declare and pay a
dividend unless it has a positive balance of retained earnings
from which the dividend may be declared and paid. If we were to
declare dividends in the future, we would declare those
dividends in NIS but pay those dividends to our non-Israeli
shareholders in U.S. dollars. Because exchange rates
between NIS and the dollar fluctuate continuously, a
U.S. shareholder would be subject to currency fluctuation
between the date when the dividends were declared and the date
the dividends were paid. The Company does not intend to pay cash
dividends in the foreseeable future.



| |                
| | ---------------
| | Preferred Stock

The Company is authorized to provide for the
issuance of up to 50,000,000 shares of undesignated
preferred stock, none of which had been issued at
December 31, 2002.

Immediately prior to the completion of the
Companys initial public offering all outstanding shares of
Series A, B, C and D preferred stock converted into an
aggregate of 23,090,238 Ordinary Shares.

As of December 31, 2002, the Company had no
Series E Preferred Shares outstanding. The Series E
Preferred Share was issued in connection with the acquisition by
the Company of Lanacom Inc., in July 1997, and represented
shares of Lanacom and/or BackWeb Canada Inc. that were
exchangeable on a three-for-one basis for the Companys
Ordinary Shares. During 2002, the last holders of the
exchangeable shares exchanged their shares for 422,212 Ordinary
Shares of the Company and the Series E Preferred Share was
returned to the Company and converted into Ordinary Shares,
which are held in the Companys treasury.



| |               
| | --------------
| | Stock Warrants

On January 17, 2000, RealNetworks Inc. and
BackWeb entered into a Securities Purchase Agreement under which
RealNetworks Inc. was granted a warrant to purchase up to
114,500 Ordinary Shares of BackWeb at an exercise price of
$32.75 per share. The fair value ascribed to the warrant was
immaterial. The warrant was not exercised prior to its
expiration in June 2001.



| |                   
| | ------------------
| | Stock Option Plans

Under the 1996 Israel Stock Option Plan (the
1996 Israel Plan), BackWeb is authorized to grant
options to purchase Ordinary Shares to its Israeli employees and
other eligible participants. Options granted under the 1996
Israeli Plan expire seven years from the date of grant and
terminate upon the termination of the option holders employment
or other relationship with BackWeb. The options under the 1996
Israel Plan will vest as determined by the Plan Administrator
and generally vest over a four-year period. The 1996 Israel Plan
does not have a termination date. Stock options cancelled or
forfeited are credited back to the stock option pool.

Under the 1996 U.S. Stock Option Plan (the
1996 U.S. Plan), BackWeb is authorized to grant
incentive stock options to employees and non-statutory stock
options to employees, officers, directors and consultants at
BackWeb or any other member of the BRM group. Options granted
under the 1996 U.S. Plan expire no later than seven years
from the date of grant and generally vest over a four-year
period. BackWeb is no longer granting options under the 1996
U.S. Plan. In the event of merger, sale or dissolution of
the Company, all options will terminate immediately, except to
the extent the Successor Corporation assumes the options.

Under the 1998 U.S. Option Plan (the
1998 U.S. Plan), BackWeb is authorized to grant
incentive stock options to employees and non-statutory stock
options and Share Purchase Rights to employees, directors and
consultants. Options and Share Purchase Rights under the 1998
U.S. Plan will vest as determined by the

60



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Plan Administrator and, if not assumed or
substituted by a successor corporation will accelerate and
become fully vested in the event of an acquisition of the
Company. The exercise price of options and Share Purchase Rights
granted under the 1998 U.S. Plan will be as determined by
the Plan Administrator, although the exercise price of incentive
stock options must not be less than the fair market value of its
Ordinary Share at the date of the grant. Options granted under
the 1998 U.S. Plan generally vest over four years. Stock
options cancelled or forfeited are credited back to the stock
option pool. The Plan Administrator may amend, modify or
terminate the 1998 U.S. Plan at any time as long as such
amendment, modification or termination does not impair vesting
rights of 1998 U.S. Plan participants. The 1998
U.S. Plan will terminate in 2008, unless terminated earlier
by the administrator.

Effective July 1, 2000, the Company amended
the 1998 U.S. Plan and the 1996 Israel Plan (the
Plans) to adopt an annual increase provision,
commonly referred to as an evergreen provision, to
each of the Plans. These amendments provide for an automatic
increase on each anniversary beginning July 1, 2000 in the
number of shares authorized for issuance under the Plans equal
to the lesser of (a) an aggregate amount equal to
1,960,000 shares, (b) 5% of the outstanding shares on
such date, or (c) an amount to be determined by the Board
of Directors. The total annual increase will be allocated 70% to
the 1998 U.S. Plan and 30% to the 1996 Israel Plan, unless
the Board of Directors determines a different allocation.
Therefore, for the 1996 Israel Plan, the amount of increase
would be equal to the lesser of 588,000 shares, or 1.5% of
the outstanding shares on such date, unless the Board of
Directors determines a different allocation between the Plans or
decides on a lesser amount. Also, for the 1998 U.S. Plan
the amount of increase would be equal to the lesser of
1,372,000 shares or 3.5% of the outstanding shares on such
date, unless the Board of Directors determines a different
allocation between the Plans or decides on a lesser amount.

In addition to the automatic annual increase on
July 1, 2000, the Company approved an additional increase
in the shares available under the 1998 U.S. Plan and the
1996 Israel Plan to increase the shares available under the
Plans by 1,894,622 shares as of June 30, 2000. The
total amount of the increase was allocated 70% to the 1998
U.S. Plan and 30% to the 1996 Israel Plan, which are
1,326,235 shares for the 1998 U.S. Plan and
568,387 shares for the 1996 Israel Plan.

In addition to the automatic annual increase on
July 1, 2001, the Company approved an additional increase
in the Ordinary Shares available under the 1998 Plan and the
1996 Israel Plan to increase the total Ordinary Shares available
under the Plans by an aggregate of 2,500,000 Ordinary Shares, as
of June 30, 2001. The total amount of the increase was
allocated 60% (1,500,000 Ordinary Shares) to the 1998 Plan and
40% (1,000,000 Ordinary Shares) to the 1996 Israel Plan.

BackWeb introduced in 1999 an Employee Stock
Purchase Plan, which was adopted by the Board of Directors in
March 1999. BackWeb has reserved a total of 600,000 shares for
issuance under the plan. The number of shares reserved under the
plan is subject to an annual increase on each anniversary
beginning July 1, 2000 equal to the lesser of 833,333
shares, 2% of the then outstanding shares or an amount
determined by the Board of Directors. Eligible employees may
purchase Ordinary Shares at 85% of the lesser of the fair market
value of BackWebs Ordinary Shares on the first day of the
applicable offering period or the last day of the applicable
purchase period. During 2002, 453,025 total shares were issued
of which 377,140 shares were issued at $0.48 per share and
75,885 shares were issued at $0.23 share. As of
December 31, 2002 2,017,299 shares were available for grant
under the Employee Stock Purchase Plan.

In February 2001, the Company implemented a
voluntary stock option exchange program for its employees. Under
the program, each employee was offered the opportunity to cancel
all, or part of, outstanding stock options previously granted to
them from June 8, 1999 through and including
January 15, 2001 (but excluding those options granted on
November 1, 2000, with a set vesting schedule) in exchange
for an equal number of new options. The new options were granted
after six months and one day from cancellation, the exercise
price of the new options was the fair market value as of the new
date of grant and the vesting schedule of the new options was
unchanged from that of the cancelled options. The new options
were

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

granted to the employee only if the employee was
continually employed by the Company through the date the new
options were granted. Members of the Companys Board of
Directors and its CEO did not participate in this program. An
aggregate of 194 employees elected to cancel their options,
resulting in the cancellation of options to acquire
3,022,149 Ordinary Shares of the Company. An aggregate of
133 employees were granted new options, resulting in the
grant of options to acquire 2,340,324 Ordinary Shares of
the Company. The stock option exchange program did not have an
affect on the Companys results of operations.

In October 2001, the Company instituted a
company-wide incentive program, granting new options to each
employee and the Board under the Companys 1998
U.S. Plan. With respect to management level employees, at
the level of director and above, the Company granted
2,270,000 options at an exercise price of $0.60 per share.
For employees at the level of vice president and above the
options vest over five years with 12.5% of the Ordinary Shares
subject to the option vesting on each of the first four
anniversaries of a defined vesting commencement date which is
January 1, 2003, and 50% of the Ordinary Shares subject to
the option vesting on the fifth anniversary of the vesting
commencement date. Options for director-level employees also
vest over five years, with 16.6% vesting each of the first four
years and 33.3% vesting in year five. Notwithstanding this
vesting schedule, if certain pre-established financial targets
are achieved the vesting and exercisability of the options is
accelerated 50% on the first anniversary date, 30% on the second
anniversary date and 20% on the third anniversary date. The
pre-established financial targets in 2002 were not achieved and
therefore the options were not accelerated on January 1,
2003.

A summary of activity under the stock option
plans is as follows:

|                             |                    |               |           |             |   |                |            |                |   |                |                 |   |       |       |  |   |       |  | 
|---------------------------- | ------------------ | ------------- | --------- | ----------- | - | -------------- | ---------- | -------------- | - | -------------- | --------------- | - | ----- | ----- |  | - | ----- |  | 
|                             |                    |               |           |             |   |                |            |                |   | Weighted-     
|                             |                    | Shares        |           |             |   |                |            | Weighted-      |   | Average Fair  
|                             |                    | Available for |           | Options     |   | Exercise Price |            | Average        |   | Value of      
|                             |                    | Grant         |           | Outstanding |   | Per Share      |            | Exercise Price |   | Option Granted
|                             |                    |               |           |             |   |                |            |                |   |               
|Balance at December 31, 1999 |                    |               | 2,624,642 |             |   |                | 5,271,131  |                |   | $0.03  $38.38 |                 | $ | 5.41  |       |  | $ | 10.85 | 
|                             | Options authorized |               |           | 3,771,381   |   |                |            |               |   |                |                |   |       |      |  |   |       |  | 
|                             | Options granted    |               |           | (6,962,292  | ) |                |            | 6,962,292      |   |                | $0.01  $49.25  |   | $     | 18.00 |  |   |       |  | 
|                             | Options exercised  |               |           |            |   |                |            | (1,202,246     | ) |                | $0.03  $  8.10 |   | $     | 1.90  |  |   |       |  | 
|                             | Options canceled   |               |           | 1,816,806   |   |                |            | (1,816,806     | ) |                | $0.24  $42.13  |   | $     | 12.01 |  |   |       |  | 
|                             | Forfeited shares   |               |           | 120,501     |   |                |            |               |   |                | $1.50  $  2.10 |   |       | 1.56  |  |   |       |  | 
|                             |                    |               |           |             |   |                |            |                |   |                |                 |   |       |       |  |   |       | 
|Balance at December 31, 2000 |                    |               | 1,371,038 |             |   |                | 9,214,371  |                |   | $0.01  $49.25 |                 | $ | 14.11 |       |  | $ | 19.63 | 
|                             | Options authorized |               |           | 4,419,942   |   |                |            |               |   |                |                |   |       |      |  |   |       |  | 
|                             | Options granted    |               |           | (6,899,562  | ) |                |            | 6,899,562      |   |                | $0.60  $  7.94 |   | $     | 1.17  |  |   |       |  | 
|                             | Options exercised  |               |           |            |   |                |            | (282,283       | ) |                | $0.03  $  3.00 |   | $     | 0.92  |  |   |       |  | 
|                             | Options canceled   |               |           | 5,820,568   |   |                |            | (5,820,568     | ) |                | $0.12  $49.25  |   | $     | 17.40 |  |   |       |  | 
|                             | Forfeited shares   |               |           | 77,079      |   |                |            |               |   |                | $3.00  $  3.00 |   | $     | 3.00  |  |   |       |  | 
|                             |                    |               |           |             |   |                |            |                |   |                |                 |   |       |       |  |   |       | 
|Balance at December 31, 2001 |                    |               | 4,789,065 |             |   |                | 10,011,082 |                |   | $0.01  $35.00 |                 | $ | 3.66  |       |  | $ | 0.85  | 
|                             | Options authorized |               |           | 1,960,000   |   |                |            |               |   |                |                |   |       |      |  |   |       |  | 
|                             | Options granted    |               |           | (2,444,904  | ) |                |            | 2,444,904      |   |                | $0.24  $  1.32 |   | $     | 0.93  |  |   |       |  | 
|                             | Options exercised  |               |           |            |   |                |            | (276,279       | ) |                | $0.01  $  0.76 |   | $     | 0.25  |  |   |       |  | 
|                             | Options canceled   |               |           | 3,406,933   |   |                |            | (3,406,933     | ) |                | $0.01  $35.00  |   | $     | 2.68  |  |   |       |  | 
|                             |                    |               |           |             |   |                |            |                |   |                |                 |   |       |       |  |   |       | 
|Balance at December 31, 2002 |                    |               | 7,711,094 |             |   |                | 8,772,774  |                |   | $0.12  $19.00 |                 | $ | 3.38  |       |  | $ | 0.71  | 
|                             |                    |               |           |             |   |                |            |                |   |                |                 |   |       |       |  |   |       | 

