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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,
    2003                                             
|  
|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                        |  | 52136                                      
|(Address of principal executive
    offices)                       |  | (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.     o

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

As of June 30, 2003, based on the closing
sales price of the registrants Ordinary Shares as quoted
by the Nasdaq SmallCap Market, 28,026,475 Ordinary Shares,
having an aggregate market value of approximately $14,013,237,
were held by non-affiliates. For purposes of the above statement
only, all directors and executive officers of the registrant and
5% holders of Ordinary Shares are deemed to be affiliates.

As of March 15, 2004, the registrant had
40,708,414 Ordinary Shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.



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BACKWEB TECHNOLOGIES LTD.

ANNUAL REPORT ON FORM 10-K

Year Ended December 31, 2003


TABLE OF CONTENTS

|              |  |                                                                                                        |    |      |    | 
|------------- |  | ------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|              |  |                                                                                                        |    | Page
|              |  |                                                                                                        |    |     
|              |  | PART I                                                                                                 |    |      |    | 
|Item 1.       |  | Business                                                                                               |    |      | 3  | 
|Item 2.       |  | Properties                                                                                             |    |      | 11 | 
|Item 3.       |  | Legal Proceedings                                                                                      |    |      | 11 | 
|Item 4.       |  | Submission of Matter to a
    Vote of Security Holders                                                 |    |      | 12 | 
|              |  | PART II                                                                                                |    |      |    | 
|Item 5.       |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |    |      | 12 | 
|Item 6.       |  | Selected Financial Data                                                                                |    |      | 13 | 
|Item 7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |    |      | 14 | 
|Item 7A.      |  | Quantitative and Qualitative
    Disclosures About Market Risk                                         |    |      | 40 | 
|Item 8.       |  | Financial Statements and
    Supplementary Data                                                        |    |      | 41 | 
|Item 9.       |  | Changes in and Disagreements
    With Accountants On Accounting and Financial Disclosure               |    |      | 70 | 
|Item 9A.      |  | Controls and Procedures                                                                                |    |      | 70 | 
|              |  | PART III                                                                                               |    |      |    | 
|Item 10.      |  | Directors and Executive
    Officers of the Registrant                                                 |    |      | 71 | 
|Item 11.      |  | Executive Compensation                                                                                 |    |      | 73 | 
|Item 12.      |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |    |      | 75 | 
|Item 13.      |  | Certain Relationships and
    Related Transactions                                                     |    |      | 78 | 
|Item 14.      |  | Principal Accountant Fees
    and Services                                                             |    |      | 78 | 
|              |  | PART IV                                                                                                |    |      |    | 
|Item 15.      |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                   |    |      | 79 | 
|Signatures    |  |                                                                                                        | 80 |     
|EXHIBIT 10.2 
|EXHIBIT 10.3 
|EXHIBIT 10.6 
|EXHIBIT 10.12
|EXHIBIT 10.13
|EXHIBIT 10.14
|EXHIBIT 10.15
|EXHIBIT 10.16
|EXHIBIT 10.19
|EXHIBIT 10.20
|EXHIBIT 23.1 
|EXHIBIT 23.2 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 

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 Annual Report on Form 10-K.

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 Offline Access
Server, e-Accelerator, Polite Sync Server, and Foundation are
trademarks of ours that appear in this Annual Report. All other
trademarks or trade names appearing elsewhere in this Annual
Report are the property of their respective owners.

1



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The terms BackWeb,
Company, we, us, and
our as used in this Annual Report 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,
anticipates, or similar expressions may identify
forward-looking statements. Readers are cautioned not to place
undue reliance on the Companys forward-looking statements,
as they involve many risks and uncertainties. The Companys
actual results may differ materially from such statements.
Factors that may cause or contribute to such differences include
those discussed in this Annual Report under the caption
Risk Factors and elsewhere in this Annual Report, as
well as 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 of this Report. 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 software that
enables companies to enhance the value of their technology
investments by offering mobile and remote employees offline
access to portals, intranets, and other Web-based applications
and content. The Companys products allow 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 information. The Companys products are
designed to reduce network costs and improve the productivity of
increasingly mobile workforces.

The BackWeb Offline Access Server (OAS), formerly
known as the BackWeb ProactivePortal Server, integrates with
portal frameworks, intranets, and websites to extend their
access to users who are remote with poor connectivity and users
who are frequently disconnected from the network. Its two-way
synchronization capability enables field personnel to both
access and publish to the portal, intranet, or website while
disconnected, enabling greater efficiency and improved data
accuracy and value. Using HyperText Markup Language or HTML-type
tags (called Offline Tagging Markup Language or OTML), our
customers can easily offline-enable their websites and portals
without rewriting code, creating an offline end-user experience
that is essentially equal to being online. Our BackWeb
e-Accelerator Web application provides companies with a complete
stand-alone solution to manage, publish and deliver pertinent
information and alerts to both online and offline users. The
BackWeb Polite Sync Server, formerly known as BackWeb
Foundation, uses network-sensitive background content delivery
that can deliver large amounts of data without impacting the
performance of other network applications. This allows
organizations to efficiently target and deliver sizeable digital
data of any format to users desktops throughout the
extended enterprise. At the core of the Companys products
is the Companys patented Polite synchronization technology
that can distribute large amounts of data over narrow bandwidth
connections.

BackWeb Technology and Products

We develop, market, and support offline Web
access software that enables companies to extend the reach of
their Web applications and content to their mobile community of
customers, partners and employees. Our

3



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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 access 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, to analyze what content, information, and
    applications mobile users need most often;                                                                                         
|
| |  | 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 proprietary core technologies: 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 Sync
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 users 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 it was interrupted. This
bandwidth-sensitive delivery is accomplished through the use of
various components, including the following:



| |   |                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Polite Agentmonitors the network activity of the
    plug-in and communicates with BackWeb Polite Sync 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 Proxyallows
    communication between the BackWeb proxy server and BackWeb
    Polite Sync Servers only when wide area network, or WAN,
    bandwidth utilization is below a specified threshold. It
    achieves this by monitoring the WAN.                             

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Polite Neighborcastenables the automatic transmission of
    digital data from one BackWeb plug-in to others on the same
    local area network, or LAN, eliminating 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 Upstreamenables the automatic transmission of
    digital data from BackWeb plug-ins to the BackWeb Polite Sync
    Server when the network connection is idle.                                                                                                                                                                                                                                       



| |                             
| | ----------------------------
| | OTML Offline Web Integration

BackWeb has developed a set of HTML tags referred
to as OTML 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 Offline Access Server

In September 2001, we introduced the BackWeb
Offline Access Server (OAS), then known as the BackWeb
ProactivePortal Server, which enables mobile users to access Web
applications and content, including portal environments, when a
user is disconnected or poorly connected to a network. The
BackWeb OAS is comprised of two major components: the Web
Integration Server and the BackWeb Polite Sync Server.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Web Integration Serveris a component of the OAS that is
    designed for highly scalable Web content acquisition from
    corporate portals, intranets, and Web applications. On an
    on-going basis, the OAS logs into the portal, intranet or Web
    applications as if it were an individual user and retrieves HTML
    pages, using standard HTTP or HTTPS protocols (either secure or
    non-secure). Each page links to additional Web pages or
    documents that are retrieved once the links are identified.
    Content transformation and OTML tags parse the HTML pages and
    create an offline equivalent of the page that is sent to users.
    The Content Acquisition Server retrieves additional pages when
    it identifies links

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | to additional portal pages, external documents or
    Web pages. Since the presentation of 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 into the
    portal, intranet, or Web application page, which tags control
    the optimized transformation of the pages for offline viewing.
    OTML is an extension to HTML and applications other than OAS
    software, such as the browser, will ignore the HTML tags.
    Although portals, for example, include both personalized and
    non-personalized content, our OAS 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 OAS stores content, including documents and
    Web pages, in separate information packages that are sent to
    more than one user. 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, which is critical when only a small portion of a
    document is modified, and optimized storage and communication
    with users plug-ins.
|
| |  | The BackWeb Polite Sync Server,which is also available as a separate
    product as described below, is a highly scalable content
    delivery engine for desktops and laptops that enables offline
    access to Web content via BackWeb plug-ins. The BackWeb Polite
    Sync Server is designed to manage the delivery of thousands of
    gigabytes of data every day to end users. The server consults
    the BackWeb OAS 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
    Sync Server to enable scalable content delivery. The Polite Sync
    Server includes several key features:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  Interruptible content delivery
    activates only when the network connection is idle;                                                                                                                                                
|
| |  Byte-level differentiation
    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 Neighborcast
    distributes content over a LAN using the distributed
    client-based caching system, thereby reducing the amount of WAN
    traffic.                                                                         



| |                      
| | ---------------------
| | BackWeb e-Accelerator

The BackWeb e-Accelerator application allows
companies to equip their extended enterprise with 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.



| |                           
| | --------------------------
| | BackWeb Polite Sync Server

Our infrastructure software platform, the BackWeb
Polite Sync Server, formerly known as 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. The Polite Sync
Server automatically distributes that data to BackWeb plug-ins.
The BackWeb Polite Sync Server is highly scalable and designed
to support a large number of plug-ins concurrently. BackWeb
Development Tools are used to customize the BackWeb Polite Sync
Server 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 Sync Server with any digital data
source, enabling automated publishing of content or files from
any source to the BackWeb Polite Sync 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 Sync
Server and external data source; our BackWeb Authoring Language

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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 Sync 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.


Customers

We sell our products to customers from a variety
of industries. Our customers include industry leaders, such as
A.C. Nielsen Co., Boehringer Ingelheim, British
Telecommunications plc, Centocor, Inc., Check Point
Software Technologies Ltd., Compass Group, Eastman Kodak
Company, Fidelity Investments Institutional Services, General
Electric Medical Systems, Guidant Corporation, Hewlett-Packard
Company, Information Services International Inc. (M&M Mars),
International Business Machines Corporation, or IBM,
International Monetary Fund, KLA Tencor Corporation, Lam
Research Corp., Logitech International S.A., Nalco Chemical
Company, Owens-Illinois, Inc., Pfizer Inc., Pioneer Natural
Resources Company, and Siemens AG, as well as the United States
Social Security Administration.

Hewlett-Packard Company accounted for
approximately 15% of our revenue in 2003. For a discussion of
customer transactions by geography, please refer to Note 14
to Consolidated Financial Statements appearing elsewhere in this
Annual Report. For a discussion of related party transactions
and their effect on the Company, please refer to Note 8 to
Consolidated Financial Statements.

Sales and Marketing



| |      
| | -----
| | Sales

We currently market our software and services
primarily through a direct sales organization complemented by
indirect sales channels. Our direct sales force is located in
the United States and in Germany to serve the European market.
Our sales force consists of direct sales representatives and
sales engineers. During 2003, most of our revenue was
attributable to the efforts of this direct sales force and we
expect this trend to continue for at least the next twelve
months.

In an effort to accelerate the acceptance of our
products, we have developed cooperative alliances and entered
into reseller and remarketing agreements with leading portal
framework vendors, technology vendors, OEMs, applications
vendors, and Internet-based solutions providers. During 2003,
for example, we signed a new reseller agreement with Plumtree
Software, Inc., a leading portal framework vendor. We
believe that these alliances can provide additional marketing
and sales channels for our products, help enable us to position
BackWeb as the offline vendor of choice and help facilitate
broad market acceptance for our products. To date, however,
these alliances have not proven to be a reliable and stable
source of revenue, and we continue to depend upon our direct
sales force for the significant part of our revenue. We
typically have very little backlog and, accordingly, generate
substantially all of our revenue for a given quarter in that
quarter.



| |          
| | ---------
| | Marketing

In 2003, our marketing efforts continued to be
focused on the portal and Web applications market with the goal
of establishing BackWeb as the leading provider of offline Web
software. During this time, we have worked to educate industry
analysts, portal framework vendors and integrators, and portal
customers about our technology and its competitive advantages.

Our marketing strategy is designed to promote
offline access as a must-have technology for portal
and Web application 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 OAS technology. Marketing activities include:
telemarketing, Web seminars, e-mail campaigns, and attendance at
select 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.

7



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Customer Service and Support

We have a comprehensive service and support
organization designed to ensure that customers receive high
quality 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.

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.
We have complemented these individuals by hiring senior
management with backgrounds in the commercial software
development industries. Our research and development expenses
were $4.5 million, $6.1 million, and $9.2 million
for the years ended December 31, 2003, 2002, and 2001,
respectively. To date, all research and development costs have
been expensed as incurred.

Competition

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:



| |   |                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | small companies attempting to address the needs
    of mobile or disconnected Web users such as Lotus Domino, iOra,
    and Covigo;                                                                                
|
| |  | large companies attempting to address the needs
    of mobile or disconnected Web users, such as IBM, Microsoft, and
    SAP, that have announced or may have plans to develop offline
    capabilities internally;
|
| |  | companies addressing other segments of our
    BackWeb Polite Sync Server 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.                                                                                                                                                  

8



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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, IBM and Microsoft have
announced plans to develop offline capabilities, and we cannot
assure you that our other existing or potential customers or
partners will not internally develop products similar to our own.

Our existing and potential customers often have a
predetermined 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 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

9



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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. 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, 2003, we had a total of
72 employees, of whom 33 were engaged in research and
development, 10 in sales, marketing and business development, 14
in professional services and technical support, and 15 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 who 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

10



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##### Table of Contents



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 40 of our 72 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.






|        |           
|------- | ----------
|Item 2. | Properties

As of December 31, 2003, BackWeb leased
approximately 8,500 square feet in a single office building
located in Ramat Gan, Israel; approximately
17,600 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 June 2004. The office space in San Jose,
California is leased pursuant to a lease that expires in January
2007. The office space in Toronto, Canada is leased pursuant to
a lease that expires in August 2006. In addition to these
facilities, as of December 31, 2003, BackWeb also leased
several small field sales and support offices in New York,
NY, Atlanta, GA, Vienna, VA, Sudbury, MA, and Hamburg, Germany.
Lease terms on these offices range from month-to-month to
July 31, 2004, and certain of these leases have been
provided for under restructuring charges. We believe that our
current facilities will be adequate to meet our needs for the
foreseeable future.

For a more complete discussion of the our lease
obligations, please refer to Note 10 to Notes of
Consolidated Financial Statements found elsewhere in this Annual
Report.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

On November 13, 2001, BackWeb, six of our
officers and directors, and various underwriters for our 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, 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.

A proposal has been made for the settlement and
release of claims against the issuer defendants, including
BackWeb. We have agreed to the proposal. The settlement is
subject to a number of conditions, including approval by the
proposed settling parties and the court.

11



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##### Table of Contents



If the settlement does not occur, and litigation
against us continues, we believe we have meritorious defenses
and intend to defend the case 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 the price of our Ordinary Shares.

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 2003.




PART II






|        |                                                                
|------- | ---------------------------------------------------------------
|Item 5. | Market for Our Common Stock 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 presents the high and low intra-day sales prices
per share of our Ordinary Shares as reported on the Nasdaq
National or SmallCap Market (as applicable) during the quarters
indicated below:

|     |                |      |   |      |  |  |   |      | 
|---- | -------------- | ---- | - | ---- |  |  | - | ---- | 
|     |                | High |   | Low 
|     |                |      |   |     
|2002 |                |      |   |      |  |  |   |     
|     | First Quarter  |      | $ | 1.75 |  |  | $ | 1.00 | 
|     | Second Quarter |      | $ | 1.10 |  |  | $ | 0.50 | 
|     | Third Quarter  |      | $ | 0.63 |  |  | $ | 0.20 | 
|     | Fourth Quarter |      | $ | 0.45 |  |  | $ | 0.15 | 

|     |                |      |   |      |  |  |   |      | 
|---- | -------------- | ---- | - | ---- |  |  | - | ---- | 
|     |                | High |   | Low 
|     |                |      |   |     
|2003 |                |      |   |      |  |  |   |     
|     | First Quarter  |      | $ | 0.51 |  |  | $ | 0.16 | 
|     | Second Quarter |      | $ | 0.82 |  |  | $ | 0.23 | 
|     | Third Quarter  |      | $ | 1.24 |  |  | $ | 0.42 | 
|     | Fourth Quarter |      | $ | 2.04 |  |  | $ | 0.84 | 

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

According to the records of our transfer agent,
we had approximately 181 shareholders of record as of
March 15, 2004. 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
operations. Accordingly, we have never declared a dividend and
do not anticipate declaring or paying any dividends 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.

12



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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.

In October 2003, the Company issued warrants to
purchase 200,000 Ordinary Shares to its landlord in San Jose,
California, as part of its settlement of lease obligations.
These warrants were valued at $0.66 per Ordinary Share, and
expire seven years from the date of issuance. The Company
recorded a charge of $120,000 related to the warrants.

For information regarding equity compensation
plans, please see Item 12.






|        |                                         
|------- | ----------------------------------------
|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, our Consolidated
Financial Statements 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.

|                                          |                                                                                                            |                                       |       |       |        |      |       |        |        |      |        |        |        |  |        |        |        |  |        |        |        | 
|----------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------------------------------- | ----- | ----- | ------ | ---- | ----- | ------ | ------ | ---- | ------ | ------ | ------ |  | ------ | ------ | ------ |  | ------ | ------ | ------ | 
|                                          |                                                                                                            |                                      
|                                          |                                                                                                            | Years Ended December 31,             
|                                          |                                                                                                            |                                      
|                                          |                                                                                                            | 2003                                  |       | 2002  |        | 2001 |       | 2000   |        | 1999
|                                          |                                                                                                            |                                       |       |       |        |      |       |        |        |     
|                                          |                                                                                                            |                                      
|                                          |                                                                                                            | (In thousands, except per share data)
|Consolidated Statements of
    Operations |                                                                                                            |                                       |       |       |        |      |       |        |        |      |        |        |        |  |        |        |        |  |        |       
|Revenue:                                  |                                                                                                            |                                       |       |       |        |      |       |        |        |      |        |        |        |  |        |        |        |  |        |       
|                                          | License                                                                                                    |                                       | $     | 3,232 |        |      | $     | 2,119  |        |      | $      | 13,807 |        |  | $      | 29,294 |        |  | $      | 18,514 |       
|                                          | Service                                                                                                    |                                       |       | 3,270 |        |      |       | 4,228  |        |      |        | 6,831  |        |  |        | 9,052  |        |  |        | 4,749  |       
|                                          |                                                                                                            |                                       |       |       |        |      |       |        |        |      |        |        |        |  |        |        |        |  |        |       
|                                          |                                                                                                            | Total revenue                         |       |       | 6,502  |      |       |        | 6,347  |      |        |        | 20,638 |  |        |        | 38,346 |  |        |        | 23,263 | 
|Cost of revenue:                          |                                                                                                            |                                       |       |       |        |      |       |        |        |      |        |        |        |  |        |        |        |  |        |       
|                                          | License                                                                                                    |                                       |       | 128   |        |      |       | 213    |        |      |        | 443    |        |  |        | 249    |        |  |        | 266    |       
|                                          | Service                                                                                                    |                                       |       | 1,057 |        |      |       | 3,050  |        |      |        | 5,238  |        |  |        | 6,051  |        |  |        | 3,911  |       
|                                          |                                                                                                            |                                       |       |       |        |      |       |        |        |      |        |        |        |  |        |        |        |  |        |       
|                                          |                                                                                                            | Total cost of revenue                 |       |       | 1,185  |      |       |        | 3,263  |      |        |        | 5,681  |  |        |        | 6,300  |  |        |        | 4,177  | 
|                                          |                                                                                                            |                                       |       |       |        |      |       |        |        |      |        |        |        |  |        |        |        |  |        |       
|Gross profit                              |                                                                                                            |                                       | 5,317 |       |        |      | 3,084 |        |        |      | 14,957 |        |        |  | 32,046 |        |        |  | 19,086 |       
|                                          |                                                                                                            |                                       |       |       |        |      |       |        |        |      |        |        |        |  |        |        |        |  |        |       
|Operating expenses:                       |                                                                                                            |                                       |       |       |        |      |       |        |        |      |        |        |        |  |        |        |        |  |        |       
|                                          | Research and development                                                                                   |                                       |       | 4,487 |        |      |       | 6,059  |        |      |        | 9,230  |        |  |        | 8,672  |        |  |        | 5,519  |       
|                                          | Sales and marketing                                                                                        |                                       |       | 6,272 |        |      |       | 10,298 |        |      |        | 22,882 |        |  |        | 28,479 |        |  |        | 18,876 |       
|                                          | General and administrative                                                                                 |                                       |       | 3,939 |        |      |       | 4,557  |        |      |        | 10,494 |        |  |        | 7,480  |        |  |        | 4,480  |       
|                                          | Restructuring charges                                                                                      |                                       |       | 443   |        |      |       | 4,678  |        |      |        | 2,825  |        |  |        |       |        |  |        |       |       
|                                          | Write-off and amortization of intellectual
    property, other intangibles and deferred stock compensation |                                       |       |      |        |      |       | 3,546  |        |      |        | 3,806  |        |  |        | 11,377 |        |  |        | 3,640  |       
|                                          |                                                                                                            |                                       |       |       |        |      |       |        |        |      |        |        |        |  |        |        |        |  |        |       
|                                          |                                                                                                            | Total operating expenses              |       |       | 15,141 |      |       |        | 29,138 |      |        |        | 49,237 |  |        |        | 56,008 |  |        |        | 32,515 | 
|                                          |                                                                                                            |                                       |       |       |        |      |       |        |        |      |        |        |        |  |        |        |        |  |        |       

13



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|                                                                                                |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                |  |                                      
|                                                                                                |  | Years Ended December 31,             
|                                                                                                |  |                                      
|                                                                                                |  | 2003                                  |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                                                                                |  |                                       |         |      |  |      |         |      |  |     
|                                                                                                |  |                                      
|                                                                                                |  | (In thousands, except per share data)
|Loss from operations                                                                            |  |                                       | (9,824  | )    |  |      | (26,054 | )    |  |      | (34,280 | ) |  |   | (23,962 | ) |  |   | (13,429 | )
|Interest and other income, net                                                                  |  |                                       | 98      |      |  |      | 1,172   |      |  |      | 2,037   |   |  |   | 4,749   |   |  |   | 1,940   |  
|Write down of equity investments                                                                |  |                                       | (1,000  | )    |  |      |        |      |  |      | (2,500  | ) |  |   |        |   |  |   |        |  
|                                                                                                |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net loss                                                                                        |  | $                                     | (10,726 | )    |  | $    | (24,882 | )    |  | $    | (34,743 | ) |  | $ | (19,213 | ) |  | $ | (11,489 | )
|                                                                                                |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share                                                            |  | $                                     | (0.27   | )    |  | $    | (0.63   | )    |  | $    | (0.91   | ) |  | $ | (0.52   | ) |  | $ | (0.59   | )
|                                                                                                |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Weighted average number of shares used in
    computing basic and diluted net loss per share(1) |  |                                       | 40,000  |      |  |      | 39,284  |      |  |      | 38,225  |   |  |   | 37,205  |   |  |   | 19,575  |  
|                                                                                                |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  

|                                                  |  |                    |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|------------------------------------------------- |  | ------------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                  |  |                   
|                                                  |  | As of December 31,
|                                                  |  |                   
|                                                  |  | 2003               |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                                  |  |                    |        |      |  |      |        |      |  |     
|                                                  |  |                   
|                                                  |  | (In thousands)    
|Consolidated Balance Sheet Data:                  |  |                    |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Cash, cash equivalents and short-term investments |  | $                  | 14,457 |      |  | $    | 23,757 |      |  | $    | 41,824 |  |  | $ | 64,734 |  |  | $ | 75,607 | 
|Working capital                                   |  |                    | 12,192 |      |  |      | 20,334 |      |  |      | 37,905 |  |  |   | 63,916 |  |  |   | 71,323 | 
|Total assets                                      |  |                    | 18,515 |      |  |      | 29,409 |      |  |      | 56,512 |  |  |   | 90,374 |  |  |   | 86,049 | 
|Total shareholders equity                        |  | $                  | 12,961 |      |  | $    | 22,521 |      |  | $    | 46,581 |  |  | $ | 78,430 |  |  | $ | 73,129 | 



---



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






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 report, as well as the section on Risk
Factors that is set forth in Item 1 of Part I of
this report. 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 Annual Report.

We provide offline Web software that enables
companies to enhance the value of their technology investments
by offering mobile and remote employees offline access to
portals, intranets and other Web-based applications and content.
Our products allow 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 information. Our
products are designed to reduce network costs and improve the
productivity of mobile workforces.

Our flagship product, BackWeb Offline Access
Server integrates with portal frameworks, intranets, and
Websites to extend their access to users who are remote with
poor connectivity and users who are frequently disconnected from
the network. Its two-way synchronization capability enables
field personnel to both access and publish to the portal,
intranet or Website while disconnected, creating greater
efficiency and improved data accuracy and value. Using HTML-type
tags, our customers can easily offline-enable their Websites,
intranets and portals without rewriting code. This allows for
the creation of an offline end-user experience that is
essentially equal to being online.

At the core of BackWeb Offline Access Server is
its patented Polite synchronization technology that can
distribute large amounts of data over narrow bandwidth
connections. This Polite synchronization technology uses
network-sensitive background content delivery that can deliver
large amounts of data with minimal impact on the performance of
other network applications. This allows organizations to
efficiently target and deliver sizeable digital data in any
format to users desktops throughout the extended
enterprise.

14



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##### Table of Contents



Since our inception, our revenue has been
primarily derived from licensing our products and from
associated maintenance fees and consulting services. Our
products are marketed worldwide primarily through our direct
sales force. We also have generated revenue through business
partners via our reseller and OEM channel. Since the latter half
of 2002, our direct sales force has accounted for a significant
majority of our revenue. While we expect our indirect channels
to grow, our direct sales efforts will continue to generate most
of our revenue over the next twelve months.

Critical Accounting Policies

The preparation of financial statements and
related disclosures in conformity with accounting principles
generally accepted in the United States requires us to make
judgments, assumptions and estimates that affect the amounts
reported in the Consolidated Financial Statements and
accompanying notes. We consider the accounting polices described
below to be our critical accounting polices. These critical
accounting policies are impacted significantly by judgments,
assumptions and estimates used in the preparation of the
Consolidated Financial Statements and actual results could
differ materially from the amounts reported based on these
policies.

Our critical accounting policies are as follows:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | revenue recognition;                                                                                                                
|
| |  | estimating valuation allowances and accrued
    liabilities, specifically the trade receivable allowances for
    doubtful accounts;
|
| |  | reviewing intellectual property and other
    intangible assets arising on capitalized purchased technology
    for impairment;     
|
| |  | review of equity investments for
    impairment; and                                                                                
|
| |  | accrued restructuring charges                                                                                                       



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

We derive revenue primarily from software license
fees, maintenance service fees, and consulting services paid to
us directly by corporate customers and resellers and, to a
lesser extent, from royalty fees from OEMs. Revenue derived from
resellers is not recognized until the software is sold through
to the end user. Royalty revenue is recognized when reported to
us by the OEM after delivery of the applicable products. In
addition, royalty revenue can arise from the right to use our
products. 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, and SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain
Transactions (SOP 98-9). 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.

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.

Revenue from software license agreements is
recognized when all of the following criteria are met as set
forth in SOP 97-2: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the
fee is fixed or determinable; and (4) 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

15



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##### Table of Contents



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.


We license our products on a perpetual and on a
term basis. We recognize license revenue arising from perpetual
licenses and multi-year term licenses in the accounting period
that all revenue recognition criteria have been met, which is
generally upon delivery of the software to the end user. For
term licenses with a contract period of less than two years,
revenue is recognized on a monthly basis.

At the time of each transaction, we assess
whether the fee associated with our license sale is fixed or
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. In determining whether the fee is fixed or determinable, we
compare the payment terms of the transaction to our normal
payment terms. 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 we defer the fee and recognize revenue at
the time collection becomes reasonably assured, which is
generally upon the receipt of cash.

Service revenue is primarily comprised of revenue
from standard maintenance agreements and consulting services.
Customers licensing products generally purchase the standard
annual maintenance agreement for the products. We recognize
revenue from maintenance over the contractual period of the
maintenance agreement, which is generally one year. Maintenance
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 recognize this revenue over the contractual
maintenance period. Consulting services are billed at an
agreed-upon rate, plus out-of-pocket expenses. We generally
charge for our consulting services on a time and materials basis
and recognize revenue from such services as they are provided to
the customer. We account for fixed fee service arrangements in a
similar manner to an agreement containing an acceptance clause.
Our arrangements do not generally include acceptance clauses.
However if an acceptance provision exists, then we defer revenue
recognition until we receive written acceptance of the product
from the customer.

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 Allowance for Doubtful
    Accounts

Management continually reviews the collectibility
of trade accounts receivable and the adequacy of the allowance
for doubtful accounts against the trade accounts receivable.
Management specifically analyzes customer accounts, account
receivable aging reports, history of bad debts, the business or
industry sector to which the customer belongs, 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 imminent. During 2003 and 2002, within our accrual for
doubtful accounts we provided for approximately $104,000 and
$205,000, respectively.

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. A discussion of our outstanding material litigation is
contained in Part I, Item 3 Legal
Proceedings of this Form 10-K.

16



---



##### Table of Contents





| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | Reviewing Intellectual Property and Other
    Intangible Assets Arising on Capitalized Purchased Technology
    for Impairment

We assess the impairment of long-lived assets,
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; and
|
| |  | Significant negative industry or economic trends.                                                          

The determination that the carrying value of
intangibles, and long-lived assets may not be recoverable is
based upon the existence of one or both of the above factors.

As discussed in Note 2 of the Notes to the
Consolidated Financial Statements, we adopted
SFAS No. 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), we changed our internal allocation of resources. We
believed that it was unlikely that any future value would be
realized from the wireless technology we acquired from Mobix in
2000. As of June 30, 2002, the carrying value of that
wireless technology, which was recorded as an intangible asset,
was $1.8 million. Based on SFAS No. 144, our
intangible asset carrying value of $1.8 million was in
excess of its fair value of zero. Therefore, we wrote-off the
$1.8 million remaining carrying value of that intangible
asset during the three months ended September 30, 2002. Net
intangible assets at December 31, 2002 and 2003 were zero.



| |                                                
| | -----------------------------------------------
| | Review of Equity Investments for
    Impairment

We have made equity investments in other
companies that we believed were in our best interests and
aligned with our strategic objectives. Before an investment is
executed, our 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 to
participate on such Board of Directors 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
recorded an impairment charge against one of our equity
investments for the full $2.5 million amount of such equity
investment. In March 2003, management reviews determined that
our one remaining equity investment was impaired and
accordingly, we recorded an impairment charge for its full
$1.0 million book value.



| |                                          
| | -----------------------------------------
| | Review of Accrued Restructuring
    Costs

We have made decisions to provide for certain
costs associated with corporate restructurings we believed were
required in order to align our cost structure with changing
market conditions. Before a charge is executed, our executive
management and Board of Directors approve the plan. Our
restructuring plans executed in each of our last three fiscal
years resulted in a reduction in headcount and the consolidation
of facilities through the closing of excess field offices. Our
restructuring charges included accruals for the estimated loss
on facilities that we intend to either sublease or substantially
restructure the lease arrangements with our landlords. We
reassess this liability each period based on market conditions.
Revisions to our estimates of this liability could materially
impact our operating results and financial position in future
periods if anticipated events and key assumptions either change
or do not materialize. During 2001, our Board of Directors
approved a restructuring plan, and we recorded a charge of
$2.8 million. In 2002, we recorded a charge of
$4.7 million. In the fourth quarter of 2003, management
reviews determined that an additional reserve of $443,000 was
needed related to excess leased facilities that were part of the
2002 plan.

17



---



##### Table of Contents



The following table sets forth the results of
operations, for the periods indicated, expressed as a percentage
of total revenue.

|                                 |                                                                                                             |                          |      |      |     |      |      |     |     |  |      |     |     | 
|-------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------ | ---- | ---- | --- | ---- | ---- | --- | --- |  | ---- | --- | --- | 
|                                 |                                                                                                             |                         
|                                 |                                                                                                             | Year Ended December 31, 
|                                 |                                                                                                             |                         
|                                 |                                                                                                             | 2003                     |      | 2002 |     | 2001
|                                 |                                                                                                             |                          |      |      |     |     
|Revenue:                         |                                                                                                             |                          |      |      |     |      |      |     |     |  |      |    
|                                 | License                                                                                                     |                          |      | 50   | %   |      |      | 33  | %   |  |      | 67  | %  
|                                 | Service                                                                                                     |                          |      | 50   |     |      |      | 67  |     |  |      | 33  |    
|                                 |                                                                                                             |                          |      |      |     |      |      |     |     |  |      |    
|                                 |                                                                                                             | Total revenue            |      |      | 100 |      |      |     | 100 |  |      |     | 100 | 
|Cost of revenue:                 |                                                                                                             |                          |      |      |     |      |      |     |     |  |      |    
|                                 | License                                                                                                     |                          |      | 2    |     |      |      | 3   |     |  |      | 2   |    
|                                 | Service                                                                                                     |                          |      | 16   |     |      |      | 48  |     |  |      | 25  |    
|                                 |                                                                                                             |                          |      |      |     |      |      |     |     |  |      |    
|                                 |                                                                                                             | Total cost of revenue    |      |      | 18  |      |      |     | 51  |  |      |     | 28  | 
|                                 |                                                                                                             |                          |      |      |     |      |      |     |     |  |      |    
|Gross profit                     |                                                                                                             |                          | 82   |      |     |      | 49   |     |     |  | 72   |    
|                                 |                                                                                                             |                          |      |      |     |      |      |     |     |  |      |    
|Operating expenses:              |                                                                                                             |                          |      |      |     |      |      |     |     |  |      |    
|                                 | Research and development                                                                                    |                          |      | 69   |     |      |      | 95  |     |  |      | 45  |    
|                                 | Sales and marketing                                                                                         |                          |      | 96   |     |      |      | 162 |     |  |      | 111 |    
|                                 | General and administrative                                                                                  |                          |      | 61   |     |      |      | 72  |     |  |      | 51  |    
|                                 | Restructuring charges                                                                                       |                          |      | 7    |     |      |      | 74  |     |  |      | 14  |    
|                                 | Write-off and amortization of intellectual
    property, other intangibles, and deferred stock compensation |                          |      |     |     |      |      | 56  |     |  |      | 18  |    
|                                 |                                                                                                             |                          |      |      |     |      |      |     |     |  |      |    
|                                 |                                                                                                             | Total operating expenses |      |      | 233 |      |      |     | 459 |  |      |     | 239 | 
|Loss from operations             |                                                                                                             |                          | (151 | )    |     |      | (410 | )   |     |  | (167 | )  
|                                 |                                                                                                             |                          |      |      |     |      |      |     |     |  |      |    
|Interest and other income, net   |                                                                                                             |                          | 2    |      |     |      | 18   |     |     |  | 10   |    
|Write down of equity investments |                                                                                                             |                          | (15  | )    |     |      |     |     |     |  | (12  | )  
|                                 |                                                                                                             |                          |      |      |     |      |      |     |     |  |      |    
|Net loss                         |                                                                                                             |                          | (165 | )%   |     |      | (392 | )%  |     |  | (169 | )% 
|                                 |                                                                                                             |                          |      |      |     |      |      |     |     |  |      |    

Results of Operations



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

|              |  |                                    |       |        |  |   |     |        |  |   |     |   |  |      |       |  |  |   |         |   |  |  |       |    |  |   |        | 
|------------- |  | ---------------------------------- | ----- | ------ |  | - | --- | ------ |  | - | --- | - |  | ---- | ----- |  |  | - | ------- | - |  |  | ----- | -- |  | - | ------ | 
|              |  |                                   
|              |  | December 31,                      
|              |  |                                   
|              |  |                                    |       |        |  |   |     |        |  |  
|              |  |                                    |       | Change |  |   |     | Change |  |  
|              |  |                                    |       |        |  |   |     |        |  |  
|              |  | 2003                               |       | $      |  | % |     | 2002   |  | $ |     | % |  | 2001
|              |  |                                    |       |        |  |   |     |        |  |   |     |   |  |     
|              |  |                                   
|              |  | (In thousands, except percentages)
|Total revenue |  | $                                  | 6,502 |        |  | $ | 155 |        |  |   | 2.4 | % |  | $    | 6,347 |  |  | $ | (14,291 | ) |  |  | (69.2 | )% |  | $ | 20,638 | 

We derive revenue from licensing and providing
maintenance and consulting services for our BackWeb Offline
Access Server, BackWeb Polite Sync Server, and BackWeb
e-Accelerator products. The increase in total revenue in 2003
was due to an increase in license fees of $1.1 million and
an increase in consulting fees of $400,000. These increases were
offset by a decrease in maintenance revenue of
$1.3 million. The re-positioning of the Company during 2002
to focusing on licensing our new product offering, the BackWeb
Offline Access Server, resulted in increased license and
consulting revenue associated with this emerging product line,
offset by decreases in maintenance revenue associated with our
other product lines which were not strongly emphasized and
marketed. Further discussion of the changes in the components of
total revenue is included in the sections below.