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Exercise prices for options outstanding and
exercisable as of December 31, 2002 and the
weighted-average remaining contractual life are as follows:

|                |  |                     |           |                     |  |                |      |                |  |                |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ------------------- |  | -------------- | ---- | -------------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |                     |           |                    
|                |  | Options Outstanding |           | Options Exercisable
|                |  |                     |           |                    
|                |  | Number              |           | Weighted Average    |  | Weighted       |      | Number         |  | Weighted      
|Range of        |  | Outstanding         |           | Remaining           |  | Average        |      | Exercisable    |  | Average       
|Exercise Prices |  | As of 12/31/02      |           | Contractual Years   |  | Exercise Price |      | As of 12/31/02 |  | Exercise Price
|                |  |                     |           |                     |  |                |      |                |  |               
|$ 0.12 - $ 0.50 |  |                     | 336,066   |                     |  |                | 5.58 |                |  | $              | 0.25  |  |  |  | 58,066    |  |  | $ | 0.18  | 
|$ 0.60 - $ 0.60 |  |                     | 2,229,938 |                     |  |                | 8.25 |                |  | $              | 0.60  |  |  |  | 49,583    |  |  | $ | 0.60  | 
|$ 0.72 - $ 0.86 |  |                     | 2,006,771 |                     |  |                | 5.12 |                |  | $              | 0.76  |  |  |  | 883,648   |  |  | $ | 0.76  | 
|$ 0.90 - $ 1.32 |  |                     | 1,365,165 |                     |  |                | 7.95 |                |  | $              | 1.25  |  |  |  | 186,329   |  |  | $ | 1.11  | 
|$ 1.44 - $ 3.00 |  |                     | 830,491   |                     |  |                | 4.71 |                |  | $              | 1.95  |  |  |  | 665,658   |  |  | $ | 2.01  | 
|$ 3.34 - $ 6.30 |  |                     | 154,293   |                     |  |                | 4.41 |                |  | $              | 4.70  |  |  |  | 101,150   |  |  | $ | 4.82  | 
|$ 7.32 - $10.25 |  |                     | 907,000   |                     |  |                | 4.84 |                |  | $              | 7.42  |  |  |  | 681,696   |  |  | $ | 7.42  | 
|$12.56 - $19.00 |  |                     | 943,050   |                     |  |                | 4.60 |                |  | $              | 16.87 |  |  |  | 558,318   |  |  | $ | 16.81 | 
|                |  |                     |           |                     |  |                |      |                |  |                |       |  |  |  |           |  |  |   |       | 
|$ 0.12 - $19.00 |  |                     | 8,772,774 |                     |  |                | 6.24 |                |  | $              | 3.38  |  |  |  | 3,184,448 |  |  | $ | 5.40  | 
|                |  |                     |           |                     |  |                |      |                |  |                |       |  |  |  |           |  |  |   |       | 

There were 3,184,448, 3,125,561 and 1,467,982
options exercisable as of December 31, 2002, 2001 and 2000,
respectively. During the year ended 2002, options to purchase
3,934 shares expired with an exercise price of $0.03 per share.
No options expired during the years ended 2001 and 2000. During
the year ended December 31, 1999 in connection with the
grant of certain stock options, BackWeb recorded deferred stock
compensation of $2,608,000. Such amounts represented the
difference between the exercise price and the deemed fair market
value of BackWebs Ordinary Share on the date such stock
options were granted. Such amount was amortized based on an
accelerated method over the vesting period of the options,
generally four years.

During 2002, 2001 and 2000, 2,444,904, 6,899,562
and 6,903,151 options were granted at exercise prices equal to
the fair market value on their respective dates of grant.



| |                                                  
| | -------------------------------------------------
| | Restricted Shares Issued for Promissory
    Notes

On March 25, 1999, we entered into
promissory notes in the aggregate amount of $3,538,000 with
several key employees in connection with their exercise of stock
options to purchase 1,141,333 Ordinary Shares. The notes are
full recourse and are secured by the shares, bear interest at a
rate in the range of 5.25% to 6% per annum and are payable over
the remaining vesting period. The shares are restricted and are
subject to a right of repurchase in favor of BackWeb in
accordance with the original options vesting schedule,
which is generally four years. In 2001, two remaining payments
totaling $221,000 for one employee were extended for one year
and in 2002, this payment of $221,000 was forgiven. Also in
2001, one employee who left the Company forfeited 77,079
unvested restricted Ordinary Shares, which represented $238,000
of one of the promissory notes.

12.     Backweb
Technologies Inc. 401(k) Plan (Plan)

The Company offers a defined contribution plan
for eligible employees in the U.S. During 2002,
participants in the Plan are allowed to contribute up to the
lower of 25% of their W-2 compensation or $11,000 in the Plan.
The participants are 100% vested in the Plan. The Company does
not make contributions to the Plan.

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

13.     Income
Taxes



| |                     
| | --------------------
| | Israeli Income Taxes



| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | Measurement of taxable income under the Income
    Tax (Inflationary Adjustments) Law, 1985:

Results for tax purposes are measured in terms of
earnings in NIS after certain adjustments for increases in the
Israeli CPI. As explained in Note 2, the financial
statements are measured in U.S. dollars. The difference
between the annual change in the Israeli CPI and in the
NIS/dollar exchange rate causes a further difference between
taxable income and the income before taxes shown in the
financial statements. In accordance with paragraph 9(f) of
SFAS No. 109, the Company has not provided deferred income
taxes on the difference between the functional currency and the
tax bases of assets and liabilities.



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | Tax benefits under the Israeli Law for the
    Encouragement of Industry (Taxation), 1969:

BackWeb Technologies Ltd. is currently viewed as
qualifying as an industrial company under the above
law and as such is entitled to certain tax benefits, including
accelerated rates of depreciation, deduction of public offering
expenses in three equal annual installments and deduction of
12.5% per annum on the purchase of certain intangible property
rights.



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Tax benefits under the Law for the
    Encouragement of Capital Investments, 1959:

BackWeb Technologies Ltd. production facilities
have been granted the status of Approved Enterprise
by the Israel government under the law for the Encouragement of
Capital Investments, 1959 (the Law) for two separate
investment programs. Income derived in Israel from the
Approved Enterprise entitles BackWeb Technologies
Ltd. to tax exemption for a period of two years commencing in
the first year that it will earn taxable income. After this
BackWeb Technologies Ltd. is entitled to a reduced tax rate of
10%  25% for an additional 5 to 8 year period
(depending on the rate of foreign investment in BackWeb). The
tax benefit period is limited to the earlier of 12 years
from completion of the investment under the plan or
14 years from receiving the approval. Accordingly, the
period of benefits relating to these investment programs will
expire in the years 2009 through 2014. Thereafter, BackWeb will
be subject to the regular corporate tax rate of 36% on its
Israel income. Income from sources other than the Approved
Enterprise will be subject to tax at the regular rate of
36%. As of December 31, 2002 the tax benefit period has not
commenced.

BackWeb currently has no plans to distribute such
tax-exempt income as dividend and intends to retain future
earnings to finance the development of the business. If the
retained tax-exempt income were distributed in a manner other
than in the complete liquidation of BackWeb, it would be taxed
at the corporate tax rate applicable to such profits (currently
25%). As of December 31, 2002, BackWeb is in the process of
completing the investments required under the program. If
BackWeb fails to meet certain conditions as stipulated by law
and the Approval Certification, it could be subject to corporate
tax in Israel at the corporate rate of 36% and could be required
to refund tax benefits already received at that time (inclusive
of interest and penalties). The conditions that are specified
include inter alia making specified investments in property and
equipment, maintaining the development and production nature of
its facilities, and financing of at least 30% of the investment
program through equity.

As of December 31, 2002, BackWeb had
approximately $82 million of Israeli net operating loss
carry-forwards. The Israeli loss carryforwards have no
expiration date. The Company expects that during the period
these losses are utilized, its income would be substantially
tax-exempt. Accordingly, there will be no tax benefit available
from such losses and no deferred income taxes have been included
in these financial statements.

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                  
| | -----------------
| | U.S. Income Taxes

At December 31, 2002, BackWeb Technologies
Inc. had U.S. federal net operating loss carryforwards of
approximately $5 million. The net operating loss
carryforwards expire in various amounts between the years 2011
and 2022.

Utilization of the U.S. net operating losses
may be subject to substantial annual limitation due to the
change in ownership provisions of the Internal
Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses
before utilization.

Pretax loss

Loss before income taxes consisted of the
following (in thousands):

|                  |  |                         |        |      |  |      |        |  |  |   |        | 
|----------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                  |  |                        
|                  |  | Year Ended December 31,
|                  |  |                        
|                  |  | 2002                    |        | 2001 |  | 2000
|                  |  |                         |        |      |  |     
|Domestic (Israel) |  | $                       | 8,715  |      |  | $    | 2,361  |  |  | $ | 1,366  | 
|Foreign           |  |                         | 16,167 |      |  |      | 32,382 |  |  |   | 17,847 | 
|                  |  |                         |        |      |  |      |        |  |  |   |        | 
|                  |  | $                       | 24,882 |      |  | $    | 34,743 |  |  | $ | 19,213 | 
|                  |  |                         |        |      |  |      |        |  |  |   |        | 

Due to operating losses and the inability to
recognize the benefits there from, there is no provision for
income taxes for the years ended December 31, 2002, 2001 or
2000.

Deferred taxes

Deferred tax assets reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The significant components of the
Companys deferred tax assets are as follows
(in thousands):

|                                               |  |              |        |      |  |   |        |  
|---------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |        | 2001
|                                               |  |              |        |     
|U.S. net operating loss carryforwards          |  | $            | 1,867  |      |  | $ | 681    |  
|Reserves not currently deductible              |  |              | 2,651  |      |  |   | 5,297  |  
|Other, net                                     |  |              | 2,425  |      |  |   |       |  
|                                               |  |              |        |      |  |   |        |  
|Net deferred assets before valuation allowance |  |              | 6,943  |      |  |   | 5,978  |  
|Valuation allowance                            |  |              | (6,943 |      |  |   | (5,978 | )
|                                               |  |              |        |      |  |   |        |  
|Net deferred tax assets                        |  | $            |       |      |  | $ |       |  
|                                               |  |              |        |      |  |   |        |  

As of December 31, 2002 the Company and its
subsidiaries have provided valuation allowances of approximately
$6.9 million in respect of deferred tax assets resulting
from tax loss carryforwards, and other temporary differences.
For the years ended December 31, 2002, 2001 and 2000, the
valuation allowance increased/(decreased) by $965,000,
($442,000) and $820,000, respectively. Management currently
believes that since the Company and its subsidiaries have a
history of losses, it is not likely that those deferred tax
deductions will be realized in the foreseeable future.