The decrease in total revenue in 2002 was due
primarily to a $9.4 million decrease in revenue from one
OEM customer, whose contract expired during 2002. We negotiated
a new reseller agreement with this

18



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##### Table of Contents



customer in September 2003 for which revenue has
thus far been insignificant. The new reseller agreement has no
minimums or guarantees and we are not able to quantify the
amount of revenue, if any, that may be generated in future
periods from the new agreement. The remaining $4.9 million
of the decrease in 2002 was due to the decrease in the volume
and average size of license and consulting service deals. This
was 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 focus on licensing our new product offering,
the BackWeb Offline Access Server. We have limited visibility to
forecast revenue for 2004 and therefore we are unable to
quantify future overall trends in our total revenue. In the
sections below we discuss expected trends in the individual
components of our total revenue and in our product revenue mix.




| |                
| | ---------------
| | License Revenue

|                                 |  |                                    |       |        |  |   |       |        |  |   |      |   |  |      |       |   |  |   |         |   |  |  |       |    |  |   |        |  
|-------------------------------- |  | ---------------------------------- | ----- | ------ |  | - | ----- | ------ |  | - | ---- | - |  | ---- | ----- | - |  | - | ------- | - |  |  | ----- | -- |  | - | ------ | -
|                                 |  |                                   
|                                 |  | December 31,                      
|                                 |  |                                   
|                                 |  |                                    |       |        |  |   |       |        |  |  
|                                 |  |                                    |       | Change |  |   |       | Change |  |  
|                                 |  |                                    |       |        |  |   |       |        |  |  
|                                 |  | 2003                               |       | $      |  | % |       | 2002   |  | $ |      | % |  | 2001
|                                 |  |                                    |       |        |  |   |       |        |  |   |      |   |  |     
|                                 |  |                                   
|                                 |  | (In thousands, except percentages)
|License revenue                  |  | $                                  | 3,232 |        |  | $ | 1,113 |        |  |   | 52.5 | % |  | $    | 2,119 |   |  | $ | (11,688 | ) |  |  | (84.7 | )% |  | $ | 13,807 |  
|As a percentage of total revenue |  |                                    | 49.7  | %      |  |   |      |        |  |   |     |   |  |      | 33.4  | % |  |   |        |   |  |  |      |    |  |   | 66.9   | %

License revenue increased significantly in 2003
primarily due to our re-positioning during 2002 to focusing on
licensing our BackWeb Offline Access Server. In 2003, license
revenue associated with BackWeb Offline Access Server increased
by approximately 660.0% to approximately 60.1% of license
revenue. License revenue associated with our e-Accelerator
product decreased by approximately 75.0% to approximately 4.6%
of license revenue, while license revenue from our BackWeb
Polite Synch Server product decreased by approximately 7.3% to
approximately 35.3% of license revenue.

The $11.7 million decrease in license
revenue in 2002 was primarily due to the $9.0 million
decrease in license revenue from the OEM customer whose contract
terminated during 2002. The remaining $2.7 million decrease
was due to a decrease in the volume and average size of our
license deals. This was 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 focus on licensing our BackWeb
Offline Access Server, as the new product line was beginning to
generate revenue and our existing products began to see declines
in license revenue. Our license revenue during 2002 was largely
dependent on our older products, especially the BackWeb Polite
Synch Server product.

During 2004 we expect license revenue from
BackWeb Offline Access Server to increase both in absolute
dollars and as a percentage of the overall product portfolio. We
expect to continue to generate license revenue from our older
products, in particular the BackWeb Polite Synch Server product,
but we expect this to continue to decrease as a percentage of
the overall product mix.



| |                
| | ---------------
| | Service Revenue

|                                 |  |                                    |       |        |  |   |      |        |  |   |       |    |  |      |       |   |  |   |        |   |  |  |       |    |  |   |       |  
|-------------------------------- |  | ---------------------------------- | ----- | ------ |  | - | ---- | ------ |  | - | ----- | -- |  | ---- | ----- | - |  | - | ------ | - |  |  | ----- | -- |  | - | ----- | -
|                                 |  |                                   
|                                 |  | December 31,                      
|                                 |  |                                   
|                                 |  |                                    |       |        |  |   |      |        |  |  
|                                 |  |                                    |       | Change |  |   |      | Change |  |  
|                                 |  |                                    |       |        |  |   |      |        |  |  
|                                 |  | 2003                               |       | $      |  | % |      | 2002   |  | $ |       | %  |  | 2001
|                                 |  |                                    |       |        |  |   |      |        |  |   |       |    |  |     
|                                 |  |                                   
|                                 |  | (In thousands, except percentages)
|Service revenue                  |  | $                                  | 3,270 |        |  | $ | (958 | )      |  |   | (22.7 | )% |  | $    | 4,228 |   |  | $ | (2,603 | ) |  |  | (38.1 | )% |  | $ | 6,831 |  
|As a percentage of total revenue |  |                                    | 50.3  | %      |  |   |     |        |  |   |      |    |  |      | 66.6  | % |  |   |       |   |  |  |      |    |  |   | 33.1  | %

Service revenue consists of maintenance,
consulting and training services. The decrease in service
revenue in 2003 was attributable to a decrease in maintenance
revenue associated with our BackWeb Polite Synch Server and
BackWeb e-Accelerator products. Overall, maintenance revenue
decreased by $1.3 million, or 38.0%, as customers began
terminating their maintenance agreements for these older
products. This development reflects our re-positioning of the
Company during 2002 to focusing on licensing our new BackWeb
Offline Access Server and de-emphasizing our older products, the
relative age of a number of our customers installments
utilizing our older products, and an overall trend in the IT
industry toward reducing

19



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maintenance obligations This decrease in
maintenance revenue was partially offset by an increase of
$377,000, or 52.7%, in consulting revenue. The vast majority of
our consulting revenue was associated with increased customer
deployments of our BackWeb Offline Access Server.


The decrease in service revenue in 2002 was
primarily related to the decrease in our maintenance revenue
directly attributable to the reduction in our license revenue, a
decrease in maintenance renewals due to global economic
conditions and the overall trend in the IT industry toward
reducing maintenance obligations, and a decrease in consulting
revenue directly related to the reduced volume of license
transactions.

During 2004 we expect service revenue to remain
relatively flat, or to increase slightly. We expect that
maintenance revenue associated with our older products will
continue to decrease, offset by a in maintenance revenue
associated with BackWeb Offline Access Server. Any increase in
maintenance revenue from BackWeb Offline Access Server, however,
is dependent upon an absolute dollar level increase in license
revenue from that product, which cannot be assured. Further,
while we expect consulting revenue to increase in 2004, this too
is dependent on increased licenses of our BackWeb Offline Access
Server.

In 2003, 2002, and 2001, revenue from our
relationship with Hewlett-Packard Company accounted for
$1.0 million or 14.7% of total revenue, $200,000 or 3.2% of
total revenue, and $1.3 million or 6.3% of total revenue,
respectively, and revenue from our relationship with SAP
accounted for $107,000, or 1.6% of total revenue,
$1.3 million, or 20.5% of total revenue, and
$10.7 million, or 51.8% of total revenue, respectively. 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 24.0%, 46.3%, and 70.1% of our total revenue in the twelve
months ended December 31, 2003, 2002 and 2001,
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 decline in revenue generated outside of the
United States was attributable to the geographical distribution
of revenue that was associated with the OEM agreement that ended
during 2002 as well as more significant reductions in sales
personnel and activities in Europe relative to the United States.



| |                
| | ---------------
| | Cost of Revenue

|                                 |  |                                    |       |        |  |   |        |        |  |   |       |    |  |      |       |   |  |   |        |   |  |  |       |    |  |   |       |  
|-------------------------------- |  | ---------------------------------- | ----- | ------ |  | - | ------ | ------ |  | - | ----- | -- |  | ---- | ----- | - |  | - | ------ | - |  |  | ----- | -- |  | - | ----- | -
|                                 |  |                                   
|                                 |  | December 31,                      
|                                 |  |                                   
|                                 |  |                                    |       |        |  |   |        |        |  |  
|                                 |  |                                    |       | Change |  |   |        | Change |  |  
|                                 |  |                                    |       |        |  |   |        |        |  |  
|                                 |  | 2003                               |       | $      |  | % |        | 2002   |  | $ |       | %  |  | 2001
|                                 |  |                                    |       |        |  |   |        |        |  |   |       |    |  |     
|                                 |  |                                   
|                                 |  | (In thousands, except percentages)
|Cost of revenue                  |  | $                                  | 1,185 |        |  | $ | (2,078 | )      |  |   | (63.7 | )% |  | $    | 3,263 |   |  | $ | (2,418 | ) |  |  | (42.6 | )% |  | $ | 5,681 |  
|As a percentage of total revenue |  |                                    | 18.2  | %      |  |   |       |        |  |   | (33.2 | )% |  |      | 51.4  | % |  |   |       |   |  |  | 23.9  | %  |  |   | 27.5  | %

The decrease in cost of revenue in absolute
dollars in 2003 and 2002 was primarily due to the reduction in
personnel, facilities, and associated general overhead within
our support department as a result of organizational
restructurings in 2001 and 2002 that significantly reduced
personnel across the Company. In 2003, the decrease in cost of
revenue as a percentage of total revenue was due to a shift in
the revenue mix from having a majority of our revenue from lower
gross margin service revenue to having a larger portion of our
revenue from higher gross margin license revenue. In 2002, the
increase in cost of revenue as a percentage of total revenue was
due to a shift in the revenue mix from having a majority of our
revenue from higher gross margin license deals to having a
larger portion of our revenue from lower gross margin service
revenue.

20



---



##### Table of Contents





| |                        
| | -----------------------
| | Cost of License Revenue

Cost of license revenue consists primarily of
expenses related to media duplication, packaging of products,
and royalty payables to OEM vendors.

|                                   |  |                                    |     |        |  |   |     |        |  |   |       |    |  |      |      |   |  |   |      |   |  |  |       |    |  |   |     |  
|---------------------------------- |  | ---------------------------------- | --- | ------ |  | - | --- | ------ |  | - | ----- | -- |  | ---- | ---- | - |  | - | ---- | - |  |  | ----- | -- |  | - | --- | -
|                                   |  |                                   
|                                   |  | December 31,                      
|                                   |  |                                   
|                                   |  |                                    |     |        |  |   |     |        |  |  
|                                   |  |                                    |     | Change |  |   |     | Change |  |  
|                                   |  |                                    |     |        |  |   |     |        |  |  
|                                   |  | 2003                               |     | $      |  | % |     | 2002   |  | $ |       | %  |  | 2001
|                                   |  |                                    |     |        |  |   |     |        |  |   |       |    |  |     
|                                   |  |                                   
|                                   |  | (In thousands, except percentages)
|Cost of license revenue            |  | $                                  | 128 |        |  | $ | (85 | )      |  |   | (39.9 | )% |  | $    | 213  |   |  | $ | (230 | ) |  |  | (51.9 | )% |  | $ | 443 |  
|As a percentage of license revenue |  |                                    | 4.0 | %      |  |   |    |        |  |   | (6.1  | )% |  |      | 10.1 | % |  |   |     |   |  |  | 6.8   | %  |  |   | 3.2 | %
|As a percentage of total revenue   |  |                                    | 2.0 | %      |  |   |    |        |  |   | (1.4  | )% |  |      | 3.4  | % |  |   |     |   |  |  | 1.2   | %  |  |   | 2.1 | %

Cost of license revenue decreased in absolute
dollars in both 2003 and 2002 due to a shift in the license
revenue mix away from products with higher royalties associated
with them. In 2002, cost of license revenue was higher as a
percentage of license revenue when compared to 2001 due to
decreased overall license revenue relative to the fixed cost
elements of royalties payable for embedded third party software.
In 2003, cost of license revenue was lower as a percentage of
license revenue when compared to 2002 due to a decrease in
revenue from third parties, including a decrease in revenue from
products with higher royalties associated with them, resulting
in a decrease in royalties payable.

We expect our cost of license revenue as a
percentage of license revenue to remain at approximately the
same levels as 2003 during 2004.



| |                        
| | -----------------------
| | Cost of Service Revenue

Cost of service revenue consists primarily of
expenses related to the personnel expenses and overhead of our
customer support and professional service organizations,
including related expenses of BackWeb consultants, third party
consultants, and contractors.

|                                   |  |                                    |       |        |  |   |        |        |  |   |       |    |  |      |       |   |  |   |        |   |  |  |       |    |  |   |       |  
|---------------------------------- |  | ---------------------------------- | ----- | ------ |  | - | ------ | ------ |  | - | ----- | -- |  | ---- | ----- | - |  | - | ------ | - |  |  | ----- | -- |  | - | ----- | -
|                                   |  |                                   
|                                   |  | December 31,                      
|                                   |  |                                   
|                                   |  |                                    |       |        |  |   |        |        |  |  
|                                   |  |                                    |       | Change |  |   |        | Change |  |  
|                                   |  |                                    |       |        |  |   |        |        |  |  
|                                   |  | 2003                               |       | $      |  | % |        | 2002   |  | $ |       | %  |  | 2001
|                                   |  |                                    |       |        |  |   |        |        |  |   |       |    |  |     
|                                   |  |                                   
|                                   |  | (In thousands, except percentages)
|Cost of service revenue            |  | $                                  | 1,057 |        |  | $ | (1,993 | )      |  |   | (65.3 | )% |  | $    | 3,050 |   |  | $ | (2,278 | ) |  |  | (42.8 | )% |  | $ | 5,238 |  
|As a percentage of service revenue |  |                                    | 32.3  | %      |  |   |       |        |  |   | (39.8 | )% |  |      | 72.1  | % |  |   |       |   |  |  | (5.9  | )% |  |   | 78.0  | %
|As a percentage of total revenue   |  |                                    | 16.3  | %      |  |   |       |        |  |   | (31.8 | )% |  |      | 48.1  | % |  |   |       |   |  |  | 22.2  | %  |  |   | 25.8  | %

The decrease in absolute dollars of cost of
service revenue in 2003 and 2002 was primarily due to the
reduced level of payroll and related expenses together with a
reduction in the associated overhead expenses that resulted from
the reorganizations that occurred in October 2002 and July 2001,
and continuing cost containment and reduction programs applied
throughout 2003. The decrease in cost of service revenue as a
percentage of service revenue in both periods was primarily a
result of a reduction in infrastructure and overhead expenses
associated with both our support and professional services
departments, primarily stemming from the reorganization in
October 2002.

We expect cost of service revenue to increase
marginally and remain relatively constant as a percentage of
service revenue during 2004.

21



---



##### Table of Contents





| |                   
| | ------------------
| | Operating Expenses



| |                         
| | ------------------------
| | Research and Development

Research and development expenses consist of
personnel costs, equipment and supply costs for our development
efforts. We charge these expenses to operations as they are
incurred. We have our research and development facilities in
Israel.

|                                 |  |                                    |       |        |  |   |        |        |  |   |       |    |  |      |       |   |  |   |        |   |  |  |       |    |  |   |       |  
|-------------------------------- |  | ---------------------------------- | ----- | ------ |  | - | ------ | ------ |  | - | ----- | -- |  | ---- | ----- | - |  | - | ------ | - |  |  | ----- | -- |  | - | ----- | -
|                                 |  |                                   
|                                 |  | December 31,                      
|                                 |  |                                   
|                                 |  |                                    |       |        |  |   |        |        |  |  
|                                 |  |                                    |       | Change |  |   |        | Change |  |  
|                                 |  |                                    |       |        |  |   |        |        |  |  
|                                 |  | 2003                               |       | $      |  | % |        | 2002   |  | $ |       | %  |  | 2001
|                                 |  |                                    |       |        |  |   |        |        |  |   |       |    |  |     
|                                 |  |                                   
|                                 |  | (In thousands, except percentages)
|Research and development         |  | $                                  | 4,487 |        |  | $ | (1,572 | )      |  |   | (25.9 | )% |  | $    | 6,059 |   |  | $ | (3,171 | ) |  |  | (34.4 | )% |  | $ | 9,230 |  
|As a percentage of total revenue |  |                                    | 69.0  | %      |  |   |       |        |  |   | (26.5 | )% |  |      | 95.5  | % |  |   |       |   |  |  | 50.8  | %  |  |   | 44.7  | %

The decrease in research and development expenses
during 2003 was primarily due to lower compensation and third
party contractor costs and a reduction in depreciation expense.
During 2003, we realized a full year of savings resulting from
the reorganization of the Company in October 2002. Additionally,
we significantly reduced our use of outside contractors and
reduced headcount in our research and development department
from 37 to 30 full-time employees through attrition and
personnel management. The combination of these items reduced
payroll and related expenses by approximately $750,000. A
reduction in depreciation expense as result of reduced personnel
and a significant decline in the acquisition of new property and
equipment, resulted in an expense reduction of approximately
$575,000.

The decrease in research and development expenses
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, and
the realization of a full year of savings from the
reorganization of the Company in July 2001. Our research and
development expenses also decreased in 2002 due to more
effective cost management and the restructuring of our office
lease costs in Israel following the reorganization.

We believe that continued investment in research
and development is important in order to attain our strategic
objectives. However, we intend to continually monitor expenses
across the organization and continually strive for cost
reductions, particularly in areas such as facilities, travel and
entertainment, and telecommunications expenses. As a result, we
expect that research and development expenses will moderately
decrease in terms of absolute dollars during 2004.



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

Sales and marketing expenses consist of personnel
and related costs for our direct sales force and our product
management, marketing, business development, and operations
management employees, together with the costs of marketing
programs, including trade shows and other related direct
expenses and general overhead.

|                                 |  |                                    |       |        |  |   |        |        |  |   |       |    |  |      |        |   |  |   |         |   |  |  |       |    |  |   |        |  
|-------------------------------- |  | ---------------------------------- | ----- | ------ |  | - | ------ | ------ |  | - | ----- | -- |  | ---- | ------ | - |  | - | ------- | - |  |  | ----- | -- |  | - | ------ | -
|                                 |  |                                   
|                                 |  | December 31,                      
|                                 |  |                                   
|                                 |  |                                    |       |        |  |   |        |        |  |  
|                                 |  |                                    |       | Change |  |   |        | Change |  |  
|                                 |  |                                    |       |        |  |   |        |        |  |  
|                                 |  | 2003                               |       | $      |  | % |        | 2002   |  | $ |       | %  |  | 2001
|                                 |  |                                    |       |        |  |   |        |        |  |   |       |    |  |     
|                                 |  |                                   
|                                 |  | (In thousands, except percentages)
|Sales and marketing              |  | $                                  | 6,272 |        |  | $ | (4,026 | )      |  |   | (39.1 | )% |  | $    | 10,298 |   |  | $ | (12,584 | ) |  |  | (55.0 | )% |  | $ | 22,882 |  
|As a percentage of total revenue |  |                                    | 96.5  | %      |  |   |       |        |  |   | (65.8 | )% |  |      | 162.3  | % |  |   |        |   |  |  | 51.4  | %  |  |   | 110.9  | %

The decrease in sales and marketing expenses
during 2003 resulted primarily from a reduction in personnel
related costs, marketing programs, facilities expenses, and
depreciation. Realizing the full effect of the reorganization of
the Company in October 2002, plus additional personnel expense
management during 2003, resulted in a savings of
$2.5 million in payroll and related expenses. We
significantly reduced our marketing program expenses beginning
in the latter half of 2002 and continuing throughout 2003,
resulting in savings of approximately $600,000. The closing of
several sales and marketing offices in conjunction with the
October 2002 reorganization resulted in a savings in 2003 of
approximately $500,000. A reduction in

22



---



##### Table of Contents



depreciation expense as result of reduced
personnel and a significant decline in the acquisition of new
property and equipment, resulted in an expense savings of
approximately $300,000.