14.     Geographic
Information and Major Customer

BackWeb operates in one industry segment, the
development and marketing of network application software.
Operations in Israel include research and development and sales.
Operations in North America and Europe include sales and
marketing. The Company has adopted Statement of Financial
Accounting Standard No. 131 Disclosures About
Segments of an Enterprise and Related Information
(SFAS No. 131). The

65



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

following is a summary of operations within
geographic areas based on the location of the Legal Entity
making that sale (in thousands):

|                                              |               |                         |       |       |  |      |        |        |  |   |        |        | 
|--------------------------------------------- | ------------- | ----------------------- | ----- | ----- |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                              |               |                        
|                                              |               | Year Ended December 31,
|                                              |               |                        
|                                              |               | 2002                    |       | 2001  |  | 2000
|                                              |               |                         |       |       |  |     
|Revenue from sales to unaffiliated customers: |               |                         |       |       |  |      |        |        |  |   |        |       
|                                              | North America |                         | $     | 3,705 |  |      | $      | 6,695  |  |   | $      | 20,926 | 
|                                              | Israel        |                         |       | 1,731 |  |      |        | 11,809 |  |   |        | 13,020 | 
|                                              | Europe        |                         |       | 911   |  |      |        | 2,134  |  |   |        | 4,400  | 
|                                              |               |                         |       |       |  |      |        |        |  |   |        |       
|                                              |               | $                       | 6,347 |       |  | $    | 20,638 |        |  | $ | 38,346 |       
|                                              |               |                         |       |       |  |      |        |        |  |   |        |       

|                   |               |              |       |       |  |      |       |       |  |   |        |        | 
|------------------ | ------------- | ------------ | ----- | ----- |  | ---- | ----- | ----- |  | - | ------ | ------ | 
|                   |               |             
|                   |               | December 31,
|                   |               |             
|                   |               | 2002         |       | 2001  |  | 2000
|                   |               |              |       |       |  |     
|Long-lived assets: |               |              |       |       |  |      |       |       |  |   |        |       
|                   | North America |              | $     | 704   |  |      | $     | 2,038 |  |   | $      | 3,034  | 
|                   | Israel        |              |       | 1,351 |  |      |       | 5,544 |  |   |        | 10,254 | 
|                   | Other         |              |       | 28    |  |      |       | 104   |  |   |        | 199    | 
|                   |               |              |       |       |  |      |       |       |  |   |        |       
|                   |               | $            | 2,083 |       |  | $    | 7,686 |       |  | $ | 13,487 |       
|                   |               |              |       |       |  |      |       |       |  |   |        |       

Revenue generated in the U.S. and Canada
(collectively, North America) and Europe are all to customers
located in those geographic regions. Revenue generated in Israel
consist of export sales to End-customers located in the rest of
the world excluding North America and Europe; and OEM sales to
all geographic regions.

Revenue from one OEM customer, whose contract
terminated in 2002, accounted for 20%, 52% and 27% of total
revenue in the year ended December 31, 2002, 2001 and 2000,
respectively.

Note 15.     Nasdaq
Listing

On August 13, 2002, the Company received a
letter from The Nasdaq Listing Qualifications Staff, advising it
that the Companys Ordinary Shares had been trading below
the $1.00 per share requirement for continued inclusion on The
Nasdaq National Market and that the Company had not regained
compliance with this requirement during the previous ninety
days. As a result, the Staff advised it would delist the
Companys Ordinary Shares from The Nasdaq National Market
at the opening of business on August 21, 2002, unless the
Company applied to transfer its securities to The Nasdaq
SmallCap Market or requested a hearing to appeal the
Staffs determination to a Listing Qualification Panel. The
Company initially requested a hearing to appeal the Staffs
determination to a Listing Qualifications Panel. Subsequently,
the Company applied to transfer to and began trading on The
Nasdaq SmallCap Market on September 23, 2002.

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

There have been no changes in and no
disagreements with our accountants.

PART III



|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

A.  Directors and Executive
Officers

Our current directors and designated executive
officers are:

|                  |  |     |    |          |  |                                                             
|----------------- |  | --- | -- | -------- |  | ------------------------------------------------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|Eli Barkat        |  |     | 39 |          |  | Chairman of the Board and Chief Executive Officer           
|Charles Federman  |  |     | 46 |          |  | Director                                                    
|Joseph Gleberman  |  |     | 45 |          |  | Director                                                    
|William L. Larson |  |     | 46 |          |  | Director                                                    
|Isabel Maxwell    |  |     | 52 |          |  | Director                                                    
|Gil Shwed         |  |     | 34 |          |  | Director                                                    
|Michael A. Morgan |  |     | 40 |          |  | Chief Financial Officer                                     
|Erez Lorber       |  |     | 38 |          |  | Vice President, Worldwide Sales and Business
    Development

Eli Barkathas
served as our Chairman of the Board and Chief Executive Officer
since 1996. From 1988 to February 1996, Mr. Barkat served
as a Managing Director and Vice President of Business
Development of BRM Technologies Ltd., a technology venture firm.
Prior to 1988, Mr. Barkat held various positions with the
Aurec Group, a communications media and information company, and
Daizix Technologies, a computer assisted design applications
company. In addition, Mr. Barkat served as a paratrooper in
the Israel Defense Forces where he attained the rank of
lieutenant. Mr. Barkat holds a Bachelor of Science degree
in computer science and mathematics from the Hebrew University
of Jerusalem. Mr. Barkat serves as a Class III
Director, holding office until the Annual Meeting of
Shareholders to be held in 2005.

Charles Federmanhas
served as a director of BackWeb since November 1996. Since
January 1998, Mr. Federman has served as Managing Director
of BRM Technologies Ltd., a technology venture firm. From
1983 to January 1998, Mr. Federman held various positions
at Broadview Associates LLC, a financial advisory company, most
recently serving as Chairman. Mr. Federman holds a Bachelor
of Science degree from the Wharton School of the University of
Pennsylvania. Mr. Federman serves as a Class II
Director, holding office until the Annual Meeting of
Shareholders to be held in 2004.

Joseph Glebermanhas
served as a director of BackWeb since November 1998.
Mr. Gleberman is a Managing Director in the Principal
Investment Area of Goldman, Sachs & Co., an investment
banking firm. He joined Goldman, Sachs & Co. in 1982,
became a partner in November 1990 and was made a Managing
Director in November 1996. Mr. Gleberman serves on the
Board of Directors of: aaiPharma Inc., a pharmaceutical service
and development organization; Berry Plastics Corporation, an
operator of a plastics packaging company; IPC Acquisition
Corp., a provider of voice trading systems for the financial
services industry; and MCG Credit Corporation, a specialty
finance company. Mr. Gleberman holds Bachelor of Arts and
Master of Arts degrees from Yale University and a Master of
Business Administration degree from Stanford University Graduate
School of Business. Mr. Gleberman serves as a Class I
Director, holding office until the Annual Meeting of
Shareholders to be held in 2003.

William L. Larsonhas been a director of BackWeb since September 1997. Since
February 2001, Mr. Larson serves on the Board of Directors
of several technology companies and acts as a consultant with
Summit Partners, a leading private equity firm. From September
1993 to January 2001, Mr. Larson served as the Chief
Executive Officer of Network Associates, Inc., a software
company, where he has also served as President and a director
since October 1993 and as Chairman of the Board since April
1995. Mr. Larson also served as Chairman of the Board of
McAfee.com from October 1998 to January 2001. From August 1988 to

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September 1993, Mr. Larson served as Vice
President of SunSoft, Inc., a systems software subsidiary of Sun
Microsystems, where he was responsible for worldwide sales and
marketing. Prior to SunSoft, Mr. Larson held various
executive positions at Apple Computer and Spinnaker Software and
was a consultant with Bain & Company. Mr. Larson
holds degrees from Stanford University Law School and the
Wharton School of the University of Pennsylvania.
Mr. Larson is a member of the California Bar Association.
Mr. Larson serves as a Class II Director, holding
office until the Annual Meeting of Shareholders to be held in
2004.


Isabel Maxwellhas
been a director of BackWeb since February 2002. Since March
2001, Ms. Maxwell has served as a consultant to Apax
Partners, a private equity investment firm. From February 1997
to March 2001, Ms. Maxwell served as President of Commtouch
Software Inc., a global provider of outsourced integrated email
and messaging solutions. Ms. Maxwell was a co-founder, and
from March 1993 to August 1996, served as the Senior Vice
President of Corporate Affairs and International Relations, of
The McKinley Group Inc., an Internet directory and search engine
company. From August 1996 to October 1996, Ms. Maxwell was
an Executive Vice President of Excite, Inc. Ms. Maxwell
holds Honor Moderations in Jurisprudence and a B.A. and M.A. in
History and Modern Languages from Oxford University.
Ms. Maxwell serves as an Outside Director under the Israeli
Companies Law for a term expiring on February 28, 2005.

Gil Shwedhas served
as a director of BackWeb since March 1999. Since July 1993,
Mr. Shwed has served as Chief Executive Officer of Check
Point Software Technologies Ltd., a network security and VPN
software company, of which he is a co-founder and also serves as
Chairman of the Board. Mr. Shwed also serves as an Outside
Director under the Israeli Companies Law for BackWeb for a term
expiring on August 23, 2003.

Michael A. Morganhas served as our Chief Financial Officer since August 2002,
when he joined BackWeb. From August 1999 through April 2002,
Mr. Morgan served as Vice President, Finance and
Administration and Chief Financial Officer at Talarian
Corporation, an infrastructure software company that was
acquired by TIBCO Software, Inc., a provider of business
integration and optimization software, in April 2002. From May
1991 to July 1999, Mr. Morgan served as Vice President,
Finance and Administration, Chief Financial Officer and
Secretary of Enlighten Software Solutions, Inc., a systems
management software company. From October 1987 to April 1991,
Mr. Morgan served in various positions at KPMG LLP, a
public accounting firm. Mr. Morgan holds a Bachelor of
Science degree in business administration and accounting from
San Jose State University and is a certified public accountant
in California.

Erez Lorberhas
served as our Vice President, Worldwide Sales and Business
Development since October 2002. From May 2000 to September 2002,
he served as our Vice President, Business Development. Prior to
joining BackWeb, from December 1998 to May 2002, Mr. Lorber
was CEO and President of HERMES Softlab USA, Inc., a U.S.-based
subsidiary of HERMES Softlab d.d., a system management, storage
and telecommunications company. From January 1997 to December
1998, Mr. Lorber served as Managing Director of Deloitte
Touche Information Technology Israel Ltd., a systems consultant
and integrator. From 1991 to December 1996, Mr. Lorber
served as Chairman and Managing Director for Madei Taas
Industrial Controls Ltd., an Israeli-based industrial controls
firm, which he founded and owns and where he continues to serve
as Chairman to the present. In addition, Mr. Lorber served
in the Israel Defense Forces where he attained the rank of
captain. Mr. Lorber holds a Bachelor of Arts degree from
Temple University and a Master of Business Administration degree
from Tel-Aviv University.

There are no family relationships between or
among any of our directors or executive officers.



|   |                                                            
|-- | -----------------------------------------------------------
|B. | Section 16(a) Beneficial Ownership
    Reporting Compliance

Section 16(a) of the Securities Exchange Act
of 1934, requires the Companys executive officers and
directors and persons who own more than 10 percent of a
registered class of the Companys equity securities to file
an initial report of ownership on Form 3 and changes in
ownership on Form 4 or 5 with the Securities and Exchange
Commission (SEC). Executive officers, directors and
greater than 10 percent shareholders are also required by
SEC rules to furnish the Company with copies of all
Section 16(a) forms they file.

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Based solely on its review of the copies of such
forms received by it, or written representations from certain
reporting persons, the Company believes that, with respect to
fiscal year 2002, all filing requirements applicable to its
executive officers, directors and 10 percent shareholders
were met.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The following table sets forth the compensation
earned for services rendered to us in all capacities for the
fiscal years ended December 31, 2002, December 31,
2001 and December 31, 2000, by our Chief Executive Officer,
the Companys two other current executive officers, one
person who served as one of our executive officers during 2002
but who left the Company prior to December 31, 2002, and an
additional person who was one of our executive officers until
his responsibilities and title changed in the last calendar
quarter of 2002 (collectively, our Named Executive
Officers):

Summary Compensation Table

|                            |                              |  |      |                     |  |              |         |                 |  |           |         |                 |  |   |        |        |  |  |         |         |  |   |     |   | 
|--------------------------- | ---------------------------- |  | ---- | ------------------- |  | ------------ | ------- | --------------- |  | --------- | ------- | --------------- |  | - | ------ | ------ |  |  | ------- | ------- |  | - | --- | - | 
|                            |                              |  |      |                     |  |              |         |                 |  | Long Term |         |                
|                            |                              |  |      |                     |  | Compensation |         |                
|                            |                              |  |      | Annual Compensation |  | Awards       |         |                
|                            |                              |  |      |                     |  |              |         |                
|                            |                              |  |      |                     |  | Other        |         | Securities      |  |          
|                            |                              |  |      |                     |  | Annual       |         | Underlying      |  | All Other
|Name and Principal Position |                              |  |      | Salary($)           |  | Bonus($)     |         | Compensation($) |  | Options   |         | Compensation($)
|                            |                              |  |      |                     |  |              |         |                 |  |           |         |                
|Eli Barkat(1)               |                              |  | 2002 |                     |  | $            | 281,264 |                 |  | $         | 0       |                 |  | $ | 0      |        |  |  | 725,000 |         |  | $ | 0   |  
|                            | Chief Executive Officer      |  |      | 2001                |  |              | $       | 144,000         |  |           | $       | 0               |  |   | $      | 0      |  |  |         | 225,000 |  |   | $   | 0 | 
|                            |                              |  | 2000 |                     |  | $            | 261,251 |                 |  | $         | 0       |                 |  | $ | 0      |        |  |  | 750,000 |         |  | $ | 0   |  
|                           
|Michael A. Morgan(2)        |                              |  | 2002 |                     |  | $            | 69,910  |                 |  | $         | 13,065  |                 |  | $ | 0      |        |  |  | 250,000 |         |  | $ | 0   |  
|                            | Chief Financial Officer      |  |      | 2001                |  |              |         |                |  |           |         |                |  |   |        |       |  |  |         |        |  |   |     |  | 
|                            |                              |  |      | 2000                |  |              |         |                |  |           |         |                |  |   |        |       |  |  |         |        |  |   |     |  | 
|                           
|Erez Lorber(3)              |                              |  | 2002 |                     |  | $            | 199,771 |                 |  | $         | 6,075   |                 |  | $ | 19,377 |        |  |  | 37,500  |         |  | $ | 0   |  
|                            | Vice President, Worldwide    |  |      | 2001                |  |              | $       | 215,000         |  |           | $       | 142,273         |  |   | $      | 7,200  |  |  |         | 275,000 |  |   | $   | 0 | 
|                            | Sales and Business           |  |      | 2000                |  |              | $       | 150,000         |  |           | $       | 104,375         |  |   | $      | 39,803 |  |  |         | 260,000 |  |   | $   | 0 | 
|                            | Development                  |  |      |                     |  |              |         |                 |  |           |         |                 |  |   |        |        |  |  |         |         |  |   |     |   | 
|                           
|Gwen Spertell(4)            |                              |  | 2002 |                     |  | $            | 195,115 |                 |  | $         | 241,405 |                 |  | $ | 0      |        |  |  | 62,500  |         |  | $ | 605 |  
|                            | Chief Operating Officer      |  |      | 2001                |  |              | $       | 250,000         |  |           | $       | 0               |  |   | $      | 0      |  |  |         | 434,000 |  |   | $   | 0 | 
|                            |                              |  | 2000 |                     |  | $            | 228,333 |                 |  | $         | 87,000  |                 |  | $ | 0      |        |  |  | 166,000 |         |  | $ | 0   |  
|                           
|Christopher Marshall(5)     |                              |  | 2002 |                     |  | $            | 132,327 |                 |  | $         | 3,091   |                 |  | $ | 0      |        |  |  | 22,500  |         |  |   |     |  
|                            | Senior Director, Finance and |  |      | 2001                |  |              | $       | 170,000         |  |           | $       | 10,500          |  |   | $      | 0      |  |  |         | 231,800 |  |   | $   | 0 | 
|                            | Corporate Controller         |  |      | 2000                |  |              | $       | 143,750         |  |           | $       | 13,594          |  |   | $      | 0      |  |  |         | 211,000 |  |   | $   | 0 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Barkats base salary for 2001 was
    $288,000. However, Mr. Barkat voluntarily relinquished the
    balance of his 2001 base salary as of July 1, 2001. The
    base salary set forth in the table above for 2001 reflects only
    base salary actually paid to Mr. Barkat by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(2) | Mr. Morgan joined BackWeb in August 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(3) | The Other Annual Compensation paid to
    Mr. Lorber were commissions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(4) | Ms. Spertell left BackWeb in July 2002. In
    connection with her leaving the Company, Ms. Spertell
    received a severance package that included approximately four
    and one-half months salary to be paid over a twelve-month
    period. Ms. Spertell also received approximately eight
    weeks salary in the form of vacation days. In addition, the
    Company forgave the outstanding principal and interest on a loan
    provided to Ms. Spertell prior to the Companys
    initial public offering to enable her to exercise certain of her
    stock options. The Company is also paying for
    Ms. Spertells health benefits through September 2003.
    The figure shown as salary for 2002 includes $34,605 in vacation
    pay and a pro-rated amount of the four and one-half months
    salary being paid as part of Ms. Spertells severance.
    The amount shown for 2002 in the column entitled
    Bonus represents the amount of the loan forgiven
    which the Company accounted for as a bonus and for which
    Ms. Spertell paid the applicable tax directly. The figure
    stated for 2002 in the

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|    |                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|    | column for All Other Compensation
    represents the amount the Company has paid for
    Ms. Spertells health benefits as part of her
    severance.    
|   
|(5) | Mr. Marshall served as an executive officer
    of BackWeb in the position of Vice President, Finance and Chief
    Accounting Officer until December 2002.

Stock Option Grants in Fiscal 2002

The following table presents each grant of stock
options to each of our Named Executive Officers under our 1996
Israel Stock Option Plan and 1998 United States Stock Option
Plan (collectively, the Option Plans), during the
fiscal year ended December 31, 2002, including the
potential realizable value of the options at assumed 5% and 10%
annual rates of appreciation over the term of the option,
compounded annually. These rates of returns are mandated by the
rules of the Securities and Exchange Commission and do not
represent our estimate or projections of our future stock
prices. Actual gains, if any, on stock option exercises will
depend on the future performance of our Ordinary Shares. No
stock appreciation rights were granted during this period.

Percentages shown under Percent of Total
Options Granted to Employees in Fiscal Year are based on
an aggregate of 2,194,904 options granted to employees of the
Company under the Option Plans during the fiscal year ended
December 31, 2002.

The exercise price of each option was equal to
the closing sale price of our Ordinary Shares as quoted on The
Nasdaq National or SmallCap Market, as applicable, the day
before the date of grant.

The exercise price for an option may be paid in
cash, check, in shares of our Ordinary Shares valued at fair
market value on the exercise date, a reduction in Company
liability to the optionee or any combination of these methods of
payment.

Option Grants in Fiscal 2002

|                     |  |            |         |               |  |             |      |       |  |            |      |                            |  |     |         |  |  |  |         |  |  |   |         |  |  |   |           | 
|-------------------- |  | ---------- | ------- | ------------- |  | ----------- | ---- | ----- |  | ---------- | ---- | -------------------------- |  | --- | ------- |  |  |  | ------- |  |  | - | ------- |  |  | - | --------- | 
|                     |  |            |         |               |  |             |      |       |  |            |      |                           
|                     |  |            |         |               |  |             |      |       |  |            |      | Potential Realizable Value
|                     |  |            |         |               |  |             |      |       |  |            |      | at Assumed Annual         
|                     |  | Number of  |         | Percent of    |  |             |      |       |  |            |      | Rates of Stock Price      
|                     |  | Securities |         | Total Options |  |             |      |       |  |            |      | Appreciation for Option   
|                     |  | Underlying |         | Granted to    |  | Exercise or |      |       |  |            |      | Term                      
|                     |  | Options    |         | Employees in  |  | Base Price  |      | Grant |  | Expiration |      |                           
|Name                 |  | Granted(#) |         | Fiscal Year   |  | ($/Share)   |      | Date  |  | Date       |      | 5%                         |  | 10%
|                     |  |            |         |               |  |             |      |       |  |            |      |                            |  |    
|Eli Barkat           |  |            | 725,000 |               |  |             | 33.0 | %     |  | $          | 1.32 |                            |  |     | 2/28/02 |  |  |  | 1/1/12  |  |  | $ | 554,658 |  |  | $ | 1,432,335 | 
|Michael A. Morgan    |  |            | 250,000 |               |  |             | 11.4 | %     |  | $          | 0.24 |                            |  |     | 8/20/02 |  |  |  | 8/20/09 |  |  | $ | 20,908  |  |  | $ | 52,051    | 
|Erez Lorber          |  |            | 37,500  |               |  |             | 1.7  | %     |  | $          | 0.77 |                            |  |     | 4/15/02 |  |  |  | 4/15/09 |  |  | $ | 12,283  |  |  | $ | 28,125    | 
|Gwen Spertell        |  |            | 62,500  |               |  |             | 2.8  | %     |  | $          | 0.77 |                            |  |     | 4/15/02 |  |  |  | 4/15/09 |  |  | $ | 20,471  |  |  | $ | 46,875    | 
|Christopher Marshall |  |            | 22,500  |               |  |             | 1.0  | %     |  | $          | 0.77 |                            |  |     | 4/15/02 |  |  |  | 4/15/09 |  |  | $ | 7,370   |  |  | $ | 16,875    | 

Mr. Barkats option to acquire
725,000 Ordinary Shares was awarded as part of a
Company-wide program instituted in October 2001 under which
options granted to employees at the level of vice president and
above, vest over five years, with 12.5% of the Ordinary Shares
subject to the option vesting on each of the first four
anniversaries of a designated vesting commencement date
(January 1, 2003), and the remaining 50% of the Ordinary
Shares subject to the option vesting on the fifth anniversary of
the vesting commencement date. Notwithstanding this vesting
schedule, if, for the fourth quarter of calendar year 2002, the
Companys earnings per share on an operational basis (prior
to taking into consideration any special charges) were $0.00 or
greater, then 50% of the aggregate amount of the Ordinary Shares
subject to the option would vest and become exercisable upon the
first anniversary of the vesting commencement date. In addition,
if the Companys revenues grow by 20% or more growth in
each of the next two calendar years and the Companys
earnings per share on an operational basis (prior to taking into
consideration any special charges) are greater than $0.00, then,
30% and 20%, respectively, of the remaining Ordinary Shares
subject to the options would vest and become exercisable upon
the second and third anniversary of the vesting commencement
date. The options granted in connection with this Company-wide
program have a term of ten years. The options were not
accelerated on the first anniversary of the vesting commencement
date.

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The other options shown on the table above have a
term of seven years and vest as to 25% of the Ordinary Shares
subject to the option on the first anniversary of the grant date
and as to 1/48 of the Ordinary Shares subject to the option each
month thereafter until the option is fully vested four years
from the grant date.

Aggregated Option Exercises in Last Fiscal
year and Fiscal Year End Option Values

None of the Named Executive Officers in the
Summary Compensation Table, set forth above, exercised any of
his or her options during the fiscal year ended
December 31, 2002. The following table sets forth the
number and value of securities underlying unexercised options
held by each of the Named Executive Officers, as of
December 31, 2002.

Amounts shown under the column Value of
Unexercised In-the-Money Options at Fiscal Year End are
based on the fair market value, i.e., the closing sale price, of
our Ordinary Shares at December 31, 2002 (which was $0.23
per Ordinary Share), less the exercise price payable for such
Ordinary Shares. Because the exercise prices of each of the
options granted to our Named Executive Officers in 2002 were
greater than the fair market value of our Ordinary Shares as of
December 31, 2002, none of these options is
in-the-money was of such date.