The decrease in sales and marketing expenses
during 2002 was due primarily to the reduced level of headcount
and related costs as a result of the reorganizations that
occurred in both October 2002 and July 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 commissions earned, which was
directly related to the lower levels of revenue, and reduced
advertising and marketing program expenses and underlying fixed
overhead. The increase in sales and marketing expenses as a
percentage of total revenue during 2002 was due to a larger
percentage decrease in total revenue as compared with the
decrease in sales and marketing expenses.

We consider maintaining a marketing presence and
an effective sales organization to be vital to the achievement
of our strategic objectives. Though we intend to continually
monitor expenses across the organization and continually strive
for cost reductions, we expect to selectively increase our
direct sales organization when and where appropriate. We expect
that any reduced expenses in areas of facilities, travel and
entertainment, and telecommunications expenses to be offset by
increased personnel expenses and, thus, we expect sales and
marketing expenses will remain relatively flat during 2004.



| |                           
| | --------------------------
| | 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, and
legal, as well as the provision for bad debts.

|                                 |  |                                    |       |        |  |   |      |        |  |   |       |    |  |      |       |   |  |   |        |   |  |  |       |    |  |   |        |  
|-------------------------------- |  | ---------------------------------- | ----- | ------ |  | - | ---- | ------ |  | - | ----- | -- |  | ---- | ----- | - |  | - | ------ | - |  |  | ----- | -- |  | - | ------ | -
|                                 |  |                                   
|                                 |  | December 31,                      
|                                 |  |                                   
|                                 |  |                                    |       |        |  |   |      |        |  |  
|                                 |  |                                    |       | Change |  |   |      | Change |  |  
|                                 |  |                                    |       |        |  |   |      |        |  |  
|                                 |  | 2003                               |       | $      |  | % |      | 2002   |  | $ |       | %  |  | 2001
|                                 |  |                                    |       |        |  |   |      |        |  |   |       |    |  |     
|                                 |  |                                   
|                                 |  | (In thousands, except percentages)
|General and administrative       |  | $                                  | 3,939 |        |  | $ | (618 | )      |  |   | (13.6 | )% |  | $    | 4,557 |   |  | $ | (5,937 | ) |  |  | (56.6 | )% |  | $ | 10,494 |  
|As a percentage of total revenue |  |                                    | 60.6  | %      |  |   |     |        |  |   | (11.2 | )% |  |      | 71.8  | % |  |   |       |   |  |  | 21.0  | %  |  |   | 50.8   | %

During 2003, the decrease in general and
administrative expenses was primarily due to a reduction in
personnel and facilities expenses associated with the
reorganization of the Company in October 2002. Realizing the
full effect of the reorganization in October 2002, resulted in a
reduction of approximately $400,000 in payroll and related
expenses. In addition, the closing and consolidation of several
offices in conjunction with the October 2002 reorganization
resulted in a savings in 2003 of approximately $250,000. These
reductions were offset in part by an increase in legal and other
professional fees associated with the Companys real estate
holdings, IPO litigation, expenses related to the
liquidation of certain European entities, expenses related to
being a public company, and various employee litigation matters.
These items increased in the aggregate during 2003 by
approximately $200,000.

The decrease in general and administrative
expenses during 2002, was due in large part to a reduction of
$2.7 million of bad debt expense recorded in 2001.
Excluding the provision for bad debts, the decrease in 2002 was
primarily a result of decreased payroll and related expenses as
well as reductions in underlying fixed overhead expenses
following the reduction in our headcount from 29 to
16 full-time employees resulting from the reorganization in
October 2002, as well as a full years benefit from the
reductions as a result of the reorganization in July 2001.

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
realizing the full effects of the October 2002 reorganization
and more effective cost management.

23



---



##### Table of Contents





| |                      
| | ---------------------
| | Restructuring Charges

|                                 |  |                                    |     |        |  |   |        |        |  |   |       |    |  |      |       |   |  |   |       |  |  |  |      |   |  |   |       |  
|-------------------------------- |  | ---------------------------------- | --- | ------ |  | - | ------ | ------ |  | - | ----- | -- |  | ---- | ----- | - |  | - | ----- |  |  |  | ---- | - |  | - | ----- | -
|                                 |  |                                   
|                                 |  | December 31,                      
|                                 |  |                                   
|                                 |  |                                    |     |        |  |   |        |        |  |  
|                                 |  |                                    |     | Change |  |   |        | Change |  |  
|                                 |  |                                    |     |        |  |   |        |        |  |  
|                                 |  | 2003                               |     | $      |  | % |        | 2002   |  | $ |       | %  |  | 2001
|                                 |  |                                    |     |        |  |   |        |        |  |   |       |    |  |     
|                                 |  |                                   
|                                 |  | (In thousands, except percentages)
|Restructuring and other charges  |  | $                                  | 443 |        |  | $ | (4,235 | )      |  |   | (90.5 | )% |  | $    | 4,678 |   |  | $ | 1,853 |  |  |  | 65.6 | % |  | $ | 2,825 |  
|As a percentage of total revenue |  |                                    | 6.8 | %      |  |   |       |        |  |   | (66.9 | )% |  |      | 73.7  | % |  |   |      |  |  |  | 60.0 | % |  |   | 13.7  | %

During 2002, we implemented a restructuring plan
which included reducing our workforce by 61 employees, vacating
some facilities, canceling office service leases, and
writing-down fixed assets as a result of such 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. Additionally, in November 2003, we accrued
a charge of approximately $443,000, of which approximately
$289,000 related to the impairment of leased facilities in
Canada, $120,000 related to a charge for settlement of leased
space in San Jose, California, and approximately $34,000
related to other office lease impairment charges. For further
information related to this restructuring, see Note 9 of
the Notes to the Consolidated Financial Statements.

During 2001, we approved a restructuring plan
which included reducing our workforce by 63 employees,
vacating 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.



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

|                                                                   |  |                                    |     |        |  |   |        |        |  |   |        |    |  |      |       |   |  |   |       |  |  |  |       |   |  |   |     |  
|------------------------------------------------------------------ |  | ---------------------------------- | --- | ------ |  | - | ------ | ------ |  | - | ------ | -- |  | ---- | ----- | - |  | - | ----- |  |  |  | ----- | - |  | - | --- | -
|                                                                   |  |                                   
|                                                                   |  | December 31,                      
|                                                                   |  |                                   
|                                                                   |  |                                    |     |        |  |   |        |        |  |  
|                                                                   |  |                                    |     | Change |  |   |        | Change |  |  
|                                                                   |  |                                    |     |        |  |   |        |        |  |  
|                                                                   |  | 2003                               |     | $      |  | % |        | 2002   |  | $ |        | %  |  | 2001
|                                                                   |  |                                    |     |        |  |   |        |        |  |   |        |    |  |     
|                                                                   |  |                                   
|                                                                   |  | (In thousands, except percentages)
|Write-off of intellectual property and other
    intangible assets |  | $                                  |    |        |  | $ | (1,764 | )      |  |   | (100.0 | )% |  | $    | 1,764 |   |  | $ | 1,764 |  |  |  | 100.0 | % |  | $ |    |  
|As a percentage of total revenue                                   |  |                                    | 0.0 | %      |  |   |       |        |  |   | (27.8  | )% |  |      | 27.8  | % |  |   |      |  |  |  | 27.8  | % |  |   | 0.0 | %

In conjunction with the restructuring we
implemented during 2002, we changed our internal allocation of
resources. As of June 30, 2002, we believed that it was
unlikely that any future value would be realized from the
wireless technology we acquired from Mobix Communications Ltd.
This wireless technology had a carrying value of
$1.8 million as of June 30, 2002, which was in excess
of its fair value of zero. Therefore, we wrote-off the
$1.8 million remaining carrying value of these intangibles
during 2002.



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Amortization of Intellectual Property, Other
    Intangibles, and Deferred Stock Compensation

|                                                                                             |  |                                    |     |        |  |   |        |        |  |   |        |    |  |      |       |   |  |   |        |   |  |  |       |    |  |   |       |  
|-------------------------------------------------------------------------------------------- |  | ---------------------------------- | --- | ------ |  | - | ------ | ------ |  | - | ------ | -- |  | ---- | ----- | - |  | - | ------ | - |  |  | ----- | -- |  | - | ----- | -
|                                                                                             |  |                                   
|                                                                                             |  | December 31,                      
|                                                                                             |  |                                   
|                                                                                             |  |                                    |     |        |  |   |        |        |  |  
|                                                                                             |  |                                    |     | Change |  |   |        | Change |  |  
|                                                                                             |  |                                    |     |        |  |   |        |        |  |  
|                                                                                             |  | 2003                               |     | $      |  | % |        | 2002   |  | $ |        | %  |  | 2001
|                                                                                             |  |                                    |     |        |  |   |        |        |  |   |        |    |  |     
|                                                                                             |  |                                   
|                                                                                             |  | (In thousands, except percentages)
|Amortization of intellectual property, other
    intangibles and deferred stock compensation |  | $                                  |    |        |  | $ | (1,782 | )      |  |   | (100.0 | )% |  | $    | 1,782 |   |  | $ | (2,024 | ) |  |  | (53.2 | )% |  | $ | 3,806 |  
|As a percentage of total revenue                                                             |  |                                    | 0.0 | %      |  |   |       |        |  |   | (28.1  | )% |  |      | 28.1  | % |  |   |       |   |  |  | 9.6   | %  |  |   | 18.4  | %

Amortization of intellectual property, other
intangible assets and deferred stock compensation consists of
amortization of deferred stock compensation related to grants of
stock options prior to our IPO of $0 in 2003, $216,000 in 2002,
and $674,000 in 2001, and amortization of intellectual property
and other intangibles

24



---



##### Table of Contents



associated with the acquisition of certain assets
from Mobix for approximately $0 in 2003, $3.1 million in
2002, and $1.5 million in 2001. 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. Intellectual property and other intangibles are being
amortized on a straight-line basis over the estimated useful
lives, 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.




| |                               
| | ------------------------------
| | Interest and Other Income, Net

|                                 |  |                                    |     |        |  |   |        |        |  |   |       |    |  |      |       |   |  |   |      |   |  |  |       |    |  |   |       |  
|-------------------------------- |  | ---------------------------------- | --- | ------ |  | - | ------ | ------ |  | - | ----- | -- |  | ---- | ----- | - |  | - | ---- | - |  |  | ----- | -- |  | - | ----- | -
|                                 |  |                                   
|                                 |  | December 31,                      
|                                 |  |                                   
|                                 |  |                                    |     |        |  |   |        |        |  |  
|                                 |  |                                    |     | Change |  |   |        | Change |  |  
|                                 |  |                                    |     |        |  |   |        |        |  |  
|                                 |  | 2003                               |     | $      |  | % |        | 2002   |  | $ |       | %  |  | 2001
|                                 |  |                                    |     |        |  |   |        |        |  |   |       |    |  |     
|                                 |  |                                   
|                                 |  | (In thousands, except percentages)
|Interest and other income, net   |  | $                                  | 98  |        |  | $ | (1,061 | )      |  |   | (90.5 | )% |  | $    | 1,172 |   |  | $ | (865 | ) |  |  | (42.5 | )% |  | $ | 2,037 |  
|As a percentage of total revenue |  |                                    | 1.7 | %      |  |   |       |        |  |   | (16.8 | )% |  |      | 18.5  | % |  |   |     |   |  |  | 8.6   | %  |  |   | 9.9   | %

Interest 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. The decrease in interest and
other income, net during 2003 and 2002 was due to the decrease
in our cash, cash equivalents and short-term investments due to
our operating losses and reduced interest rates. We expect
interest and other income, net to continue to decrease during
2004 as we anticipate we will continue to use cash during 2004
and, as a result, we expect to earn less investment and interest
income.



| |                                 
| | --------------------------------
| | Write-Down of Equity Investments

|                                 |  |                                    |       |        |  |   |       |        |  |   |      |   |  |      |     |   |  |   |        |   |  |  |        |    |  |   |       |  
|-------------------------------- |  | ---------------------------------- | ----- | ------ |  | - | ----- | ------ |  | - | ---- | - |  | ---- | --- | - |  | - | ------ | - |  |  | ------ | -- |  | - | ----- | -
|                                 |  |                                   
|                                 |  | December 31,                      
|                                 |  |                                   
|                                 |  |                                    |       |        |  |   |       |        |  |  
|                                 |  |                                    |       | Change |  |   |       | Change |  |  
|                                 |  |                                    |       |        |  |   |       |        |  |  
|                                 |  | 2003                               |       | $      |  | % |       | 2002   |  | $ |      | % |  | 2001
|                                 |  |                                    |       |        |  |   |       |        |  |   |      |   |  |     
|                                 |  |                                   
|                                 |  | (In thousands, except percentages)
|Write-down of equity investments |  | $                                  | 1,000 |        |  | $ | 1,000 |        |  |   | 100  | % |  | $    |    |   |  | $ | (2,500 | ) |  |  | (100.0 | )% |  | $ | 2,500 |  
|As a percentage of total revenue |  |                                    | 15.4  | %      |  |   |      |        |  |   | 15.4 | % |  |      | 0.0 | % |  |   |       |   |  |  | (12.1  | )% |  |   | 12.1  | %

In 2000, we invested in certain development-stage
companies operating Internet-centric businesses which we
believed had a significant strategic interest. Due to the
economic slowdown and the significant decline in capital
available to, and in the valuations of, the privately funded
Internet-centric businesses, management determined that one of
our investments had become impaired. Accordingly, in 2001, we
recorded a charge of $2.5 million to reflect impairment of
this asset below its recorded cost to represent what management
considered to be fair value. No impairment charge was recorded
during the year ended December 31, 2002. During September
2003, we determined our one remaining investment was fully
impaired primarily due to continuing difficulties in the
economy, and recorded a charge for the full remaining carrying
value of that investment, or $1 million.



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

There is no provision for income taxes because we
have incurred operating losses since our inception. As of
December 31, 2003, we had approximately $93.0 million
of Israeli net operating loss carry forwards and
$5.1 million and $2.0 million of U.S. federal and state net
operating losses carry forwards, respectively, available to
offset future taxable income. The U.S. federal and state net
operating loss carry forwards expire in varying amounts between
the years 2004 and 2022. The Israeli net operating loss carry
forwards have no expiration date.

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| |                                                 
| | ------------------------------------------------
| | Off-Balance Sheet Financings and
    Liabilities

Other than operating lease commitments, we do not
have any off-balance sheet financing arrangements or
liabilities, guarantee contracts, retained or contingent
interests in transferred assets or any obligation arising out of
a material variable interest in an unconsolidated entity. We do
not have any majority-owned subsidiaries that are not included
in the Consolidated Financial Statements.

Liquidity and Capital Resources

As of December 31, 2003, we had
$14.5 million of cash, cash equivalents and short-term
investments as compared to $23.8 million as of
December 31, 2002.

Net cash used in operating activities was
$10.4 million and $18.4 million for the twelve months
ended December 31, 2003 and 2002, respectively, and was
primarily used to fund our ongoing operational needs. The
decrease in cash used in operating activities is reflective of
the restructuring that was implemented in the latter half of
2002 resulting in significant headcount and other operational
cost reductions. Cash provided by investing activities was
$5.4 million and $18.6 million for the twelve months
ended December 31, 2003 and 2002, respectively, and
primarily represents the net proceeds from the purchases and
sales of short-term investments to fund operational needs. Cash
provided by financing activities was $1.1 million and
$807,000 for the twelve months ended December 31, 2003
and 2002, respectively, and consisted primarily of proceeds from
the issuance of Ordinary Shares under our employee Stock
Purchase Plan, issuances related to the exercise of stock
options and proceeds from shareholders notes receivable.

As of December 31, 2003, we 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 BackWeb Offline Access 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, or we may be required to further
reduce our expenditures, any of which could harm our business.



| |                        
| | -----------------------
| | Contractual Obligations

The following table summarizes our contractual
obligations at December 31, 2003, and the effect such
obligations are expected to have on our liquidity and cash flows
in future periods (in thousands). We did not have long-term debt
obligations, capital lease obligations, or purchase obligations
as of such date.

|                              |  |       |       |                        |  |       |     |       |  |         |       |  |  |   |   |  |  |   |   | 
|----------------------------- |  | ----- | ----- | ---------------------- |  | ----- | --- | ----- |  | ------- | ----- |  |  | - | - |  |  | - | - | 
|                              |  |       |       |                       
|                              |  |       |       | Payments Due by Period
|                              |  |       |       |                       
|                              |  |       |       | Less than              |  | 1-3   |     | 3-5   |  | After 5
|                              |  | Total |       | 1 Year                 |  | Years |     | Years |  | Years  
|                              |  |       |       |                        |  |       |     |       |  |        
|Operating lease obligations   |  | $     | 2,878 |                        |  | $     | 945 |       |  | $       | 1,933 |  |  | $ |  |  |  | $ |  | 
|                              |  |       |       |                        |  |       |     |       |  |         |       |  |  |   |   |  |  |   |   | 
|Total contractual commitments |  | $     | 2,878 |                        |  | $     | 945 |       |  | $       | 1,933 |  |  | $ |  |  |  | $ |  | 
|                              |  |       |       |                        |  |       |     |       |  |         |       |  |  |   |   |  |  |   |   | 

As part of the restructuring plan that began in
the three months ended September 30, 2002, we entered into
negotiations with our various landlords to renegotiate our lease
obligations. We have reached agreement in principle with our
landlords in San Jose, California, Toronto, Canada, and Ramat
Gan, Israel whereby we were able to mitigate our lease
obligations by, among other things, buying out certain of our
obligations, subletting space or reducing rent or a combination
of these. The amounts in the table reflect the final executed
agreements, with the exception of our lease agreement in Canada,
which is still in negotiation.

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Effective Corporate Tax Rates

Our tax rate reflects a mix of the U.S. statutory
tax rate on our U.S. income, European country tax rates on our
individual European country income and the Israeli tax rate
discussed below. We expect that most of our future 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 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% to 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, of our Consolidated Financial
Statements elsewhere in this report. 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, 2003, we have not yet used the tax benefits
for which we are eligible. See Item 1,
Business  Risk Factors  Any future
profitability may be diminished if tax benefits from the State
of Israel are reduced or withheld.

Impact of Inflation and Currency
Fluctuations

Most of our 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 exceeds the
devaluation of the foreign 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 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. To date these fluctuations have not been
material, primarily because we hedge through the use of forward
contracts for our R&D expenses in Israel.

Recently Issued Accounting
Pronouncements

In 2002, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard
No. 146 Accounting for Costs Associated with Exit or
Disposal Activities (SFAS No. 146).
SFAS No. 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 No. 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 No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002.
Adoption of SFAS No. 146 did not have a material effect on
the Companys financial position or operating results.