Aggregate Option Exercises in Fiscal
2002

|                        |  |             |   |             |  |                            |   |                      |  |             |         |               |  |  |           |  |  |   |   |  |  |   |   | 
|----------------------- |  | ----------- | - | ----------- |  | -------------------------- | - | -------------------- |  | ----------- | ------- | ------------- |  |  | --------- |  |  | - | - |  |  | - | - | 
|                        |  |             |   |             |  |                            |   |                     
|                        |  |             |   |             |  | Number of Securities       |   | Value of Unexercised
|                        |  | Shares      |   |             |  | Underlying Unexercised     |   | In-the-Money Options
|                        |  | Acquired    |   |             |  | Options at Fiscal Year End |   | at Fiscal Year End  
|                        |  | on          |   | Value       |  |                            |   |                     
|Name                    |  | Exercise(#) |   | Realized($) |  | Exercisable                |   | Unexercisable        |  | Exercisable |         | Unexercisable
|                        |  |             |   |             |  |                            |   |                      |  |             |         |              
|Eli Barkat              |  |             | 0 |             |  | $                          | 0 |                      |  |             | 507,812 |               |  |  | 1,192,188 |  |  | $ | 0 |  |  | $ | 0 | 
|Michael A. Morgan       |  |             | 0 |             |  | $                          | 0 |                      |  |             | 0       |               |  |  | 250,000   |  |  | $ | 0 |  |  | $ | 0 | 
|Erez Lorber             |  |             | 0 |             |  | $                          | 0 |                      |  |             | 183,749 |               |  |  | 263,751   |  |  | $ | 0 |  |  | $ | 0 | 
|Gwen Spertell           |  |             | 0 |             |  | $                          | 0 |                      |  |             | 282,874 |               |  |  | 377,084   |  |  | $ | 0 |  |  | $ | 0 | 
|Christopher C. Marshall |  |             | 0 |             |  | $                          | 0 |                      |  |             | 131,295 |               |  |  | 193,005   |  |  | $ | 0 |  |  | $ | 0 | 

Employment Agreements

None of the Named Executive Officers has an
employment agreement with the Company.

In the event of a change-in-control of the
Company or a change in responsibilities following a
change-in-control of the Company, the options granted to each of
the Named Executive Officers (except for Ms. Spertell who
left the Company in July 2002) would fully vest upon the time of
the closing of any such transaction.

Mr. Lorbers initial employment offer
letter provides that, if he were terminated by the Company
without cause, he would receive three months salary as
severance. In the event that he were not employed elsewhere at
the end of three months, the letter also provides that the
Company would then pay him an additional three months salary.

Mr. Marshalls initial employment offer
letter provides that, if he left or were terminated by the
Company for any reason other than cause, eight-weeks notice
would be required to be given.

Compensation of Directors

Members of the Board of Directors of the Company
do not receive cash compensation from BackWeb for the services
they provide as directors, although they are reimbursed for
certain expenses in connection with attendance at Board and
Board Committee meetings. Directors who are not employees of
BackWeb generally receive grants of options to purchase
BackWebs Ordinary Shares when they first join the Board
and at each Annual Shareholder Meeting during their term of
service, subject to ratification and approval by the
Companys shareholders. The grant date of any such options
is the date of the Annual Shareholder Meeting approving such
grant, and the exercise price is the Fair Market Value of the
Companys Ordinary Shares, as

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that term is defined in the Option Plans, which
is generally the closing sale price of the Companys
Ordinary Shares on The Nasdaq National or SmallCap Market the
day before the Annual Shareholder Meeting approving such grant.
In February 2002, pursuant to shareholder approval at an
Extraordinary General Meeting, each of the Companys
non-employee directors was granted options to acquire 50,000
Ordinary Shares as part of the Company-wide incentive program
described above in connection with Mr. Barkats option
grant in 2002. These options vest according to the schedule
described above for Mr. Barkat and have an exercise price
of $1.32 per Ordinary Share.


Compensation Committee Interlocks and Insider
Participation

Mr. Federman and Mr. Larson are members
of the Compensation Committee of the Companys Board of
Directors. Mr. Federman also served as the Chairman of a
company called 3Path, Inc. On October 3, 2000, the Company
acquired 1,197,679 shares of Series B Preferred Stock of
3Path in exchange for payment of $2,500,000 under a Stock
Purchase Agreement for Series B Convertible Preferred
Stock, dated February 2, 2000, between and among 3Path and
certain investors, including BackWeb. Among such investors are
also some of our major shareholders, including EliBarkat
Holdings Ltd., NirBarkat Holdings Ltd., Yuval 63 Holdings
(1995) Ltd., Bare, LLC (a company controlled by
Mr. Federman) and affiliates of The Goldman Sachs Group,
Inc. (affiliates of which are principal shareholders of
BackWeb). In addition, BRM Technologies Ltd., of which
Mr. Federman is Managing Director, is also a 3Path
investor. As a group, such shareholders have a controlling
interest in 3Path. Another of our directors, Joseph Gleberman,
also served as a member of the 3Path Board until December 2001.
Gwen Spertell, our former Chief Operating Officer, also served
as a member of the 3Path Board until November 2001. In the
ordinary course of business, the Company has granted 3Path
various non-exclusive licenses to use the Companys
programs for 3Paths business. These transactions were
granted on customary commercial terms.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The following table shows the amount of our
Ordinary Shares beneficially owned, as of March 3, 2003, by
(i) persons known by us (based upon SEC filings) to own 5%
or more of our Ordinary Shares, (ii) our Named Executive
Officers, (iii) our directors, and (iv) our Named
Executive Officers and directors as a group. Beneficial
ownership is determined in accordance with the rules of the
Securities and Exchange Commission.

Except as indicated below, the address for each
listed director and officer is c/o BackWeb Technologies Ltd.,
3 Abba Hillel Street, Ramat Gan 52136, Israel. Except as
indicated by footnote, the persons named in the table have sole
voting and investment power with respect to all Ordinary Shares
shown as beneficially owned by them. The number of Ordinary
Shares outstanding used in calculating the percentages in the
table below includes the Ordinary Shares underlying options or
warrants held by such person that are exercisable within
60 days of March 3, 2003, but excludes Ordinary Shares
underlying options or warrants held by any other person.
Percentage of beneficial ownership is based on
39,818,628 Ordinary Shares outstanding as of March 3,
2003.

72



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##### Table of Contents



|                                                                               |                              |                    |           |                    |  |  |      |   | 
|------------------------------------------------------------------------------ | ---------------------------- | ------------------ | --------- | ------------------ |  |  | ---- | - | 
|                                                                               |                              | Number of          |           | Percentage of     
|                                                                               |                              | Ordinary Shares    |           | Ordinary Shares   
|Beneficial Owner                                                               |                              | Beneficially Owned |           | Beneficially Owned
|                                                                               |                              |                    |           |                   
|5% or More Shareholders                                                        |                              |                    |           |                    |  |  |      |  
|EliBarkat Holdings Ltd.(1)                                                     |                              |                    | 3,352,342 |                    |  |  | 8.4  | %
|                                                                               | 8 Hamarpe Street             |                    |           |                    |  |  |      |   | 
|                                                                               | Har Hotzvim                  |                    |           |                    |  |  |      |   | 
|                                                                               | Jerusalem 91450 Israel       |                    |           |                    |  |  |      |   | 
|Yuval 63 Holdings (1995) Ltd.(2)                                               |                              |                    | 3,352,342 |                    |  |  | 8.4  | %
|                                                                               | 8 Hamarpe Street             |                    |           |                    |  |  |      |   | 
|                                                                               | Har Hotzvim                  |                    |           |                    |  |  |      |   | 
|                                                                               | Jerusalem 91450 Israel       |                    |           |                    |  |  |      |   | 
|NirBarkat Holdings Ltd.(3)                                                     |                              |                    | 3,352,342 |                    |  |  | 8.4  | %
|                                                                               | 8 Hamarpe Street             |                    |           |                    |  |  |      |   | 
|                                                                               | Har Hotzvim                  |                    |           |                    |  |  |      |   | 
|                                                                               | Jerusalem 91450 Israel       |                    |           |                    |  |  |      |   | 
|The Goldman Sachs Group, Inc.(4)                                               |                              |                    | 3,272,676 |                    |  |  | 8.2  | %
|                                                                               | 85 Broad Street              |                    |           |                    |  |  |      |   | 
|                                                                               | New York, New York 10004     |                    |           |                    |  |  |      |   | 
|Bank of New York(5)                                                            |                              |                    | 3,272,677 |                    |  |  | 8.2  | %
|                                                                               | West 47th Street, 25th Floor |                    |           |                    |  |  |      |   | 
|                                                                               | New York, New York 10036     |                    |           |                    |  |  |      |   | 
|Named Executive Officers and
    Directors                                     |                              |                    |           |                    |  |  |      |  
|Eli Barkat(6)                                                                  |                              |                    | 4,590,535 |                    |  |  | 11.3 | %
|Michael A. Morgan                                                              |                              |                    | 10,000    |                    |  |  | *    |  
|Erez Lorber(7)                                                                 |                              |                    | 247,422   |                    |  |  | *    |  
|Gwen Spertell(8)                                                               |                              |                    | 666,260   |                    |  |  | 1.7  | %
|Christopher C. Marshall(9)                                                     |                              |                    | 181,900   |                    |  |  | *    |  
|Charles Federman(10)                                                           |                              |                    | 797,742   |                    |  |  | 2.0  | %
|Joseph Gleberman(11)                                                           |                              |                    | 3,302,154 |                    |  |  | 8.3  | %
|William L. Larson(12)                                                          |                              |                    | 33,923    |                    |  |  | *    |  
|Isabel Maxwell(13)                                                             |                              |                    | 6,250     |                    |  |  | *    |  
|Gil Shwed(14)                                                                  |                              |                    | 72,812    |                    |  |  | *    |  
|Named Executive Officers and current directors as
    a group (10 persons)(15) |                              |                    | 9,908,998 |                    |  |  | 23.9 | %



---



| |   |             
| | - | ------------
| | * | Less than 1%



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Eli Barkat, the Companys Chairman and Chief
    Executive Officer, substantially controls the voting power of
    EliBarkat Holdings Ltd. The shares listed in the table above for
    EliBarkat Holdings Ltd. do not include 548,131 Ordinary
    Shares owned directly by Eli Barkat nor do they include
    1,000 Ordinary Shares owned directly by
    Mr. Barkats wife, with respect to which he disclaims
    beneficial ownership.
|
| | (2) | Yuval Rakavy, a former BackWeb director, owns
    substantially all of the equity and voting power of Yuval Rakavy
    Ltd., the parent company of Yuval 63 Holdings
    (1995) Ltd. The shares listed in the table above for Yuval
    63 Holdings (1995) Ltd. do not include
    198,136 Ordinary Shares owned directly by Mr. Rakavy.                                                                                                   
|
| | (3) | Nir Barkat, a former BackWeb director, owns
    substantially all of the equity and voting power of Nir Barkat
    Ltd., the parent company of NirBarkat Holdings Ltd. Nir Barkat
    is the brother of Eli Barkat, our Chief Executive Officer. The
    shares listed in the table above for NirBarkat Holdings Ltd. do
    not include 198,133 Ordinary Shares owned directly by Nir
    Barkat.                                         

73



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##### Table of Contents





| |     |                                                                                                                                                                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (4) | The shares listed in the table above for The
    Goldman Sachs Group, Inc. represent 3,272,676 Ordinary
    Shares owned by investment partnerships, of which affiliates of
    The Goldman Sachs Group, Inc. are the general partner, managing
    general partner or investment manager, including:



| |   |                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 1,955,591 Ordinary Shares held by GS Capital
    Partners II, L.P.;                                                                                                                    
|
| |  | 777,427 Ordinary Shares held by GS Capital
    Partners II Offshore, L.P.;                                                                                                             
|
| |  | 72,132 Ordinary Shares held by Goldman,
    Sachs & Co. Verwaltungs GmbH, as nominee for
    GS Capital Partners II (Germany) Civil Law Partnership
    (with limitation of liability);
|
| |  | 278,594 Ordinary Shares held by Stone Street
    Fund 1996, L.P.; and                                                                                                                  
|
| |  | 188,932 Ordinary Shares held by Bridge
    Street Fund 1996, L.P.                                                                                                                      



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Goldman Sachs Group, Inc. disclaims
    beneficial ownership of the Ordinary Shares owned by such
    investment partnerships to the extent attributable to
    partnership interests therein held by persons other than The
    Goldman Sachs Group, Inc. and its affiliates. Each of such
    investment partnerships shares voting and investment power with
    certain of its respective affiliates. Mr. Gleberman, a
    Managing Director of Goldman, Sachs & Co. and a
    director of the Company, disclaims beneficial ownership of
    Ordinary Shares that may be deemed to be beneficially owned by
    The Goldman Sachs Group, Inc., except to the extent of his
    direct or indirect ownership in such investment partnerships.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (5) | The shares listed in the table above for Bank of
    New York, as successor to United States Trust Company of New
    York, represent the Ordinary Shares beneficially owned by the
    investment partnerships affiliated with The Goldman Sachs Group,
    Inc., referenced in footnote (4) above, which entered into
    a Voting Trust Agreement, dated as of July 1, 1999 (the
    Voting Trust Agreement), with United States Trust
    Company of New York, as voting trustee (the Voting
    Trustee). Pursuant to the Voting Trust Agreement, the
    investment partnerships agreed to deposit into the voting trust
    created under such agreement (the Voting Trust) and
    transfer to the Voting Trustee all Ordinary Shares of BackWeb
    beneficially owned by the investment partnerships. Under the
    Voting Trust Agreement, the Voting Trustee, among other things,
    will vote such Ordinary Shares with the majority of votes cast
    or, in certain circumstances, in proportion to the votes cast
    for all other Ordinary Shares outstanding or abstain from
    voting. Under the Voting Trust Agreement, (i) each
    investment partnership has the power to dispose or to direct the
    disposition of the Ordinary Shares deposited by such investment
    partnership into the Voting Trust, and (ii) each investment
    partnership has the right to receive all dividends paid on the
    Ordinary Shares deposited by such investment partnership into
    the Voting Trust, including securities that are not entitled to
    vote.
|
| | (6) | The shares listed in the table above for Eli
    Barkat include 3,352,342 Ordinary Shares held by EliBarkat
    Holdings Ltd., an entity substantially controlled by Eli Barkat,
    1,000 Ordinary Shares owned directly by
    Mr. Barkats wife, with respect to which he disclaims
    beneficial ownership or control, and options to purchase
    689,062 Ordinary Shares that are exercisable within sixty
    days of March 3, 2003. In addition, 21,875 Ordinary
    Shares held directly by Mr. Barkat are subject to a right
    of repurchase by the Company pursuant to the terms of
    Mr. Barkats loan agreement with the Company described
    in more detail in Item 13 below. Approximately
    262,500 Ordinary Shares directly held by Mr. Barkat
    also serve as collateral for this loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | (7) | The shares listed in the table above for Erez
    Lorber include options to purchase 234,791 Ordinary Shares
    that are exercisable within sixty days of March 3, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (8) | The shares listed in the table above for Gwen
    Spertell include options to purchase 353,186 Ordinary Shares
    that are exercisable within sixty days of March 3, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | (9) | The shares listed in the table above for
    Christopher C. Marshall consist of options to purchase
    181,900 Ordinary Shares that are exercisable within sixty days
    of March 3, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



|     |                                                                                                                                                                                                                                                                              
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | The shares listed in the table above for Charles
    Federman include 539,691 shares held by Bare LLC, an entity
    substantially controlled by Mr. Federman and options to
    purchase 29,478 Ordinary Shares that are exercisable within
    sixty days of March 3, 2003.

74



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##### Table of Contents





|     |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(11) | The shares listed in the table above for Joseph
    Gleberman consist of 3,272,676 shares held by entities
    affiliated with The Goldman Sachs Group, Inc. and options to
    purchase 29,478 Ordinary Shares that are exercisable by
    Mr. Gleberman within sixty days of March 3, 2003.
    Mr. Gleberman is a Managing Director of Goldman,
    Sachs & Co., which is a wholly owned subsidiary of The
    Goldman Sachs Group, Inc.
|    
|(12) | The shares listed in the table above for
    William L. Larson consist of options to purchase 33,923
    Ordinary Shares that are exercisable within sixty days of
    March 3, 2003.                                                                                                                                                                                                                                                      
|    
|(13) | The shares listed in the table above for Isabel
    Maxwell consist of options to purchase 6,250 Ordinary Shares
    that are exercisable within sixty days of March 3, 2003.                                                                                                                                                                                                                                                              
|    
|(14) | The shares listed in the table above for Gil
    Shwed include options to purchase 49,999 Ordinary Shares that
    are exercisable within sixty days of March 3, 2003.                                                                                                                                                                                                                                                                     
|    
|(15) | The shares listed in the table above for our
    Named Executive Officers and directors as a group include
    1,608,067 Ordinary Shares held by our Named Executive Officers
    and directors subject to options which are exercisable within
    60 days of March 3, 2003.                                                                                                                                                              

Equity
Compensation Plan Information

Our shareholders have approved all our equity
compensation plans. These plans are designed to further align
our directors and managements interests with the
Companys long-term performance and the long-term interests
of our shareholders.

The following table summarizes the number of our
Ordinary Shares that may be issued under our equity compensation
plans as of December 31, 2002

|                                                               |  |                      |           |                      |  |                       |      |  |  |  |           | 
|-------------------------------------------------------------- |  | -------------------- | --------- | -------------------- |  | --------------------- | ---- |  |  |  | --------- | 
|                                                               |  |                      |           |                      |  | Number of Securities 
|                                                               |  |                      |           |                      |  | Remaining Available  
|                                                               |  |                      |           |                      |  | for Future Issuance  
|                                                               |  | Number of Securities |           |                      |  | Under Equity         
|                                                               |  | to be Issued Upon    |           | Weighted-Average     |  | Compensation Plans   
|                                                               |  | Exercise of          |           | Exercise Price of    |  | (Excluding Securities
|                                                               |  | Outstanding Options, |           | Outstanding Options, |  | Reflected in the     
|Plan Category                                                  |  | Warrants and Rights  |           | Warrants and Rights  |  | First Column)        
|                                                               |  |                      |           |                      |  |                      
|Equity compensation plans approved by security
    holders(1)  |  |                      | 8,772,774 |                      |  | $                     | 3.38 |  |  |  | 9,728,393 | 
|Equity compensation plans not approved by
    security holders |  |                      | -0-       |                      |  |                       | -0-  |  |  |  | -0-       | 
|                                                               |  |                      |           |                      |  |                       |      |  |  |  |           | 
|Total                                                          |  |                      | 8,772,774 |                      |  | $                     | 3.38 |  |  |  | 9,728,393 | 
|                                                               |  |                      |           |                      |  |                       |      |  |  |  |           | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes our 1996 Israel Stock Option Plan and
    1998 United States Stock Option Plan, which provide for an
    annual increase in the number of Ordinary Shares available for
    issuance thereunder, on July 1 of each fiscal year, equal
    to the lesser of (a) 1,960,000 Ordinary Shares and
    (b) 5% of the Ordinary Shares outstanding on that date,
    with 30% of the Ordinary Shares being allocated to the 1996
    Israel Stock Option Plan and 70% of such Shares being allocated
    to the 1998 United States Stock Option Plan. Also includes
    2,017,299 Ordinary Shares reserved for issuance under our 1999
    Employee Stock Purchase Plan, which provides for an annual
    increase in the number of shares available for issuance
    thereunder, on July 1 of each fiscal year, equal to the
    lesser of (a) 833,333 Ordinary Shares and (b) 2% of
    the Ordinary Shares outstanding on that date.




Item 13.Certain
Relationships and Related Transactions

Stock Option Loans

In March 1999, prior to its initial public
offering, the Company made loans to some of its executive
officers to allow these executive officers to exercise options
to purchase Ordinary Shares of the Company. Each loan is
evidenced by a full recourse promissory note with an interest
rate of 5.25% compounded annually. Each note is secured by the
Ordinary Shares acquired by the executive officers as a result
of the option

75



---



##### Table of Contents



exercise. Generally, each note is to be repaid in
equal installments over a four-year period that coincides with
the vesting schedule for the underlying options. Each payment is
to consist of one-quarter of the outstanding principal, plus all
accrued unpaid interest as at the date of payment. Payments are
due on each anniversary date of vesting schedule of the
underlying options. The Companys only current executive
officer to whom such loan was made is Eli Barkat. During the
year ended December 31, 2002 the largest amount of
Mr. Barkats indebtedness was $1,073,494, including
interest.





Item 14.Controls
and Procedures

We maintain disclosure controls and procedures
that are designed with the objective of providing reasonable
assurance that the information required to be disclosed in our
reports filed, pursuant to the Securities Exchange Act of 1934,
is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, our management recognized
that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving
the desired control objectives, and our management necessarily
was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.

Within the 90-day period prior to the filing of
this Report, our Chief Executive Officer and Chief Financial
Officer carried out an evaluation, in conjunction with our
Disclosure Committee, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on
that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls
and procedures were effective as of the date of that evaluation.
There have been no significant changes in internal controls, or
in factors that could significantly affect internal controls,
subsequent to the date our Chief Executive Officer and Chief
Financial Officer completed their evaluation.




PART IV




Item 15.Exhibits,
Financial Statement Schedules, and Reports on
Form 8-K

(a) 1. Financial
Statements

The following Consolidated Financial Statements
are included at Part II, Item 8, of this Annual Report
on Form 10-K:



| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Page Report of Kost, Forer & Gabbay, a
    member of Ernst & Young Global, Independent Auditors 
|
| | Consolidated Financial Statements:                                                              
|
| | Balance Sheets as of December 31, 2002 and
    2001                                             
|
| | Statements of Operations for the three years
    ended December 31, 2002, 2001 and 2000         
|
| | Statements of Shareholders Equity for the three
    years ended December 31, 2002, 2001 and 2000
|
| | Statements of Cash Flows for the three years
    ended December 31, 2002, 2001 and 2000         
|
| | Notes to the Consolidated Financial Statements                                                  

2. Financial Statement
Schedules

Schedule II     Schedule
of Valuation and Qualifying Accounts at December 31, 2002

76



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##### Table of Contents






SCHEDULE II

BACKWEB TECHNOLOGIES, LTD.

SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
AT DECEMBER 31, 2002


|                             |                                 |                        |   |               |  |              |   |            |  |  |   |        |   |  |   |       | 
|---------------------------- | ------------------------------- | ---------------------- | - | ------------- |  | ------------ | - | ---------- |  |  | - | ------ | - |  | - | ----- | 
|                             |                                 |                        |   |               |  | Write-off of |   |           
|                             |                                 | Balance at             |   | Provision for |  | Previously   |   | Balance at
|                             |                                 | Beginning of           |   | Doubtful      |  | Provided     |   | End of    
|                             |                                 | Period                 |   | Accounts      |  | Accounts     |   | Period    
|                             |                                 |                        |   |               |  |              |   |           
|                             |                                 |                       
|                             |                                 | (Dollars in Thousands)
|Year Ended December 31, 2002 |                                 |                        |   |               |  |              |   |            |  |  |   |        |   |  |   |      
|                             | Allowance for Doubtful Accounts |                        | $ | 2,957         |  |              | $ | 205        |  |  | $ | (1,116 | ) |  | $ | 2,046 | 
|Year Ended December 31, 2001 |                                 |                        |   |               |  |              |   |            |  |  |   |        |   |  |   |      
|                             | Allowance for Doubtful Accounts |                        | $ | 1,038         |  |              | $ | 2,948      |  |  | $ | (1,029 | ) |  | $ | 2,957 | 
|Year Ended December 31, 2000 |                                 |                        |   |               |  |              |   |            |  |  |   |        |   |  |   |      
|                             | Allowance for Doubtful Accounts |                        | $ | 919           |  |              | $ | 731        |  |  | $ | (612   | ) |  | $ | 1,038 | 

Other schedules are omitted because they are not
required or the required information is shown in the financial
statements or notes thereto.