In May 2003, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 150,
Accounting For Certain Financial Instruments with
Characteristics of Both Liabilities and Equity (SFAS
No. 150), which established standards for how an
issuer of financial instruments classifies and measures certain
financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset
in some circumstances) if, at inception, the monetary value of
the obligation is based solely or predominantly on a fixed
monetary amount known at inception, variations in something
other than the fair value of the issuers equity shares or
variations inversely related to changes in the fair value of the
issuers equity shares. SFAS No. 150 is effective for
financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning
of the first

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interim period beginning after June 15,
2003. The adoption of SFAS No. 150 did not have a material
impact on our financial position or results of operations.


In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities (SFAS No. 149). SFAS
No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement is effective for
contracts entered into or modified after June 30, 2003, and
did not have a material impact on our financial position or
results of operations.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest
Entities, which was revised in December 2003.
Interpretation No. 46, as revised, clarifies the
application of Accounting Research Bulletin No. 51 and
applies immediately to any variable interest entities created
after January 31, 2003 and to variable interest entities in
which an interest is obtained after that date. This
Interpretation is applicable in the quarter ending
March 31, 2004, for interests acquired in variable interest
entities prior to February 1, 2003. This Interpretation
requires variable interest entities to be consolidated if the
equity investment at risk is not sufficient to permit an entity
to finance its activities without support from other parties or
the equity investors lack specified characteristics. The
adoption of Interpretation No. 46, as revised, is not
expected to have a material impact on our financial position or
results of operations.

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.

Despite recent signs of improvement, general
economic indicators suggest continued uncertain economic
conditions for the near future. Weak or uncertain economic
conditions may continue to cause a reduction in or irregular
information technology spending generally. In addition, some of
our customers continue to operate Internet-centric businesses,
and these companies have been more acutely affected by uncertain
economic conditions 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 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 in our
current markets. 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 again re-positioned our
products to focus on the portal market. During 2003, we expand
our market focus to include corporate intranets and other
Web-based applications. These changes required us to adjust our
business processes and make a number of significant personnel
changes. To date, we have only generated

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limited revenue from our new strategic focus, and
we do not know if we will ever generate significant revenue from
our new products. To the extent we do not succeed in generating
significant revenue from licensing our new products,
particularly Offline Access Server, our business, operating
results and financial conditions will suffer.




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

Since our inception, we have not achieved
profitability and we expect to continue to incur net losses for
the foreseeable future. We incurred net losses of approximately
$10.7 million in the year ended December 31, 2003. As
of December 31, 2003, we had an accumulated deficit of
$138.6 million. We expect to continue to incur significant
sales and marketing, research and development, and general and
administrative expenses through the remainder of 2004 and into
2005. 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 the 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;                                             
|
| |  | loss of customers;                                                                                  
|
| |  | new product introductions or internal development
    efforts by competitors or partners;           
|
| |  | 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.



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are increasingly relying on our direct
    sales force, rather than strategic partners, for revenue
    generation and this trend could negatively affect our
    revenues.

Until recently, we had expected revenue to be
generated increasingly through or by our various strategic
partners or relationships and our business plans and budgets
reflected such expectations. However, in the year ended
December 31, 2003, we did not generate significant revenue
from our strategic reseller relationships. We do not know if
these existing or any future strategic partnerships will prove
to be successful relationships, or if we will derive material
revenue from them. Moreover, these companies are constantly
evaluating their product offerings and evaluating build or buy
scenarios with respect to market offerings. Indeed, we are aware
that certain of our partners, such as IBM and SAP, and potential
partners are actively evaluating and may be developing their own
offline solutions that could be competitive with or replace our
OAS technology solution. 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.
Such events would have an adverse impact on our revenue. As a
result, we are increasingly relying on our direct sales force,
rather than strategic relationships, for sales of

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licenses to our new products. If our direct sales
force is not successful in these efforts, we may not achieve our
business plans or attain our revenue goals.




| |                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our quarterly product license revenue
    typically depends on a small number of large orders, and any
    failure to complete one or more substantial license sales in a
    quarter could materially and adversely affect our operating
    results.

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 and 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
the use of our products within our existing customers
organizations, our revenue would be adversely affected. In 2003,
our three largest customers represented approximately 28% of our
total revenue. In 2002, our 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. We signed a new reseller agreement
with this customer, but the agreement does not require the
customer to purchase any product from us. In 2003, we did not
generate significant revenue from this reseller agreement, and
we cannot assure you that we will derive significant revenue
from any of our reseller agreements in the future. The failure
to derive significant revenue from these agreements could
adversely affect our business.



| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We derive approximately 60% of our total
    license revenue from our OAS product, and, if demand for OAS
    does not increase or decreases, our total revenue will not
    increase and may decrease.

We currently derive approximately 60% of our
total license revenue from licensing our OAS product and derive
additional related revenue through providing related consulting
and maintenance services. We expect to continue to derive a
substantial portion of our license and consulting revenue, and
an increasing amount of our maintenance revenue, from this
product for the foreseeable future. Accordingly, our future
operating results will depend on the demand for OAS by future
customers. If our competitors release products that are superior
to OAS in performance or price, OAS is not widely accepted by
the market, or we fail to enhance OAS and introduce new versions
in a timely manner, demand for this product may decrease or fail
to increase. A decline in demand for OAS or a failure of demand
to increase, as a result of competition, technological change or
other factors, would significantly and adversely affect our
business, financial condition, and operating results.



| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 OAS, we have
experienced a decline in licensing revenue generated from our
older products, such as Polite Sync Server 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

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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
will decline significantly. Further, some of our customers are
telecommunications or information technology companies, which
have been forced to significantly reduce their operations in
light of limited access to sources of financing and the national
and global economic uncertainty. 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 the Internet
    infrastructure cannot support the demands placed on
    it.

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
placed increased demands on its infrastructure. 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 remain a viable business.

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. For example,
emerging technologies, such as wireless, that take a different
approach to the challenge of offline Web access by, for example,
re-engineering platforms and applications, pose a competitive
challenge. In addition, other companies, including some of our
partners, also approach the issue of offline Web architecture
differently than we do in some cases, and such approaches may
achieve a greater degree of market acceptance. If we do not use
leading technologies effectively, meet the challenges posed by
emerging technologies or other architectures, 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 interfaces 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.

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| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, which 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, due to our financial condition. In
the event that we obtain additional financing by issuing
Ordinary Shares or securities that are convertible into Ordinary
Shares, the interests of existing shareholders 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 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. Recently, for example, both Microsoft and IBM have
announced product plans addressing the offline Web application
market segment served by our OAS product. If such companies
enter this market segment, 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.

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| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Our growth may suffer because of the
    complexities involved in implementing our
    products.

The use of our products by our customers often
requires implementation services, and 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. In the second half of 2003, there were a
greater number of deployments of our OAS solution by customers,
and that solution is being subjected to actual commercial use
and implementation. Initial 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 at the
expense of other projects.



| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 recognize license revenue when persuasive
evidence of an agreement exists, the product has been delivered,
the license fee is fixed or determinable, and collection of the
fee is probable. If an arrangement requires acceptance testing
or specialized professional services, recognition of the
associated license and service revenue would be delayed. The
timing of the commencement and completion of 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 specialized 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 our license
    revenue to vary significantly.

To date, our customers have typically taken a
long time to evaluate our products before making their
purchasing 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 OAS solution slowly, depending upon the skill
set of the customer, the size of the 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.



| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the economic slowdown continues, or if
    our revenue does not increase over the next two years, 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 was implemented in the fourth quarter of
2002. We also previously implemented a restructuring plan in
July 2001. If the economic slowdown continues, or if our revenue
does not increase from its current level over the next two
years, 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.

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| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | 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 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 decided to liquidate these companies in order to further
streamline our operations and to simplify our legal entity
structure. 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 be
required to pay significant taxes and penalties, which could
adversely affect our cash balances and results of operations.



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | 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.



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

Revenue from customers outside the United States
represented approximately $1.6 million, or 24% of our total
revenue, for the year-ended December 31, 2003, and
$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 Euro and the
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,

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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.



| |                                                                   
| | ------------------------------------------------------------------
| | 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 have received emails from certain
of our customers end users, claiming that our technology
is a form of spyware, and we are actively engaged in challenging
such accusations. In the event such allegations result in
litigation, we could spend a significant amount of time and
money pursuing or defending legal claims, which could have a
material adverse effect on our business.



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | 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 commercial
liability 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.



| |                                                                        
| | -----------------------------------------------------------------------
| | 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.



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Recently enacted legislation and regulatory
    changes may cause us to incur increased costs, limit our ability
    to obtain director and officer liability insurance, and make it
    more difficult for us to attract and retain qualified officers
    and directors.

Recently enacted changes in the laws and
regulations affecting public companies, including the provisions
of the Sarbanes-Oxley Act of 2002 and rules adopted by the SEC
and Nasdaq, have required changes in some of our corporate
governance and accounting practices. We expect these laws,
rules, and regulations to increase

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our legal and financial compliance costs and to
make some activities more difficult, time consuming and costly.
The new rules could also make it more difficult for us to obtain
certain types of insurance, including director and officer
liability insurance, and we may be forced to accept reduced
policy limits and coverage or incur substantially higher costs
to obtain the same or similar coverage. The impact of these
events could also make it more difficult for us to attract and
retain qualified persons to serve on our board of directors,
particularly on our audit committee, or as executive officers.
We are presently evaluating the effect these new rules will have
on our operations in particular, and we cannot predict or
estimate the amount of the additional costs we may incur or the
timing of such costs.




| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are required to treat employee stock
    option and employee stock purchase plans as a compensation
    expense, it could significantly reduce our net income and
    earnings per share.

There has been ongoing public debate whether
employee stock option and employee stock purchase plan shares
should be treated as a compensation expense and, if so, how to
properly value such charges. If we elected or were required to
record an expense for our stock-based compensation plans using
the fair value method, we could have significant accounting
charges. For example, in 2003, had we accounted for stock-based
compensation plans as a compensation expense, annual diluted
earnings per share would have been reduced by $0.05 per share.
Although we are not currently required to record any
compensation expense using the fair value method in connection
with option grants that have an exercise price at or above fair
market value and for shares issued under our employee stock
purchase plan, it is possible that future laws or regulations
will require us to treat all stock-based compensation as a
compensation expense using the fair value method.

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 an increase in the degree of
violence in Israel or of any possible military action elsewhere
in the Middle East. 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 that we must continue to meet include
making specified investments in fixed assets, financing at least
30% of these investments through the issuance of capital stock,
and maintaining the development and production nature of our
facilities. 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 is June 30, 2004
(which may be extended by ministerial decision until
December 31, 2004), and no new benefits will be granted
after that date unless the expiration date is extended. We
cannot assure you that new benefits will be available after
June 30, 2004 or that the benefits will be continued in the
future at their current levels or at any level.

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| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | 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 April 2004. 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 that was,
    according to the laws of the state of the court, competent to
    render the judgment;                                                                             
|
| |  | the judgment is no longer able to be appealed;                                                                                                                                                                        
|
| |  | 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;                                   
|
| |  | 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.

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| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, such as our staggered Board, 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 analysis of
the likely implications of the new tax reform legislation on our
results of operations. Our evaluation concluded that the impact
of the tax reform on both our corporate and income tax framework
would not have a material effect on our results and operations.
This evaluation was based, in part, on the assumptions that we
would not expand beyond the countries in which we already
operate and that we would remain in a net operating loss for tax
purposes for at least the next three years. We cannot assure you
that these assumptions will be met, and the tax reform will not
materially and adversely affect our results of 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 these obligations will have on us 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.

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;
|
| |  | 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, which could seriously harm our business and results
of operations.

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| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | Our stock is listed on the Nasdaq SmallCap
    Market and our continued listing on the Nasdaq SmallCap Market
    listing is not assured.

We do not currently meet the listing requirements
necessary for our Ordinary Shares to be listed on the Nasdaq
National Market System, or NMS. Effective on September 23,
2002, we transferred the listing of our Ordinary Shares from the
NMS and began trading on the Nasdaq SmallCap Market. The listing
of our Ordinary Shares on the Nasdaq SmallCap Market may be
perceived as a negative by investors and may adversely affect
the liquidity and trading price of our Ordinary Shares. We may
be unable to re-list our Ordinary Shares on the NMS.

We have met the initial and continued listing
criteria for the Nasdaq SmallCap Market. As a foreign company we
are not required to meet the minimum bid price requirement of
$1.00 per share. Therefore, we will remain eligible to be quoted
on the Nasdaq SmallCap Market, subject to our compliance with
the other continued listing requirements which require, among
other things, that (i) we have shareholders equity of
$2.5 million, (ii) we have $500,000 in net income, or
(iii) the market value of our publicly held shares be
$35 million or more. At December 31, 2003, we met
these 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. If our Ordinary Shares are delisted from
trading on the Nasdaq SmallCap Market, then the trading market
for our Ordinary Shares, and the ability of our shareholders to
trade our shares and obtain liquidity for their shares, may be
significantly impaired and the market price of our Ordinary
Shares may decline significantly.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | 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 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.

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.

39



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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 owned
approximately 28% of our outstanding Ordinary Shares as of
December 31, 2003. 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 7A.Quantitative
and Qualitative Disclosures about Market Risk

We develop products in Israel and sell them in
the 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.

We hedge certain forecasted committed expenses
that are payable in NIS to minimize the Companys exposure
to fluctuations in the exchange rate between the NIS and the
U.S. dollar. 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 reasonably confident that we can
forecast a stable stream of expenses payable in NIS. Taking all
industry specific and macroeconomic indicators into account, in
order to protect ourselves from fluctuating exchange rates, we
enter into forward contracts. The contracts are generally
monthly and timed in the month to mature when we incur most of
our expense in NIS, which are 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. We do not anticipate any material adverse effect
on our consolidated financial position utilizing our current
hedging strategy.

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Item 8.Financial
Statements and Supplementary Data


The following are summaries of consolidated
quarterly financial data for the years ended December 31,
2003 and 2002:

|     |                                      |                                       |   |            |   |           |   |            |   |  |   |         |   |  |   |        |  
|---- | ------------------------------------ | ------------------------------------- | - | ---------- | - | --------- | - | ---------- | - |  | - | ------- | - |  | - | ------ | -
|     |                                      | First Qtr                             |   | Second Qtr |   | Third Qtr |   | Fourth Qtr
|     |                                      |                                       |   |            |   |           |   |           
|     |                                      |                                      
|     |                                      | Unaudited                            
|     |                                      | (In thousands, except per share data)
|2003 |                                      |                                       |   |            |   |           |   |            |   |  |   |         |   |  |   |       
|     | Revenue                              |                                       | $ | 1,527      |   |           | $ | 1,465      |   |  | $ | 1,754   |   |  | $ | 1,756  |  
|     | Gross profit                         |                                       |   | 1,251      |   |           |   | 1,183      |   |  |   | 1,486   |   |  |   | 1,397  |  
|     | Net loss                             |                                       |   | (3,638     | ) |           |   | (2,608     | ) |  |   | (2,490  | ) |  |   | (1,990 | )
|     | Basic and diluted net loss per share |                                       |   | (0.09      | ) |           |   | (0.07      | ) |  |   | (0.06   | ) |  |   | (0.05  | )
|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  | )



|    |                     
|--- | --------------------
|(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
Annual Report on Form 10-K.



| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | Report of Ernst & Young
    LLP, Independent Auditors                                                 
|
| | Report of Kost Forer Gabbay &
    Kasierer, 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                                                        

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REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

BackWeb Technologies Ltd.


We have audited the accompanying consolidated
balance sheet of BackWeb Technologies Ltd. (the
Company) and its subsidiaries as of
December 31, 2003, and the related consolidated statement
of operations, shareholders equity and cash flows for the
year then ended. Our audit also included the financial statement
schedule listed at Item 15(a) 2. These financial statements
and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.

We conducted our audit 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 audit
provides 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,
2003 and the consolidated results of their operations and cash
flows for the year then ended, in conformity with accounting
principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the
information set forth therein.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Palo Alto, CA

January 27, 2004


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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 the related consolidated statements
of operations, shareholders equity and cash flows for each
of the two 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 the consolidated results of their operations and cash
flows for each of the two 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.



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

Tel-Aviv, Israel

February 4, 2003


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BACKWEB TECHNOLOGIES LTD.

CONSOLIDATED BALANCE SHEETS

|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      |                                            |          |         |        |       |          |         |        | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------- | ------- | ------ | ----- | -------- | ------- | ------ | 
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                     
|                                                 |                                                                                                                                            | December 31,                                                                                                                                                                                                                                                                                                                                        
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                     
|                                                 |                                                                                                                                            | 2003                                                                                                                                                                                                                                                                                                                                                 |                                            | 2002    
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      |                                            |         
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                     
|                                                 |                                                                                                                                            | (In thousands, except                                                                                                                                                                                                                                                                                                                               
|                                                 |                                                                                                                                            | share and per share data)                                                                                                                                                                                                                                                                                                                           
|ASSETS                                          
|Current assets:                                  |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      |                                            |          |         |        |       |         
|                                                 | Cash and cash equivalents                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                      | $                                          | 4,026    |         |        | $     | 4,782    |        
|                                                 | Short-term investments                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                      |                                            | 10,431   |         |        |       | 18,975   |        
|                                                 | Trade accounts receivable, net of allowance for
    doubtful accounts of $2,150 and $2,046 at December 31, 2003
    and 2002, respectively |                                                                                                                                                                                                                                                                                                                                                      |                                            | 2,403    |         |        |       | 1,659    |        
|                                                 | Other accounts receivables and prepaid expenses                                                                                            |                                                                                                                                                                                                                                                                                                                                                      |                                            | 782      |         |        |       | 1,523    |        
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      |                                            |          |         |        |       |         
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      | Total current assets                       |          |         | 17,642 |       |          |         | 26,939 | 
|Long-term investments and other long term assets |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      | 572                                        |          |         |        | 1,387 |         
|Property and equipment, net                      |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      | 301                                        |          |         |        | 1,083 |         
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      |                                            |          |         |        |       |         
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      | Total assets                               |          | $       | 18,515 |       |          | $       | 29,409 | 
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      |                                            |          |         |        |       |         
|                                                
|LIABILITIES AND SHAREHOLDERS
    EQUITY        
|Current liabilities:                             |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      |                                            |          |         |        |       |         
|                                                 | Accounts payable                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                      | $                                          | 403      |         |        | $     | 286      |        
|                                                 | Accrued liabilities                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                      |                                            | 3,813    |         |        |       | 5,054    |        
|                                                 | Deferred revenue                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                      |                                            | 1,125    |         |        |       | 1,265    |        
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      |                                            |          |         |        |       |         
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      | Total current liabilities                  |          |         | 5,341  |       |          |         | 6,605  | 
|                                                 | Accrued severance pay, net                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                      |                                            | 108      |         |        |       | 114      |        
|                                                 | Long-term deferred revenue                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                      |                                            | 105      |         |        |       | 169      |        
|Commitments and contingencies                    |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      |                                            |          |         |        |       |         
|                                                 | Shareholders equity:                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                      |                                            |          |         |        |       |          |        
|                                                 |                                                                                                                                            | Preferred Shares, nominal value NIS 0.01 per
    share; 50,000,000 shares authorized and zero outstanding at
    December 31, 2003 and December 31, 2002, Series E
    Preferred Shares, nominal value NIS 0.01 per share; zero
    and one share authorized and issued and outstanding at
    December 31, 2003 and December 31, 2002, respectively |                                            |          |        |        |       |          |        |       
|                                                 |                                                                                                                                            | Ordinary Shares, nominal value NIS 0.03 per
    share; 150,067,829 shares authorized at December 31,
    2003 and 2002; 40,560,182 and 39,772,254 shares issued and
    outstanding at December 31, 2003 and 2002, respectively                                                                                                                      |                                            |          | 151,496 |        |       |          | 150,867 |       
|                                                 | Notes receivable from shareholders                                                                                                         |                                                                                                                                                                                                                                                                                                                                                      |                                            |         |         |        |       | (506     | )      
|                                                 | Accumulated other comprehensive income (loss)                                                                                              |                                                                                                                                                                                                                                                                                                                                                      |                                            | 9        |         |        |       | (22      | )      
|                                                 | Accumulated deficit                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                      |                                            | (138,544 | )       |        |       | (127,818 | )      
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      |                                            |          |         |        |       |         
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      | Total shareholders equity                 |          |         | 12,961 |       |          |         | 22,521 | 
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      |                                            |          |         |        |       |         
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      | Total liabilities and shareholders equity |          | $       | 18,515 |       |          | $       | 29,409 | 
|                                                 |                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                      |                                            |          |         |        |       |         