3. Exhibits

The following exhibits are filed herewith or are
incorporated by reference to exhibits previously filed with the
Securities and Exchange Commission.

|        |        |             |  |                                                                                                                                                                                       
|------- | ------ | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|No.     |        | Description
|        |        |            
|        | 2.1    |             |  | Software and Asset Purchase Agreement Among
    BackWeb Technologies Ltd., Mobix Communications Ltd and Esther
    Hemli, dated as of June 4, 2000.(1)                                
|        | 3.1    |             |  | Articles of Association of BackWeb Technologies
    Ltd., as amended.(2)                                                                                                              
|        | 3.2    |             |  | Memorandum of Association of Registrant (English
    translation).(3)                                                                                                                 
|        | 4.1    |             |  | Specimen of Ordinary Share Certificate.(3)                                                                                                                                            
|        | 10.1*  |             |  | 1996 Israel Stock Option Plan (English
    translation).(3)                                                                                                                           
|        | 10.2*  |             |  | 1996 U.S. Stock Option Plan.(3)                                                                                                                                                       
|        | 10.3*  |             |  | 1998 U.S. Stock Option Plan (Amended and
    Restated as of January 1, 2002).(4)                                                                                                      
|        | 10.4*  |             |  | 1999 Employee Stock Purchase Plan.(3)                                                                                                                                                 
|        | 10.5   |             |  | Lease Agreement for 3 Abba Hillel Street, Ramat
    Gan, Israel (English translation).(3)                                                                                             
|        | 10.6   |             |  | Master Lease Agreement between BackWeb
    Technologies Inc. and Speiker Properties, L.P. for the premises
    located at 2077 Gateway Place, Suite 500, San Jose,
    California.(5) 
|        | 10.7   |             |  | Form of Agreement by and among Interad
    (1995) Ltd. and Nir Barkat Holdings Ltd., Eli Barkat
    Holdings Ltd., Yuval 63 Holdings (1995) Ltd., and Lior Hass
    and Iftah Sneh.(6)
|        | 10.8   |             |  | Loan and Security Agreement, and schedule
    thereto, between BackWeb Technologies Ltd. and Transamerica
    Business Credit Corporation, dated as of December 24,
    1998.(7)      
|        | 10.9   |             |  | Agreement and Plan of Acquisition by and among
    BackWeb Technologies Ltd., BackWeb Canada Inc., Lanacom Inc. and
    Anthony Davis, dated as of July 1, 1997.(8)                   
|        | 10.10 |             |  | Software Development and OEM License Agreement by
    and between BackWeb Technologies Ltd. and Baan Development B.V.,
    dated as of December 30, 1998.(9)                          
|        | 10.11  |             |  | Securities Purchase Agreement, dated as of
    January 17, 2000, by and between BackWeb Technologies Ltd.
    and RealNetworks, Inc.(10)                                              
|        | 10.12  |             |  | Warrant issued January 26, 2000 to
    RealNetworks, Inc.(11)                                                                                                                         
|        | 10.13  |             |  | 1(ST) Amendment to Lease  Expansion,
    made May 12, 2000, between Speiker Properties, L.P. and
    BackWeb Technologies, Inc.(12)                                                  
|        | 10.14  |             |  | 2(ND) Amendment to Lease  Expansion,
    made November 7, 2000, between Speiker Properties, L.P. and
    BackWeb Technologies, Inc.(13)                                              

77



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|        |        |             |  |                                                                                                                                                                                                                                 
|------- | ------ | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|No.     |        | Description
|        |        |            
|        | 10.15* |             |  | Form of Promissory Note and Security Agreement
    for executive officer loans for early exercise of options
    granted prior to initial public offering.(14)                                                                  
|        | 10.16  |             |  | Sublease Agreement, dated as of
    September 27, 1996, between SSA Canada Corporation, Lanacom
    Inc. and Confederation Life Insurance Company.(15)                                                                          
|        | 10.17  |             |  | Amendment to Sublease Agreement, dated as of
    June 1, 2000, among Zurich Canadian Holdings Limited,
    BackWeb Canada, Inc., and BackWeb Technologies Ltd.(16)                                                              
|        | 10.18 |             |  | Alliance Agreement between Pricewaterhouse
    Coopers LLP and BackWeb Technologies, Inc., effective as of
    July 19, 2001.(17)                                                                                               
|        | 10.19 |             |  | BackWeb Value Added Reseller Agreement, effective
    date July 19, 2001, between Technology Integration LLC and
    BackWeb Technologies, Inc.(18)                                                                             
|        | 10.20 |             |  | Cooperative Marketing Agreement, effective as of
    December 19, 2001, between BackWeb Technologies Inc. and
    Oblix, Inc.(19)                                                                                               
|        | 10.21 |             |  | Technology & Content Partner Agreement,
    effective as of December 21, 2001, between SAP Portals,
    Inc. and BackWeb Technologies Inc.(20)                                                                                  
|        | 10.22 |             |  | Software Remarketing Agreement, dated as of
    December 27, 2001, between BackWeb Technologies, Inc. and
    International Business Machines Corporation.(21)                                                                  
|        | 10.23 |             |  | Plumtree Technology Partner Program Master
    Agreement, effective as of December 19, 2001, between
    Plumtree Software, Inc. and BackWeb Technologies.(22)                                                                  
|        | 21.1   |             |  | Subsidiaries of the Registrant.                                                                                                                                                                                                 
|        | 23.1   |             |  | Consent of Independent Auditors.                                                                                                                                                                                                
|        | 24.1   |             |  | Power of Attorney (see signature page).                                                                                                                                                                                         
|        | 99.1** |             |  | Certifications pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002, of BackWebs Chief
    Executive Officer and Chief Financial Officer, dated
    March 31, 2003.



---



| |     |                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated herein by reference to the
    corresponding Exhibit from the Companys Current Report on
    Form 8-K, filed July 10, 2000.                                                             
|
| | (2) | Incorporated herein by reference to the
    corresponding Exhibit from the Companys Quarterly Report
    on Form 10-Q for the quarterly period ended
    September 30, 2002, filed November 14, 2002.
|
| | (3) | Incorporated herein by reference to the
    corresponding Exhibit from the Companys Registration
    Statement on Form F-1 (File No. 333-10358).                                                     
|
| | (4) | Incorporated herein by reference to the
    corresponding Exhibit from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001, filed
    April 2, 2002.                    
|
| | (5) | Incorporated herein by reference to
    Exhibit 10.7 from the Companys Registration Statement
    on Form F-1 (File No. 333-10358).                                                                  
|
| | (6) | Incorporated herein by reference to
    Exhibit 10.8 from the Companys Registration Statement
    on Form F-1 (File No. 333-10358).                                                                  
|
| | (7) | Incorporated herein by reference to
    Exhibit 10.9 from the Companys Registration Statement
    on Form F-1 (File No. 333-10358).                                                                  
|
| | (8) | Incorporated herein by reference to
    Exhibit 10.12 from the Companys Registration
    Statement on Form F-1 (File No. 333-10358).                                                                 
|
| | (9) | Incorporated herein by reference to
    Exhibit 10.13 from the Companys Registration
    Statement on Form F-1 (File No. 333-10358).                                                                 



|     |                                                                                                                                 
|---- | --------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated herein by reference to
    Exhibit 10.1 from the Companys Current Report on
    Form 8-K, filed February 11, 2000.
|    
|(11) | Incorporated herein by reference to
    Exhibit 10.2 from the Companys Current Report on
    Form 8-K, filed February 11, 2000.

78



---



##### Table of Contents





|     |                                                                                                                                                                                               
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(12) | Incorporated herein by reference to
    Exhibit 10.18 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000, filed
    April 1, 2001.                        
|    
|(13) | Incorporated herein by reference to
    Exhibit 10.19 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000, filed
    April 1, 2001.                        
|    
|(14) | Incorporated herein by reference to
    Exhibit 10.20 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000, filed
    April 1, 2001.                        
|    
|(15) | Incorporated herein by reference to
    Exhibit 10.21 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000, filed
    April 1, 2001.                        
|    
|(16) | Incorporated herein by reference to
    Exhibit 10.22 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000, filed
    April 1, 2001.                        
|    
|(17) | Incorporated herein by reference to the
    Exhibit 10.29 from the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended September 30,
    2001, filed November 14, 2001.
|    
|(18) | Incorporated herein by reference to the
    Exhibit 10.30 from the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended September 30,
    2001, filed November 14, 2001.
|    
|(19) | Incorporated herein by reference to the
    Exhibit 10.31 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001, filed
    April 1, 2002.                    
|    
|(20) | Incorporated herein by reference to the
    Exhibit 10.32 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001, filed
    April 1, 2002.                    
|    
|(21) | Incorporated herein by reference to the
    Exhibit 10.33 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001, filed
    April 1, 2002.                    
|    
|(22) | Incorporated herein by reference to the
    Exhibit 10.34 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001, filed
    April 1, 2002.                    



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| | * | Indicates management contract or compensatory
    plan or arrangement.



| |    |                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ** | These certifications accompany BackWebs
    Annual Report on Form 10-K. These certifications are not
    deemed filed with the SEC and are not to be incorporated by
    reference in any filing of BackWeb under the Securities Act of
    1933 or the Securities Exchange Act of 1934, irrespective of any
    general incorporation language in any filings.



| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Certain portions of this exhibit have been
    granted confidential treatment by the Commission. The omitted
    portions have been separately filed with the Commission.

(b) Reports on Form 8-K

No reports on Form 8-K were filed by the
Company during the quarter ended December 31, 2002.

79



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Dated: March 31, 2003



| |                          
| | -------------------------
| | BACKWEB TECHNOLOGIES LTD.



| |     |               
| | --- | --------------
| | By: | /s/ ELI BARKAT

| |                        
| | -----------------------
| |                        
| | Eli Barkat,            
| | Chief Executive Officer

POWER OF ATTORNEY

By signing this Form 10-K below, I
hereby appoint each of Eli Barkat and Michael A. Morgan, as my
attorney-in-fact to sign all amendments to this Form 10-K
on my behalf, and to file this Form 10-K (including all
exhibits and other documents related to the Form 10-K) with
the Securities and Exchange Commission. I authorize each of my
attorneys-in-fact to (1) appoint a substitute
attorney-in-fact for himself and (2) perform any actions
that he believes are necessary or appropriate to carry out the
intention and purpose of this Power of Attorney. I ratify and
confirm all lawful actions taken directly or indirectly by my
attorneys-in-fact and by any properly appointed substitute
attorneys-in-fact.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant in the capacities
and as of the dates indicated.

|                                       |  |                                                                        |  |                |  | 
|-------------------------------------- |  | ---------------------------------------------------------------------- |  | -------------- |  | 
|                                       |  | Title                                                                  |  | Date          
|Signature                              |  |                                                                        |  |               
|                                      
|/s/ ELI BARKATEli Barkat               |  | Chief Executive Officer and Director
    (Principal Executive Officer) |  | March 31, 2003
|                                      
|/s/ MICHAEL A. MORGANMichael A. Morgan |  | Chief Financial Officer
    (Principal Financial Officer)              |  | March 31, 2003
|                                      
|/s/ CHARLES FEDERMANCharles Federman   |  | Director                                                               |  | March 31, 2003
|                                      
|/s/ WILLIAM L. LARSONWilliam L. Larson |  | Director                                                               |  | March 31, 2003
|                                      
|/s/ JOSEPH GLEBERMANJoseph Gleberman   |  | Director                                                               |  | March 31, 2003
|                                      
|/s/ GIL SHWEDGil Shwed                 |  | Director                                                               |  | March 31, 2003
|                                      
|/s/ ISABEL MAXWELLIsabel Maxwell       |  | Director                                                               |  | March 31, 2003