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,              
|                                                                                             |                                                                              |                                      
|                                                                                             |                                                                              | 2003                                  |         | 2002  |        | 2001
|                                                                                             |                                                                              |                                       |         |       |        |     
|                                                                                             |                                                                              |                                      
|                                                                                             |                                                                              | (In thousands, except per share data)
|Revenue:                                                                                     |                                                                              |                                       |         |       |        |      |         |        |        |   |         |       
|                                                                                             | License                                                                      |                                       | $       | 3,232 |        |      | $       | 2,119  |        |   | $       | 13,807 |       
|                                                                                             | Service                                                                      |                                       |         | 3,270 |        |      |         | 4,228  |        |   |         | 6,831  |       
|                                                                                             |                                                                              |                                       |         |       |        |      |         |        |        |   |         |       
|                                                                                             |                                                                              | Total revenue                         |         |       | 6,502  |      |         |        | 6,347  |   |         |        | 20,638 | 
|Cost of revenue:                                                                             |                                                                              |                                       |         |       |        |      |         |        |        |   |         |       
|                                                                                             | License                                                                      |                                       |         | 128   |        |      |         | 213    |        |   |         | 443    |       
|                                                                                             | Service                                                                      |                                       |         | 1,057 |        |      |         | 3,050  |        |   |         | 5,238  |       
|                                                                                             |                                                                              |                                       |         |       |        |      |         |        |        |   |         |       
|                                                                                             |                                                                              | Total cost of revenue                 |         |       | 1,185  |      |         |        | 3,263  |   |         |        | 5,681  | 
|                                                                                             |                                                                              |                                       |         |       |        |      |         |        |        |   |         |       
|Gross profit                                                                                 |                                                                              |                                       | 5,317   |       |        |      | 3,084   |        |        |   | 14,957  |       
|                                                                                             |                                                                              |                                       |         |       |        |      |         |        |        |   |         |       
|Operating expenses:                                                                          |                                                                              |                                       |         |       |        |      |         |        |        |   |         |       
|                                                                                             | Research and development                                                     |                                       |         | 4,487 |        |      |         | 6,059  |        |   |         | 9,230  |       
|                                                                                             | Sales and marketing                                                          |                                       |         | 6,272 |        |      |         | 10,298 |        |   |         | 22,882 |       
|                                                                                             | General and administrative                                                   |                                       |         | 3,939 |        |      |         | 4,557  |        |   |         | 10,494 |       
|                                                                                            
|                                                                                             | Restructuring and other charges                                              |                                       |         | 443   |        |      |         | 4,678  |        |   |         | 2,825  |       
|                                                                                             | Write-off of intellectual property and other
    purchased intangible assets |                                       |         |      |        |      |         | 1,764  |        |   |         |       |       
|                                                                                             | Amortization of intellectual property and other
    intangible assets        |                                       |         |      |        |      |         | 1,566  |        |   |         | 3,132  |       
|                                                                                             | Amortization of deferred stock compensation                                  |                                       |         |      |        |      |         | 216    |        |   |         | 674    |       
|                                                                                             |                                                                              |                                       |         |       |        |      |         |        |        |   |         |       
|                                                                                             |                                                                              | Total operating expenses              |         |       | 15,141 |      |         |        | 29,138 |   |         |        | 49,237 | 
|                                                                                             |                                                                              |                                       |         |       |        |      |         |        |        |   |         |       
|Loss from operations                                                                         |                                                                              |                                       | (9,824  | )     |        |      | (26,054 | )      |        |   | (34,280 | )     
|Interest and other income, net                                                               |                                                                              |                                       | 98      |       |        |      | 1,172   |        |        |   | 2,037   |       
|Write down of equity investments                                                             |                                                                              |                                       | (1,000  | )     |        |      |        |        |        |   | (2,500  | )     
|                                                                                             |                                                                              |                                       |         |       |        |      |         |        |        |   |         |       
|Net loss                                                                                     |                                                                              | $                                     | (10,726 | )     |        | $    | (24,882 | )      |        | $ | (34,743 | )     
|                                                                                             |                                                                              |                                       |         |       |        |      |         |        |        |   |         |       
|Basic and diluted net loss per share                                                         |                                                                              | $                                     | (0.27   | )     |        | $    | (0.63   | )      |        | $ | (0.91   | )     
|                                                                                             |                                                                              |                                       |         |       |        |      |         |        |        |   |         |       
|Weighted average number of shares used in
    computing basic and diluted net loss per share |                                                                              |                                       | 40,000  |       |        |      | 39,284  |        |        |   | 38,225  |       
|                                                                                             |                                                                              |                                       |         |       |        |      |         |        |        |   |         |       

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             
|                                                                                                                       |  |                                  
|                                                                                                                       |  |                                   |    |                
|                                                                                                                       |  | Series E                          |    |                 |  | Notes      |        |          |  | Accumulated   |            |             
|                                                                                                                       |  | Preferred Shares                  |    | Ordinary Shares |  | Receivable |        | Deferred |  | Other         |            |              |  | Total        
|                                                                                                                       |  |                                   |    |                 |  | From       |        | Stock    |  | Comprehensive |            | Accumulated  |  | Comprehensive |         | Shareholders
|                                                                                                                       |  | Shares                            |    | Amount          |  | Shares     |        | Amount   |  | Shareholders  |            | Compensation |  | Income/(Loss) |         | Deficit       |  | Income/(Loss) |        | Equity
|                                                                                                                       |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |       
|                                                                                                                       |  |                                  
|                                                                                                                       |  | (In thousands, except share data)
|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  |  
|Issuance of Ordinary Shares pursuant to options
    exercised, ESPP and exchange of Series E preferred shares,
    net |  |                                   |   |                 |  |            |       |          |  |               | 787,928    |              |  |               | 629     |               |  |               |       |        |  |   |     |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   | 629     |  
|Forfeiture of restricted shares                                                                                        |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   |     |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   |        |  
|Repayment of notes receivable from shareholders                                                                        |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               | 506    |        |  |   |     |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   | 506     |  
|Comprehensive loss:                                                                                                    |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |      |   |  |   |      |   |  |   |          |   |  |   |         |   |  |   |         |  
|Net loss                                                                                                               |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   |     |   |  |   |     |   |  |   | (10,726  | ) |  |   | (10,726 | ) |  |   | (10,726 | )
|Unrealized income on available for sale
    marketable securities                                                      |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   |     |   |  |   | 31   |   |  |   |         |   |  |   | 31      |   |  |   | 31      |  
|                                                                                                                       |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |      |   |  |   |      |   |  |   |          |   |  |   |         |   |  |   |         |  
|Total comprehensive loss                                                                                               |  |                                   |   |                 |  |            |       |          |  |               |           |              |  |               |        |               |  |               |       |        |  |   |     |   |  |   |     |   |  |   |         |   |  | $ | (10,695 | ) |  |   |        |  
|                                                                                                                       |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |      |   |  |   |      |   |  |   |          |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2003                                                                                           |  |                                   |   |                 |  | $          |       |          |  |               | 40,560,182 |              |  | $             | 151,496 |               |  | $             |       |        |  | $ |     |   |  | $ | 9    |   |  | $ | (138,544 | ) |  |   |        |   |  | $ | 12,961  |  
|                                                                                                                       |  |                                   |    |                 |  |            |        |          |  |               |            |              |  |               |         |               |  |               |        |        |  |   |      |   |  |   |      |   |  |   |          |   |  |   |         |   |  |   |         |  

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

46



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                     |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |       |        |         |  
|------------------------------------------------------------------------------------ | --------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | -
|                                                                                     |                                                                       |                                                                            
|                                                                                     |                                                                       | Year Ended December 31,                                                    
|                                                                                     |                                                                       |                                                                            
|                                                                                     |                                                                       | 2003                                                                        |                                           | 2002  |        | 2001   
|                                                                                     |                                                                       |                                                                             |                                           |       |        |        
|                                                                                     |                                                                       |                                                                            
|                                                                                     |                                                                       | (In thousands)                                                             
|Operating activities                                                                 |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|Net loss                                                                             |                                                                       | $                                                                           | (10,726                                   | )     |        | $       | (24,882 | )     |        | $       | (34,743 | )    
|Adjustments to reconcile net loss to net cash
    used in operating activities:      |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|Write-off of intellectual property and other
    intangibles                         |                                                                       |                                                                             |                                          |       |        |         | 1,764   |       |        |         |        |      
|                                                                                     | Amortization of intellectual property and other
    intangible assets |                                                                             |                                           |      |        |         |         | 1,566 |        |         |         | 3,132 |       
|                                                                                     | Amortization of deferred stock compensation                           |                                                                             |                                           |      |        |         |         | 273   |        |         |         | 1,136 |       
|                                                                                     | Provision for bad and doubtful debts                                  |                                                                             |                                           | 104   |        |         |         | 205   |        |         |         | 2,948 |       
|                                                                                     | Depreciation                                                          |                                                                             |                                           | 878   |        |         |         | 2,262 |        |         |         | 2,235 |       
|                                                                                     | Loss on disposal of property and equipment                            |                                                                             |                                           |      |        |         |         | 71    |        |         |         |      |       
|                                                                                     | Forgiveness of shareholder loan                                       |                                                                             |                                           |      |        |         |         | 221   |        |         |         |      |       
|                                                                                     | Write down of an equity investment                                    |                                                                             |                                           | 1,000 |        |         |         |      |        |         |         | 2,500 |       
|                                                                                     | Changes in operating assets and liabilities:                          |                                                                             |                                           |       |        |         |         |       |        |         |         |       |       
|                                                                                     |                                                                       | Trade accounts receivable                                                   |                                           |       | (848   | )       |         |       | 1,665  |         |         |       | 1,923  |        
|                                                                                     |                                                                       | Other accounts receivables, prepaid expenses and
    other long-term assets |                                           |       | 556    |         |         |       | 1,523  |         |         |       | 280    |        
|                                                                                     |                                                                       | Accounts payable and accrued liabilities                                    |                                           |       | (1,130 | )       |         |       | (1,978 | )       |         |       | (71    | )      
|                                                                                     |                                                                       | Deferred revenue                                                            |                                           |       | (204   | )       |         |       | (1,065 | )       |         |       | (1,571 | )      
|                                                                                     |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|                                                                                     |                                                                       |                                                                             | Net cash used in operating activities     |       |        | (10,370 | )       |       |        | (18,375 | )       |       |        | (22,231 | )
|                                                                                     |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|Investing activities                                                                 |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|Purchases of property and equipment                                                  |                                                                       |                                                                             | (96                                       | )     |        |         | (60     | )     |        |         | (1,566  | )    
|Purchases of short-term investments                                                  |                                                                       |                                                                             |                                          |       |        |         | (6,656  | )     |        |         | (27,581 | )    
|Proceeds from sales of short-term investments                                        |                                                                       |                                                                             | 8,575                                     |       |        |         | 11,857  |       |        |         | 46,768  |      
|Purchases of long term investments                                                   |                                                                       |                                                                             |                                          |       |        |         |        |       |        |         | (500    | )    
|                                                                                     |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|                                                                                     |                                                                       |                                                                             | Net cash provided by investing activities |       |        | 8,479   |         |       |        | 5,141   |         |       |        | 17,121  |  
|                                                                                     |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|Financing activities                                                                 |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|Repayment of shareholders loans                                                     |                                                                       |                                                                             |                                          |       |        |         |        |       |        |         | (371    | )    
|Proceeds from repayment of shareholders
    notes receivable                        |                                                                       |                                                                             | 506                                       |       |        |         | 508     |       |        |         | 1,013   |      
|Proceeds from issuance of Ordinary Shares
    pursuant to options exercised and ESPP |                                                                       |                                                                             | 629                                       |       |        |         | 299     |       |        |         | 601     |      
|                                                                                     |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|                                                                                     |                                                                       |                                                                             | Net cash provided by financing activities |       |        | 1,135   |         |       |        | 807     |         |       |        | 1,243   |  
|                                                                                     |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|Net increase or (decrease) in cash and cash
    equivalents                          |                                                                       |                                                                             | (756                                      | )     |        |         | 12,427  |       |        |         | (3,867  | )    
|Cash and cash equivalents at beginning of the year                                   |                                                                       |                                                                             | 4,782                                     |       |        |         | 17,209  |       |        |         | 21,076  |      
|                                                                                     |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|Cash and cash equivalents at end of the year                                         |                                                                       | $                                                                           | 4,026                                     |       |        | $       | 4,782   |       |        | $       | 17,209  |      
|                                                                                     |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|Supplemental Disclosure of non-cash Investing
    and Financing Transactions         |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|Exchange of Series E Preferred Stock to
    Ordinary Shares                          |                                                                       | $                                                                           |                                          |       |        | $       | 3,454   |       |        | $       |        |      
|                                                                                     |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|Forfeiture of restricted shares                                                      |                                                                       | $                                                                           |                                          |       |        | $       |        |       |        | $       | 238     |      
|                                                                                     |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|Interest paid                                                                        |                                                                       | $                                                                           |                                          |       |        | $       |        |       |        | $       | 10      |      
|                                                                                     |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      
|Taxes paid                                                                           |                                                                       | $                                                                           | 78                                        |       |        | $       | 59      |       |        | $       | 121     |      
|                                                                                     |                                                                       |                                                                             |                                           |       |        |         |         |       |        |         |         |      

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

47



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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 offline Web infrastructure software and
application-specific software that enables 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, 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. The Companys
products are designed to reduce network costs and improve the
productivity of increasingly mobile workforces. The Company
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.

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. All six of the above named subsidiaries are in
various stages of liquidation with the exception of
BackWeb K.K. Ltd., which was fully liquidated as of
December 31, 2003.

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 consolidated financial
statements in conformity with generally accepted accounting
principles in the United States requires management to make
estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes.
Estimates are based on historical experience, input from sources
outside of the Company, and other relevant facts and
circumstances. Actual results could differ from these estimates.



| |                                         
| | ----------------------------------------
| | Financial Statements in
    U.S. Dollars

The Company prepares its financial statements in
U.S. dollars, which is also its functional currency. Most
of the revenue generated is in U.S. dollars. A significant
portion of the Companys research and development expenses
is incurred 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.

48



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. Operational accounts
and non-monetary balance 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 interest and other income, net for the years ended
December 31, 2003, 2002 and 2001 was a loss of $13,000, a
gain of $22,000 and a loss of $201,000, 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.

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 income/
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 interest 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 provide for any possible impairment loss based upon the
difference between the carrying amount and fair value of such
assets. During 2001, based on a review of its investments, the
Company recorded a non-cash charge of $2.5 million to
write-down an equity investment. During 2003, based on a review
of its investments, the Company recorded a non-cash charge of
$1.0 million to write-down an equity investment.



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

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

49



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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. Impairment of assets to be held and used
is assessed by a comparison of the carrying amount of the asset
group 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 as a
Research and Development expense and $200,000 related to the
restructuring charge discussed in Note 9. As of
December 31, 2003 no further impairment losses had been
identified.



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

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

The Companys intellectual property and
other purchased intangible assets are reviewed for impairment in
accordance with SFAS No. 144 at least annually and
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment
of assets to be held and used is assessed by a comparison of the
carrying amount of the asset group 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 the Companys
intangibles during the year ended December 31, 2002. As of
December 31, 2002 and 2003, the carrying value of the
intellectual property and other purchased intangible assets was
zero.



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

The Company derives revenue primarily from
software license fees, maintenance service fees, and consulting
services paid directly by corporate customers and resellers and,
to a lesser extent, from royalty fees from OEMs. Revenue derived
from resellers is not recognized until the software is sold
through to the end user. Royalty revenue is recognized when
reported to the Company by the OEM after delivery of the
applicable products. In addition, royalty revenue can arise from
the right to use the Companys products. As described
below, management estimates must be made and used in connection
with the revenue the Company recognizes in any accounting period.

50



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company recognizes software license revenue
in accordance with Statement of Position 97-2
Software Revenue Recognition
(SOP 97-2), as amended, and SOP 98-9,
Modification of SOP 97-2, Software Revenue
Recognition with Respect to Certain Transactions
(SOP 98-9). 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.

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.

Revenue from software license agreements is
recognized when all of the following criteria are met as set
forth in SOP 97-2: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the
fee is fixed or determinable; and (4) 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.

The Company licenses its products on a perpetual
and on a term basis. It recognizes license revenue arising from
perpetual licenses and multi-year term licenses in the
accounting period that all revenue recognition criteria have
been met, which is generally upon delivery of the software to
the end user. For term licenses with a contract period of less
than one year or less, revenue is recognized on a monthly basis.

At the time of each transaction, the Company
assesses whether the fee associated with its license sale is
fixed and determinable. If the fee is not fixed or determinable,
the Company recognizes revenue as payments become due from the
customer provided that all other revenue recognition criteria
have been met. In determining whether the fee is fixed or
determinable, the Company compares the payment terms of the
transaction to its normal payment terms. The Company assesses
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. The Company does not request collateral
from its customers. If credit worthiness cannot be established
the Company defers the fee and recognize revenue at the time
collection becomes reasonably assured, which is generally upon
the receipt of cash.

Service revenue is primarily comprised of revenue
from standard maintenance agreements and consulting services.
Customers licensing products generally purchase the standard
annual maintenance agreement for the products. The Company
recognizes revenue from maintenance over the contractual period
of the maintenance agreement, which is generally one year.
Maintenance is priced as a percentage of the license revenue.
For those agreements where the maintenance and license is quoted
as one fee, the Company values the maintenance as an undelivered
element at standard rates and recognize this revenue over the
contractual maintenance period. Consulting services are billed
at an agreed-upon rate, plus out-of-pocket expenses. The Company
generally charges for consulting services on a time and
materials basis and recognize revenue from such services as they
are provided to the customer. The Company accounts for fixed fee
service arrangements in a similar manner to an agreement
containing an acceptance clause. The Companys arrangements
do not generally include acceptance clauses. However if an
acceptance provision exists, then the Company defers revenue
recognition until written acceptance of the product from the
customer is received.