80



---



##### Table of Contents






CERTIFICATION OF CHIEF EXECUTIVE
OFFICER

PURSUANT TO RULE 13A-14 UNDER THE SECURITIES
EXCHANGE ACT OF 1934


I, Eli Barkat, certify that:

1. I have reviewed this annual report on
Form 10-K of BackWeb Technologies Ltd. (the
registrant);

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officer and I have indicated in this annual report whether there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                                     
| | ------------------------------------
| | /s/ ELI BARKAT                      
| |                                     
| | Eli Barkat                          
| | Chairman and Chief Executive Officer

Date: March 31, 2003

81



---



##### Table of Contents



CERTIFICATION OF CHIEF FINANCIAL
OFFICER

PURSUANT TO RULE 13A-14 UNDER THE SECURITIES
EXCHANGE ACT OF 1934


I, Michael A. Morgan, certify that:

1. I have reviewed this annual report on
Form 10-K of BackWeb Technologies Ltd. (the
registrant);

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officer and I have indicated in this annual report whether there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |     |                      
| | --- | ---------------------
| | By: | /s/ MICHAEL A. MORGAN

| |                        
| | -----------------------
| |                        
| | Michael A. Morgan      
| | Chief Financial Officer
|
|
| | Date: March 31, 2003   

82



---



##### Table of Contents



EXHIBIT INDEX

|        |        |             |  |                                                                                                                                                                                       
|------- | ------ | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|No.     |        | Description
|        |        |            
|        | 2.1    |             |  | Software and Asset Purchase Agreement Among
    BackWeb Technologies Ltd., Mobix Communications Ltd and Esther
    Hemli, dated as of June 4, 2000.(1)                                
|        | 3.1    |             |  | Articles of Association of BackWeb Technologies
    Ltd., as amended.(2)                                                                                                              
|        | 3.2    |             |  | Memorandum of Association of Registrant (English
    translation).(3)                                                                                                                 
|        | 4.1    |             |  | Specimen of Ordinary Share Certificate.(3)                                                                                                                                            
|        | 10.1*  |             |  | 1996 Israel Stock Option Plan (English
    translation).(3)                                                                                                                           
|        | 10.2*  |             |  | 1996 U.S. Stock Option Plan.(3)                                                                                                                                                       
|        | 10.3*  |             |  | 1998 U.S. Stock Option Plan (Amended and
    Restated as of January 1, 2002).(4)                                                                                                      
|        | 10.4*  |             |  | 1999 Employee Stock Purchase Plan.(3)                                                                                                                                                 
|        | 10.5   |             |  | Lease Agreement for 3 Abba Hillel Street, Ramat
    Gan, Israel (English translation).(3)                                                                                             
|        | 10.6   |             |  | Master Lease Agreement between BackWeb
    Technologies Inc. and Speiker Properties, L.P. for the premises
    located at 2077 Gateway Place, Suite 500, San Jose,
    California.(5) 
|        | 10.7   |             |  | Form of Agreement by and among Interad
    (1995) Ltd. and Nir Barkat Holdings Ltd., Eli Barkat
    Holdings Ltd., Yuval 63 Holdings (1995) Ltd., and Lior Hass
    and Iftah Sneh.(6)
|        | 10.8   |             |  | Loan and Security Agreement, and schedule
    thereto, between BackWeb Technologies Ltd. and Transamerica
    Business Credit Corporation, dated as of December 24,
    1998.(7)      
|        | 10.9   |             |  | Agreement and Plan of Acquisition by and among
    BackWeb Technologies Ltd., BackWeb Canada Inc., Lanacom Inc. and
    Anthony Davis, dated as of July 1, 1997.(8)                   
|        | 10.10 |             |  | Software Development and OEM License Agreement by
    and between BackWeb Technologies Ltd. and Baan Development B.V.,
    dated as of December 30, 1998.(9)                          
|        | 10.11  |             |  | Securities Purchase Agreement, dated as of
    January 17, 2000, by and between BackWeb Technologies Ltd.
    and RealNetworks, Inc.(10)                                              
|        | 10.12  |             |  | Warrant issued January 26, 2000 to
    RealNetworks, Inc.(11)                                                                                                                         
|        | 10.13  |             |  | 1(ST) Amendment to Lease  Expansion,
    made May 12, 2000, between Speiker Properties, L.P. and
    BackWeb Technologies, Inc.(12)                                                  
|        | 10.14  |             |  | 2(ND) Amendment to Lease  Expansion,
    made November 7, 2000, between Speiker Properties, L.P. and
    BackWeb Technologies, Inc.(13)                                              
|        | 10.15* |             |  | Form of Promissory Note and Security Agreement
    for executive officer loans for early exercise of options
    granted prior to initial public offering.(14)                        
|        | 10.16  |             |  | Sublease Agreement, dated as of
    September 27, 1996, between SSA Canada Corporation, Lanacom
    Inc. and Confederation Life Insurance Company.(15)                                
|        | 10.17  |             |  | Amendment to Sublease Agreement, dated as of
    June 1, 2000, among Zurich Canadian Holdings Limited,
    BackWeb Canada, Inc., and BackWeb Technologies Ltd.(16)                    
|        | 10.18 |             |  | Alliance Agreement between Pricewaterhouse
    Coopers LLP and BackWeb Technologies, Inc., effective as of
    July 19, 2001.(17)                                                     
|        | 10.19 |             |  | BackWeb Value Added Reseller Agreement, effective
    date July 19, 2001, between Technology Integration LLC and
    BackWeb Technologies, Inc.(18)                                   
|        | 10.20 |             |  | Cooperative Marketing Agreement, effective as of
    December 19, 2001, between BackWeb Technologies Inc. and
    Oblix, Inc.(19)                                                     
|        | 10.21 |             |  | Technology & Content Partner Agreement,
    effective as of December 21, 2001, between SAP Portals,
    Inc. and BackWeb Technologies Inc.(20)                                        
|        | 10.22 |             |  | Software Remarketing Agreement, dated as of
    December 27, 2001, between BackWeb Technologies, Inc. and
    International Business Machines Corporation.(21)                        
|        | 10.23 |             |  | Plumtree Technology Partner Program Master
    Agreement, effective as of December 19, 2001, between
    Plumtree Software, Inc. and BackWeb Technologies.(22)                        
|        | 21.1   |             |  | Subsidiaries of the Registrant.                                                                                                                                                       



---



##### Table of Contents



|        |        |             |  |                                                                                                                                                                                                                            
|------- | ------ | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|No.     |        | Description
|        |        |            
|        | 23.1   |             |  | Consent of Independent Auditors.                                                                                                                                                                                           
|        | 24.1   |             |  | Power of Attorney (see signature page).                                                                                                                                                                                    
|        | 99.1** |             |  | Certifications pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002, of BackWebs Chief Executive
    Officer and Chief Financial Officer, dated March 31, 2003.



---



| |     |                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated herein by reference to the
    corresponding Exhibit from the Companys Current Report on
    Form 8-K, filed July 10, 2000.                                                             
|
| | (2) | Incorporated herein by reference to the
    corresponding Exhibit from the Companys Quarterly Report
    on Form 10-Q for the quarterly period ended
    September 30, 2002, filed November 14, 2002.
|
| | (3) | Incorporated herein by reference to the
    corresponding Exhibit from the Companys Registration
    Statement on Form F-1 (File No. 333-10358).                                                     
|
| | (4) | Incorporated herein by reference to the
    corresponding Exhibit from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001, filed
    April 2, 2002.                    
|
| | (5) | Incorporated herein by reference to
    Exhibit 10.7 from the Companys Registration Statement
    on Form F-1 (File No. 333-10358).                                                                  
|
| | (6) | Incorporated herein by reference to
    Exhibit 10.8 from the Companys Registration Statement
    on Form F-1 (File No. 333-10358).                                                                  
|
| | (7) | Incorporated herein by reference to
    Exhibit 10.9 from the Companys Registration Statement
    on Form F-1 (File No. 333-10358).                                                                  
|
| | (8) | Incorporated herein by reference to
    Exhibit 10.12 from the Companys Registration
    Statement on Form F-1 (File No. 333-10358).                                                                 
|
| | (9) | Incorporated herein by reference to
    Exhibit 10.13 from the Companys Registration
    Statement on Form F-1 (File No. 333-10358).                                                                 



|     |                                                                                                                                                                                               
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated herein by reference to
    Exhibit 10.1 from the Companys Current Report on
    Form 8-K, filed February 11, 2000.                                                              
|    
|(11) | Incorporated herein by reference to
    Exhibit 10.2 from the Companys Current Report on
    Form 8-K, filed February 11, 2000.                                                              
|    
|(12) | Incorporated herein by reference to
    Exhibit 10.18 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000, filed
    April 1, 2001.                        
|    
|(13) | Incorporated herein by reference to
    Exhibit 10.19 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000, filed
    April 1, 2001.                        
|    
|(14) | Incorporated herein by reference to
    Exhibit 10.20 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000, filed
    April 1, 2001.                        
|    
|(15) | Incorporated herein by reference to
    Exhibit 10.21 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000, filed
    April 1, 2001.                        
|    
|(16) | Incorporated herein by reference to
    Exhibit 10.22 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000, filed
    April 1, 2001.                        
|    
|(17) | Incorporated herein by reference to the
    Exhibit 10.29 from the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended September 30,
    2001, filed November 14, 2001.
|    
|(18) | Incorporated herein by reference to the
    Exhibit 10.30 from the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended September 30,
    2001, filed November 14, 2001.
|    
|(19) | Incorporated herein by reference to the
    Exhibit 10.31 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001, filed
    April 1, 2002.                    
|    
|(20) | Incorporated herein by reference to the
    Exhibit 10.32 from the Companys Annual Report on
    Form 10-K for the quarterly period ended December 31,
    2001, filed April 1, 2002.        



---



##### Table of Contents





|     |                                                                                                                                                                                               
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(21) | Incorporated herein by reference to the
    Exhibit 10.33 from the Companys Annual Report on
    Form 10-Q for the quarterly period ended December 31,
    2001, filed April 1, 2002.        
|    
|(13) | Incorporated herein by reference to
    Exhibit 10.19 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000, filed
    April 1, 2001.                        
|    
|(14) | Incorporated herein by reference to
    Exhibit 10.20 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000, filed
    April 1, 2001.                        
|    
|(15) | Incorporated herein by reference to
    Exhibit 10.21 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000, filed
    April 1, 2001.                        
|    
|(16) | Incorporated herein by reference to
    Exhibit 10.22 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000, filed
    April 1, 2001.                        
|    
|(17) | Incorporated herein by reference to the
    Exhibit 10.29 from the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended September 30,
    2001, filed November 14, 2001.
|    
|(18) | Incorporated herein by reference to the
    Exhibit 10.30 from the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended September 30,
    2001, filed November 14, 2001.
|    
|(19) | Incorporated herein by reference to the
    Exhibit 10.31 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001, filed
    April 1, 2002.                    
|    
|(20) | Incorporated herein by reference to the
    Exhibit 10.32 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001, filed
    April 1, 2002.                    
|    
|(21) | Incorporated herein by reference to the
    Exhibit 10.33 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001, filed
    April 1, 2002.                    
|    
|(22) | Incorporated herein by reference to the
    Exhibit 10.34 from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001, filed
    April 1, 2002.                    



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| | * | Indicates management contract or compensatory
    plan or arrangement.



| |    |                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ** | These certifications accompany BackWebs
    Annual Report on Form 10-K. These certifications are not
    deemed filed with the SEC and are not to be incorporated by
    reference in any filing of BackWeb under the Securities Act of
    1933 or the Securities Exchange Act of 1934, irrespective of any
    general incorporation language in any filings.



| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Certain portions of this exhibit have been
    granted confidential treatment by the Commission. The omitted
    portions have been separately filed with the Commission.