51



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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



| |                         
| | ------------------------
| | Research and Development

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,
requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility.
Based on the Companys product development process,
technological feasibility is established upon the completion of
a working model. The Company 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, 2003, the Company had recognized all
software development costs to research and development expense
in the period incurred.



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

The Company accounts for advertising costs as an
expense in the period in which the costs are incurred.
Advertising expense for the years ended December 31, 2003,
2002 and 2001 was approximately $2,000, $0 and $48,000,
respectively.



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

The Company 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. The Company 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
require 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. For all periods reported herein, 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 conducts its business and sells its
products directly to customers primarily in North America and
Europe. In the normal course of business, the Companys
financial position is routinely subject to market risks
associated with foreign currency rate fluctuations due to
balance sheet positions in other local foreign currencies. The
Companys policy is to ensure that business exposures to
foreign exchange risks are identified, measured and minimized
using foreign currency forward contracts to reduce such risks.
The foreign currency forward contracts generally expire within
90 days. The change in fair value of these forward
contracts is recorded as income/loss in the Companys
Consolidated Statements of Operations as a component of interest
and other income, net. At December 31, 2003, the face value
of these foreign currency forward contracts was $900,000, and
the change in fair value of such contracts was not material to
the Companys financial statements.

52



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                             
| | ----------------------------
| | Concentration of Credit Risk

Financial instruments that potentially subject
the Company to concentrations of credit risk consist of cash,
cash equivalents, short-term investments, forward exchange
contracts and trade accounts receivable. The Company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, 2003 management believed 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.

The Company sells its products to customers
primarily in North America and Europe. The Company performs
ongoing credit reviews of its customers financial
condition and generally do not require collateral. The Company
maintains reserves to provide for estimated credit losses. An
allowance for doubtful accounts is determined with respect to
those amounts that the Company has determined to be doubtful of
collection. Provision for bad and doubtful debts in the years
ended December 31, 2003, 2002 and 2001 were $104,000,
$205,000 and $2,948,000, respectively. Bad debt write-offs of
accounts in the years ended December 31, 2003, 2002 and
2001 totaled $0, $1,116,000 and $1,029,000, 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,
|                                                                  |                                                    |                        
|                                                                  |                                                    | 2003                    |         | 2002   |   | 2001
|                                                                  |                                                    |                         |         |        |   |     
|Net loss                                                          |                                                    | $                       | (10,726 | )      |   | $    | (24,882 | )      |   | $ | (34,743 | )     
|Basic and diluted:                                                |                                                    |                         |         |        |   |      |         |        |   |   |         |       
|                                                                  | Weighted-average shares                            |                         |         | 40,299 |   |      |         | 39,339 |   |   |         | 38,393 |  
|                                                                  | Less weighted-average shares subject to Repurchase |                         |         | (299   | ) |      |         | (55    | ) |   |         | (168   | )
|                                                                  |                                                    |                         |         |        |   |      |         |        |   |   |         |       
|Shares used in computing basic and diluted net
    loss per share |                                                    |                         | 40,000  |        |   |      | 39,284  |        |   |   | 38,225  |       
|                                                                  |                                                    |                         |         |        |   |      |         |        |   |   |         |       
|Basic and diluted net loss per share                              |                                                    | $                       | (0.27   | )      |   | $    | (0.63   | )      |   | $ | (0.91   | )     
|                                                                  |                                                    |                         |         |        |   |      |         |        |   |   |         |       

All preferred stock, outstanding stock options
and warrants have been excluded from the calculation of the
diluted net loss per 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 stock, outstanding options and warrants
excluded from the calculations of diluted net loss per share
were 6,991,080, 8,772,774 and 10,433,294 for the years ended
December 31, 2003, 2002 and 2001, respectively.

53



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                            
| | -------------------------------------------
| | Accounting for Stock-Based
    Compensation

The Company 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 in accounting
for its employee stock options and shares issued under its
Employee Stock Purchase Plan. Under APB 25, when the
exercise price of the Companys stock options or shares is
less than the market price of the underlying shares on the date
of grant, compensation expense is recognized.

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 or
shares 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,
|                          |  |             
|Stock Options             |  | 2003         |     | 2002 |  | 2001
|                          |  |              |     |      |  |     
|Risk-free interest rates  |  |              | 3.3 | %    |  |      | 3.8 | % |  |  | 4.2 | %
|Expected lives (in years) |  |              | 5   |      |  |      | 5   |   |  |  | 5   |  
|Dividend yield            |  |              | 0   | %    |  |      | 0   | % |  |  | 0   | %
|Expected volatility       |  |              | 123 | %    |  |      | 121 | % |  |  | 138 | %

|                          |  |              |     |      |  |      |     |   |  |  |     |  
|------------------------- |  | ------------ | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                          |  |             
|                          |  | Year Ended  
|                          |  | December 31,
|                          |  |             
|Stock Purchase Shares     |  | 2003         |     | 2002 |  | 2001
|                          |  |              |     |      |  |     
|Risk-free interest rates  |  |              | 3.3 | %    |  |      | 3.8 | % |  |  | 4.2 | %
|Expected lives (in years) |  |              | 0.5 |      |  |      | 0.5 |   |  |  | 0.5 |  
|Dividend yield            |  |              | 0   | %    |  |      | 0   | % |  |  | 0   | %
|Expected volatility       |  |              | 123 | %    |  |      | 121 | % |  |  | 138 | %

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

|                                                                                  |  |                                       |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                  |  |                                      
|                                                                                  |  | December 31,                         
|                                                                                  |  |                                      
|                                                                                  |  | 2003                                  |         | 2002 |  | 2001
|                                                                                  |  |                                       |         |      |  |     
|                                                                                  |  |                                      
|                                                                                  |  | (In thousands, except per share data)
|Net loss as reported                                                              |  | $                                     | (10,726 | )    |  | $    | (24,882 | ) |  | $ | (34,743 | )
|Less  stock based expense reported in
    net loss                               |  |                                       | 0       |      |  |      | 216     |   |  |   | 674     |  
|Add  stock based compensation expense
    determined under the fair value method |  |                                       | (2,155  | )    |  |      | (3,685  | ) |  |   | (39,697 | )
|                                                                                  |  |                                       |         |      |  |      |         |   |  |   |         |  
|Pro forma net loss                                                                |  | $                                     | (12,881 | )    |  | $    | (28,351 | ) |  | $ | (73,766 | )
|                                                                                  |  |                                       |         |      |  |      |         |   |  |   |         |  
|Pro forma basic and diluted net loss per share                                    |  | $                                     | (0.32   | )    |  | $    | (0.72   | ) |  | $ | (1.93   | )
|                                                                                  |  |                                       |         |      |  |      |         |   |  |   |         |  
|Basic and diluted net loss per share                                              |  | $                                     | (0.27   | )    |  | $    | (0.63   | ) |  | $ | (0.91   | )
|                                                                                  |  |                                       |         |      |  |      |         |   |  |   |         |  

The Company applied SFAS No. 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 No. 123 requires use of an
option valuation model to measure the fair value of the options
at the commitment date.

54



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The Company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. The
Companys liability for all of its Israeli employees is
fully provided by monthly deposits with insurance policies and
by an accrual for severance pay.

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, 2003, 2002 and 2001
amounted to approximately $456,000, $332,000 and $856,000,
respectively.



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

The Company used the following methods and
assumptions in estimating the fair value disclosures for
financial instruments.

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 No. 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.



| |                                                 
| | ------------------------------------------------
| | Accumulated Other Comprehensive Income/
    Loss

Accumulated other comprehensive income/ loss
presented in the accompanying consolidated balance sheets and
consolidated statements of stockholders equity consists of
net unrealized gains and losses on short-term investments and
net unrealized gains and losses on foreign currency forward
contracts.

The following are the components of accumulated
other comprehensive income/ loss (in thousands):

|                  |                                                              |              |     |      |  |   |     |      |  
|----------------- | ------------------------------------------------------------ | ------------ | --- | ---- |  | - | --- | ---- | -
|                  |                                                              |             
|                  |                                                              | December 31,
|                  |                                                              |             
|                  |                                                              | 2003         |     | 2002
|                  |                                                              |              |     |     
|Beginning balance |                                                              | $            | (22 | )    |  | $ | 400 |     
|                  | Unrealized loss on forward exchange contracts                |              |     |     |  |   |     | (40  | )
|                  | Unrealized gain/(loss) on available-for-sale
    investments |              |     | 31   |  |   |     | (382 | )
|                  |                                                              |              |     |      |  |   |     |     
|                  | Total accumulated other comprehensive income
    (loss)      |              | $   | 9    |  |   | $   | (22  | )
|                  |                                                              |              |     |      |  |   |     |     



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

In 2002, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard
No. 146 Accounting for Costs Associated with Exit or
Disposal Activities (SFAS No. 146). SFAS
No. 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 No. 146
improves financial reporting by requiring that a liability for a
cost associated

55



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is
incurred. The provisions of SFAS No. 146 are effective for
exit or disposal activities that are initiated after
December 31, 2002. Adoption of SFAS No. 146 did not
have a material effect on the Companys financial position
or operating results.

In May 2003, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 150,
Accounting For Certain Financial Instruments with
Characteristics of Both Liabilities and Equity
(SFAS No. 150), which established
standards for how an issuer of financial instruments classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances) if, at inception,
the monetary value of the obligation is based solely or
predominantly on a fixed monetary amount known at inception,
variations in something other than the fair value of the
issuers equity shares or variations inversely related to
changes in the fair value of the issuers equity shares.
SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of
SFAS No. 150 did not have a material impact on the
Companys financial position or results of operations.

In April 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
(SFAS No. 149). SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives) and
for hedging activities under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities. This statement is effective for contracts
entered into or modified after June 30, 2003, and did not
have a material impact on the Companys financial position
or results of operations.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest
Entities, which was revised in December 2003.
Interpretation No. 46, as revised, clarifies the
application of Accounting Research Bulletin No. 51 and
applies immediately to any variable interest entities created
after January 31, 2003 and to variable interest entities in
which an interest is obtained after that date. This
Interpretation is applicable in the quarter ending
March 31, 2004, for interests acquired in variable interest
entities prior to February 1, 2003. This Interpretation
requires variable interest entities to be consolidated if the
equity investment at risk is not sufficient to permit an entity
to finance its activities without support from other parties or
the equity investors lack specified characteristics. The
adoption of Interpretation No. 46, as revised, is not
expected to have a material impact on the Companys
financial position or results of operations.



|   |                       
|-- | ----------------------
|3. | Short-Term Investments

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

|                          |        |              |       |            |  |            |   |      |  |            |       |            |  |   |        |        |  |   |    |    |  |   |        |        | 
|------------------------- | ------ | ------------ | ----- | ---------- |  | ---------- | - | ---- |  | ---------- | ----- | ---------- |  | - | ------ | ------ |  | - | -- | -- |  | - | ------ | ------ | 
|                          |        |             
|                          |        | December 31,
|                          |        |             
|                          |        |              |       |           
|                          |        | 2003         |       | 2002      
|                          |        |              |       |           
|                          |        |              |       | Unrealized |  | Estimated  |   |      |  | Unrealized |       | Estimated 
|                          |        | Cost         |       | Losses     |  | Fair Value |   | Cost |  | Gains      |       | Fair Value
|                          |        |              |       |            |  |            |   |      |  |            |       |           
|Commercial paper          |        | $            | 9,001 |            |  | $          |  |      |  | $          | 9,001 |            |  | $ | 13,490 |        |  | $ |   |    |  | $ | 13,490 |       
|Certificates of deposit   |        |              | 1,421 |            |  |            | 9 |      |  |            | 1,430 |            |  |   |       |        |  |   |   |    |  |   |       |       
|Corporate debt securities |        |              |      |            |  |            |  |      |  |            |      |            |  |   | 5,467  |        |  |   | 18 |    |  |   | 5,485  |       
|                          |        |              |       |            |  |            |   |      |  |            |       |            |  |   |        |        |  |   |    |    |  |   |        |       
|                          | Totals |              | $     | 10,422     |  |            | $ | 9    |  |            | $     | 10,431     |  |   | $      | 18,957 |  |   | $  | 18 |  |   | $      | 18,975 | 
|                          |        |              |       |            |  |            |   |      |  |            |       |            |  |   |        |        |  |   |    |    |  |   |        |       

At December 31, 2003, the total amounts of
investments due within one year and due after one year were
$9.2 million and $1.2 million, respectively.

56



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                            
|-- | ---------------------------
|4. | Property and Equipment, net

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

|                                  |  |              |        |      |  |   |        |  
|--------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                  |  |             
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2003         |        | 2002
|                                  |  |              |        |     
|Computer and peripheral equipment |  | $            | 3,871  |      |  | $ | 3,856  |  
|Office, furniture and equipment   |  |              | 2,613  |      |  |   | 2,604  |  
|Leasehold improvements            |  |              | 1,128  |      |  |   | 1,113  |  
|                                  |  |              |        |      |  |   |        |  
|                                  |  |              | 7,612  |      |  |   | 7,573  |  
|Less: accumulated depreciation    |  |              | (7,311 | )    |  |   | (6,490 | )
|                                  |  |              |        |      |  |   |        |  
|Property and equipment, net       |  | $            | 301    |      |  | $ | 1,083  |  
|                                  |  |              |        |      |  |   |        |  

Depreciation expense for the years ended
December 31, 2003, 2002 and 2001 was $878,000, $2,262,000
and $2,235,000, respectively. See Note 9 regarding
impairment of property and equipment.



|   |                                                                
|-- | ---------------------------------------------------------------
|5. | Intellectual Property and Other Purchased
    Intangible Assets

On June 27, 2000, the Company acquired
certain assets, including 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. The Company allocated the
purchase price 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. The capitalized intangible assets were 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 (see Note 9), the Company
determined that it was unlikely that any future value would be
realized from the wireless technology that was acquired from
Mobix. As of June 30, 2002, the carrying value of the
wireless technology was $1.8 million, which was determined
to be in excess of its fair value of zero. Therefore, the
Company wrote-off the $1.8 million remaining carrying value
during the year ended December 31, 2002. Net intangible
assets at December 31, 2002 and 2003 were $0.

Amortization expense related to intellectual
property and other purchased intangible assets, excluding the
impairment noted above, was $1.5 million in 2002 and
$3.1 million in 2001.



|   |                      
|-- | ---------------------
|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
$2,150,000 (the Loan Amount) for working
capital purposes. The Loan Amount bore interest at the
LIBOR rate for 6 months loans as quoted by Bank Leumi
Israel Ltd. plus 1.5% per annum, compounded monthly, and
was repayable, unless converted, in full on September 20,
2002. The Loan Amount could not be prepaid in whole or in
part without the Lenders consent. In the event that Emony closed
a financing resulting in net aggregate cash proceeds of at least
$5 million at a price of at least $1.34, the outstanding
portion of the Loan Amount would automatically convert into
Series B1 Preferred Shares (the Preferred
Shares) of Emony at a conversion price of $1.34 per
share. In addition, until such an investment was received, any
of the Lenders could 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

57



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##### Table of Contents



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 its 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, the Company 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
$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.
Accordingly, in 2001, the Company recorded a charge of
$2.5 million to reflect impairment of these assets below
their recorded cost to represent what management considered to
be fair value. No impairment charge was recorded during the year
ended December 31, 2002. In March 2003, the Company
determined the remaining investment was fully impaired primarily
due to continuing difficulties in the economy, and recorded a
charge for the full remaining investment balance of
$1.0 million.



|   |                    
|-- | -------------------
|7. | Accrued Liabilities

Accrued liabilities consist of the following (in
thousands):

|                                                   |  |              |       |      |  |   |       | 
|-------------------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                                                   |  |             
|                                                   |  | December 31,
|                                                   |  |             
|                                                   |  | 2003         |       | 2002
|                                                   |  |              |       |     
|Accrued employees compensation and related expense |  | $            | 1,780 |      |  | $ | 1,737 | 
|Sales and marketing events                         |  |              | 12    |      |  |   | 149   | 
|Restructuring accrual                              |  |              | 534   |      |  |   | 1,413 | 
|Other                                              |  |              | 1,487 |      |  |   | 1,755 | 
|                                                   |  |              |       |      |  |   |       | 
|                                                   |  | $            | 3,813 |      |  | $ | 5,054 | 
|                                                   |  |              |       |      |  |   |       | 

58



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                
|-- | ---------------
|8. | Related Parties



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

In 1995, the Company signed an agreement
(Founding Agreement) with its early stage investors
(the Early Investors), according to which the Early
Investors provided the Company with loan (the loan)
financing in the amount of $500,000. The loan was fully paid
during 2001.



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

Pursuant to the Founding Agreement, the Company
granted to its Early Investors the right to grant stock options
for up to 792,167 Ordinary Shares to any person or entity.
Through December 31, 2002, all options had been granted.
This pool of options was used by the Early Investors in granting
options to employees and consultants of BRM Technologies Ltd.
(BRM) and other related companies.

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



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

Gil Shwed serves as Chief Executive Officer of
Check Point Software Technologies Ltd. (Checkpoint),
as well as on the Board of Directors of BackWeb. Based on this
relationship, the Company has deemed Checkpoint to be a related
party. Additionally, based on the Companys investment in
Red Bend Ltd., the Company deems Red Bend to be a related party.
During 2003, 2002 and 2001, the Company recognized revenue of
$17,000, $189,000 and $350,000, respectively, related to
products licensed to these related parties. As of
December 31, 2003 and 2002, there were no balances included
in trade accounts receivable from related parties.



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

In the year ended December 31, 2001, the
Company licensed software from Red Bend Ltd. for a license fee
in the amount of $500,000.



|   |                                
|-- | -------------------------------
|9. | Restructuring and Other Charges

On September 30, 2002, the Company announced
a restructuring plan, which was implemented in the three months
ended December 31, 2002. The restructuring plan included 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 in 2002 of $4.7 million which
consisted of $1.6 million of severance and benefit costs,
which included forgiveness of a $221,000 shareholder note
receivable to one employee, $2.7 million of facility costs,
$200,000 related to the write-down of fixed assets and $200,000
related to other related restructuring costs. 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. In November 2003, the
Company accrued an additional charge of approximately $443,000
due to a change in estimate on its facilities costs, of which
approximately $289,000 related to the impairment of lease space
in its Canadian subsidiary, $120,000 related to an exchange of
Warrants to the landlord as part of the final settlement of
lease space at its headquarters in San Jose, California and
approximately $34,000 of other office lease impairment charges.

59



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 office service leases as a result of employee
terminations and office consolidation. The Company recorded a
charge of $2.8 million, which consisted of
$1.3 million of severance and benefit costs,
$1.4 million of facility costs and $100,000 related to
other related restructuring cost. The $1.3 million charge
is related to severance and benefits to terminate 63 employees,
which represented 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.

The following table summarizes the costs and
activities related to the 2001 and 2002 restructurings (in
thousands):

|                                   |  |              |        |                      |  |       |        |   |  |   |        |  
|---------------------------------- |  | ------------ | ------ | -------------------- |  | ----- | ------ | - |  | - | ------ | -
|                                   |  | Involuntary  |        |                      |  |      
|                                   |  | Terminations |        | Facilities and Other |  | Total
|                                   |  |              |        |                      |  |      
|Total charge  2001 restructuring  |  | $            | 1,300  |                      |  | $     | 1,500  |   |  | $ | 2,800  |  
|Cash payments  2001 restructuring |  |              | (700   | )                    |  |       | (1,300 | ) |  |   | (2,000 | )
|Balance at December 31, 2001       |  |              | 600    |                      |  |       | 200    |   |  |   | 800    |  
|Cash payments  2001 restructuring |  |              | (600   | )                    |  |       | (200   | ) |  |   | (800   | )
|Total charge  2002 restructuring  |  |              | 1,600  |                      |  |       | 3,100  |   |  |   | 4,700  |  
|                                   |  |              |        |                      |  |       |        |   |  |   |        |  
|Cash payments  2002 restructuring |  |              | (1,300 | )                    |  |       | (2,000 | ) |  |   | (3,300 | )
|                                   |  |              |        |                      |  |       |        |   |  |   |        |  
|Balance at December 31, 2002       |  |              | 300    |                      |  |       | (1,100 | ) |  |   | (1,400 | )
|Change in estimate                 |  |              |       |                      |  |       | 400    |   |  |   | 400    |  
|Cash payments  2002 restructuring |  |              | (300   | )                    |  |       | (1,000 | ) |  |   | (1,300 | )
|                                   |  |              |        |                      |  |       |        |   |  |   |        |  
|Balance at December 31, 2003       |  | $            |       |                      |  | $     | 500    |   |  | $ | 500    |  
|                                   |  |              |        |                      |  |       |        |   |  |   |        |  



|    |                              
|--- | -----------------------------
|10. | Commitments and Contingencies



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

The Company 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):

|     |  |   |           | 
|---- |  | - | --------- | 
|2004 |  | $ | 945,000   | 
|2005 |  |   | 966,000   | 
|2006 |  |   | 902,000   | 
|2007 |  |   | 65,000    | 
|     |  |   |           | 
|     |  | $ | 2,878,000 | 
|     |  |   |           | 

Rent expense, net approximated $1,283,000,
$4,505,000 and $3,723,000 for the years ended December 31,
2003, 2002 and 2001, respectively. Certain of the Companys
leases include escalation clauses. The Company recognized
approximately $36,000 of sublease income in 2003, which was
offset against rent expense. Approximately $500,000 of these
future rental payments have been accrued for under the
restructuring accrual.

60



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |              
| | -------------
| | 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.

BackWeb, six of the Companys officers and
directors, and various underwriters for its 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 case asserts that the prospectus from its
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 its 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 (the Exchange Act) and Rule 10b-5
promulgated under the Exchange Act. 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. A proposal has been made
for the settlement and release of claims against the issuer
defendants, including the Company. The settlement is subject to
a number of conditions, including approval by the proposed
settling parties and the court. If the settlement does not
occur, and the litigation against the Company continues, the
Company believes it has meritorious defenses and intends to
defend the case vigorously.

However, the results of any litigation are
inherently uncertain and can require significant management
attention, and the Company could be forced to incur substantial
expenditures, even if it ultimately prevails. The Company has
accrued what it considers to be the appropriate deductible under
the insurance policy with regard to legal expenses for the
pending class action.

The Company and certain of its officers are
currently parties to various other legal proceedings and may
become involved, from time to time, in other legal proceedings
in the ordinary course of the Companys business activities
in the future. In the event there is an adverse outcome with
respect to any of these proceedings, the Companys business
could be harmed. Thus, the Company cannot provide assurances
that these lawsuits will not materially and adversely affect the
Companys business, results of operations or share price.



| |                 
| | ----------------
| | Letter of Credit

In February 2001, the Company signed a thirty-day
revolving letter of credit of $300,000 in favor of Equity Office
LLC (formerly Speiker Properties LLC). In conjunction with its
lease renegotiation in San Jose, CA, the Company extended
this letter of credit to a total of $500,000 in favor of Equity
Office LLC in October 2003. The letter of credit extends to the
end of the lease in January 2007.

61



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                     
|--- | --------------------
|11. | Shareholders Equity



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

Ordinary Shares subject to future issuance are as
follows:

|                                                                 |  |              |            |      |  |  |            | 
|---------------------------------------------------------------- |  | ------------ | ---------- | ---- |  |  | ---------- | 
|                                                                 |  |             
|                                                                 |  | December 31,
|                                                                 |  |             
|                                                                 |  | 2003         |            | 2002
|                                                                 |  |              |            |     
|Exercise of outstanding options                                  |  |              | 6,791,080  |      |  |  | 8,772,774  | 
|Ordinary Shares available for grant under stock
    option plans |  |              | 6,717,446  |      |  |  | 7,711,094  | 
|                                                                 |  |              |            |      |  |  |            | 
|                                                                 |  |              | 13,508,526 |      |  |  | 16,483,868 | 
|                                                                 |  |              |            |      |  |  |            | 

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.
Under current Israeli law the Company cannot declare and pay a
dividend unless the Company has a positive balance of retained
earnings from which the dividend may be declared and paid. If
the Company were to declare dividends in the future, the Company
would declare those dividends in NIS but pay those dividends to
its 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 has
not paid dividends in the past.



| |                
| | ---------------
| | 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, 2003.

The Company issued Series E Preferred Shares
in connection with its acquisition 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 its common stock 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 Option Plans

Under the 1996 Israel Stock Option Plan (the
1996 Israel Plan), the Company 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), the Company 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 a successor corporation assumes the options.

62



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under the 1998 U.S. Option Plan (the
1998 U.S. Plan), the Company 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 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 Shares 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 plan 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.

The Company introduced in 1999 an Employee Stock
Purchase Plan, which was adopted by the Board of Directors in
March 1999. The Company 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 2003, 196,691 total
shares were issued all of which were issued at $0.20 share.
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, 2003, 1,820,608 shares were available for
grant under the Employee Stock Purchase Plan. The weighted
average per share value of the shares at December 31, 2003,
2002 and 2001 was approximately $0.12, $0.29 and $0.88,
respectively.

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,

63



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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 effect on its results of
operations

In October 2001, the Company instituted a
company-wide incentive program, granting new options to each
employee and the Board of Directors under its 1998
U.S. Plan. With respect to management level employees, at
the level of director and above, the Company granted options to
purchase 2,270,000 Ordinary Shares 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 by the Company,
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 and 2003 were not achieved and
therefore the options were not accelerated on January 1,
2003 and 2004.

In 2003, the Company adopted an amendment to its
1996 Israel Plan. In accordance with the terms and conditions
imposed by Section 102 of the Israel Income Tax Ordinance,
grantees that receive options under the 2003 amendment to the
1996 Israel Plan are afforded certain tax benefits (excluding
controlling shareholders of the Company or those who are not
employees or directors of the Company). The Company has elected
the benefits available under a capital gains
alternative. There are various conditions that must be met in
order to qualify for these benefits, including registration of
the options in the name of a trustee (the Trustee)
for each of the employees who is granted options. Each option,
and any Ordinary Shares acquired upon the exercise of the
option, must be held by the Trustee for a period commencing on
the date of grant and ending no earlier than 24 months
after the end of the tax year in which the option was granted
and deposited in trust with the Trustee.

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, 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  |  |   |       |  | 
|                             |                    |               |           |             |   |                |           |                |   |                |                |   |       |       |  |   |       | 

64



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                             |                    |               |           |             |   |                |            |                |   |                |                |   |      |      |  |   |      |  | 
|---------------------------- | ------------------ | ------------- | --------- | ----------- | - | -------------- | ---------- | -------------- | - | -------------- | -------------- | - | ---- | ---- |  | - | ---- |  | 
|                             |                    |               |           |             |   |                |            |                |   | 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, 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 | 
|                             |                    |               |           |             |   |                |            |                |   |                |                |   |      |      |  |   |      | 
|                             | Options granted    |               |           | (1,271,388  | ) |                |            | 1,271,388      |   |                | $0.23 - $1.15  |   | $    | 0.90 |  |   |      |  | 
|                             | Options exercised  |               |           |            |   |                |            | (591,235       | ) |                | $0.12 - $0.77  |   | $    | 0.70 |  |   |      |  | 
|                             | Options canceled   |               |           | 2,661,847   |   |                |            | (2,661,847     | ) |                | $0.24 - $17.00 |   | $    | 2.26 |  |   |      |  | 
|Balance at December 31, 2003 |                    |               | 9,101,553 |             |   |                | 6,791,080  |                |   | $0.12 - $19.00 |                | $ | 3.62 |      |  | $ | 0.78 | 
|                             |                    |               |           |             |   |                |            |                |   |                |                |   |      |      |  |   |      | 

Exercise prices for options outstanding and
exercisable as of December 31, 2003 and the
weighted-average remaining contractual life are as follows:

|                         |  |                     |           |                     |  |                |      |                |  |                |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | -------------- | ---- | -------------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |           |                    
|                         |  | Options Outstanding |           | Options Exercisable
|                         |  |                     |           |                    
|                         |  | Number              |           | Weighted Average    |  | Weighted       |      | Number         |  | Weighted      
|                         |  | Outstanding         |           | Remaining           |  | Average        |      | Exercisable As |  | Average       
|Range of Exercise Prices |  | As of 12/31/03      |           | Contractual Years   |  | Exercise Price |      | of 12/31/03    |  | Exercise Price
|                         |  |                     |           |                     |  |                |      |                |  |               
|$0.23 - $0.50            |  |                     | 353,000   |                     |  |                | 5.78 |                |  | $              | 0.28  |  |  |  | 110,520   |  |  | $ | 0.25  | 
|$0.60 - $0.60            |  |                     | 1,158,274 |                     |  |                | 7.32 |                |  | $              | 0.60  |  |  |  | 218,072   |  |  | $ | 0.60  | 
|$0.61 - $0.76            |  |                     | 684,619   |                     |  |                | 4.08 |                |  | $              | 0.73  |  |  |  | 473,963   |  |  | $ | 0.76  | 
|$0.77 - $1.07            |  |                     | 709,806   |                     |  |                | 4.91 |                |  | $              | 0.91  |  |  |  | 346,715   |  |  | $ | 0.94  | 
|$1.15 - $1.15            |  |                     | 851,138   |                     |  |                | 6.89 |                |  | $              | 1.15  |  |  |  | 500,000   |  |  | $ | 1.15  | 
|$1.17 - $1.32            |  |                     | 1,037,344 |                     |  |                | 7.73 |                |  | $              | 1.31  |  |  |  | 183,562   |  |  | $ | 1.28  | 
|$1.44 - $4.50            |  |                     | 568,465   |                     |  |                | 3.47 |                |  | $              | 2.03  |  |  |  | 492,776   |  |  | $ | 2.03  | 
|$5.25 - $10.25           |  |                     | 510,384   |                     |  |                | 3.84 |                |  | $              | 7.13  |  |  |  | 496,509   |  |  | $ | 7.13  | 
|$12.56 - $19.00          |  |                     | 918,050   |                     |  |                | 3.61 |                |  | $              | 16.87 |  |  |  | 772,205   |  |  | $ | 16.82 | 
|                         |  |                     |           |                     |  |                |      |                |  |                |       |  |  |  |           |  |  |   |       | 
|$0.23 - $19.00           |  |                     | 6,791,080 |                     |  |                | 5.58 |                |  | $              | 3.62  |  |  |  | 3,594,322 |  |  | $ | 5.35  | 

There were 3,594,322, 3,184,448 and 3,125,561
options exercisable as of December 31, 2003, 2002 and 2001,
respectively. During the year ended December 31, 2003,
options to purchase 2,500 shares expired with a weighted
average exercise price of $0.24 per share. During the year
ended December 31, 2002, options to purchase
3,934 shares expired with a weighted average exercise price
of $0.03 per share. No options expired during the year
ended 2001. The weighted average per share value of the options
at December 31, 2003, 2002 and 2001 was approximately
$0.78, $0.71 and $0.85, respectively.

During the year ended December 31, 1999 in
connection with the grant of certain stock options, the Company
recorded deferred stock compensation of $2,608,000. Such amounts
represented the difference between the exercise price and the
deemed fair market value of its Ordinary Shares 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.

65



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

On March 25, 1999, the Company 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 were
full recourse and were secured by the shares, bore interest at a
rate in the range of 5.25% to 6% per annum and were payable
over the remaining vesting period. The shares were restricted
and were subject to a right of repurchase in favor of BackWeb in
accordance with the original options vesting schedule,
which was 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. There were no promissory notes
outstanding at December 31, 2003.



| |                   
| | ------------------
| | 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 was secured by the
Ordinary Shares acquired by the executive officers as a result
of the option exercise. Generally, each note was to be repaid in
equal installments over a four-year period that coincides with
the vesting schedule for the options. Each payment was to
consist of one-quarter of the outstanding principal, plus all
accrued unpaid interest as of the date of payment. Payments were
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, 2003, the largest amount of
Mr. Barkats indebtedness was $533,368, including
interest. Mr. Barkat paid the last installment of his loan
in 2003, and such loan has been fully paid.



| |                
| | ---------------
| | Warrants Issued

As part of its settlement of lease obligations
with its landlord in San Jose, California, in November 2003
the Company issued warrants to purchase 200,000 Ordinary Shares.
These warrants were valued at $0.66 per Ordinary Share, and
expire seven years from the date of issuance. The Company
recorded a charge of $120,000 related to the warrants.



|    |                                                 
|--- | ------------------------------------------------
|12. | BackWeb Technologies Inc. 401(k) Plan
    (Plan)

The Company offers a defined contribution plan
(the Plan) for eligible employees in the
U.S. During 2003, participants in the Plan were allowed to
contribute up to the lower of 25% of their compensation or
$12,000 in the Plan. The participants are 100% vested in the
Plan at the time of contribution. The Company does not make
contributions to the Plan.



|    |             
|--- | ------------
|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 Consumer Price Index (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
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.

66



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The Company is currently viewed as qualifying as
an industrial company under the Israeli Law for the
Encouragement of Industry (Taxation), 1969 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:

The Companys 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 the Company to tax
exemption for a period of two years commencing in the first year
that it will earn taxable income. After this the Company 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, 2003, the tax benefit period had
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, 2003, BackWeb was 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 linkage adjustment to the Israeli CPI and interest). The
conditions that are specified include 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, 2003, BackWeb had
approximately $93.0 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.



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

At December 31, 2003, BackWeb Technologies
Inc. had U.S. federal net operating loss carryforwards of
approximately $5.1 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, as amended and similar state provisions.
The annual limitation may result in the expiration of net
operating losses before utilization.

67



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |            
| | -----------
| | Pretax Loss

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

|                  |  |                         |        |      |  |      |        |  |  |   |        | 
|----------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                  |  |                        
|                  |  | Year Ended December 31,
|                  |  |                        
|                  |  | 2003                    |        | 2002 |  | 2001
|                  |  |                         |        |      |  |     
|Domestic (Israel) |  | $                       | 9,144  |      |  | $    | 8,715  |  |  | $ | 2,361  | 
|Foreign           |  |                         | 1,582  |      |  |      | 16,167 |  |  |   | 32,382 | 
|                  |  |                         |        |      |  |      |        |  |  |   |        | 
|                  |  | $                       | 10,726 |      |  | $    | 24,882 |  |  | $ | 34,743 | 
|                  |  |                         |        |      |  |      |        |  |  |   |        | 

Due to operating losses and the inability to
recognize the benefits there from, there was no provision for
income taxes for the years ended December 31, 2003, 2002 or
2001.



| |               
| | --------------
| | 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,
|                                               |  |             
|                                               |  | 2003         |        | 2002
|                                               |  |              |        |     
|U.S. net operating loss carryforwards          |  | $            | 1,864  |      |  | $ | 1,867  |  
|Reserves not currently deductible              |  |              | 2,659  |      |  |   | 2,651  |  
|Other, net                                     |  |              | 3,831  |      |  |   | 2,425  |  
|                                               |  |              |        |      |  |   |        |  
|Net deferred assets before valuation allowance |  |              | 8,354  |      |  |   | 6,943  |  
|Valuation allowance                            |  |              | (8,354 | )    |  |   | (6,943 | )
|                                               |  |              |        |      |  |   |        |  
|Net deferred tax assets                        |  | $            |       |      |  | $ |       |  
|                                               |  |              |        |      |  |   |        |  

As of December 31, 2003 the Company and its
subsidiaries had provided valuation allowances of approximately
$8.4 million in respect of deferred tax assets resulting
from tax loss carryforwards, and other temporary differences.
For the years ended December 31, 2003, 2002 and 2001, the
valuation allowance increased/(decreased) by $1.5 million,
$1.0 million and ($442,000), 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

The Company 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 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,
|                                              |               |                        
|                                              |               | 2003                    |       | 2002  |  | 2001
|                                              |               |                         |       |       |  |     
|Revenue from sales to unaffiliated customers: |               |                         |       |       |  |      |       |       |  |   |        |       
|                                              | North America |                         | $     | 4,757 |  |      | $     | 3,705 |  |   | $      | 6,695  | 
|                                              | Israel        |                         |       | 795   |  |      |       | 1,731 |  |   |        | 11,809 | 
|                                              | Europe        |                         |       | 950   |  |      |       | 911   |  |   |        | 2,134  | 
|                                              |               |                         |       |       |  |      |       |       |  |   |        |       
|                                              |               | $                       | 6,502 |       |  | $    | 6,347 |       |  | $ | 20,638 |       
|                                              |               |                         |       |       |  |      |       |       |  |   |        |       

68



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                   |               |              |     |      |  |      |       |       |  |   |       |       | 
|------------------ | ------------- | ------------ | --- | ---- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                   |               |             
|                   |               | December 31,
|                   |               |             
|                   |               | 2003         |     | 2002 |  | 2001
|                   |               |              |     |      |  |     
|Long-lived assets: |               |              |     |      |  |      |       |       |  |   |       |      
|                   | North America |              | $   | 193  |  |      | $     | 704   |  |   | $     | 2,038 | 
|                   | Israel        |              |     | 102  |  |      |       | 1,351 |  |   |       | 5,544 | 
|                   | Other         |              |     | 6    |  |      |       | 28    |  |   |       | 104   | 
|                   |               |              |     |      |  |      |       |       |  |   |       |      
|                   |               | $            | 301 |      |  | $    | 2,083 |       |  | $ | 7,686 |      
|                   |               |              |     |      |  |      |       |       |  |   |       |      

Revenue from one OEM customer, SAP AG, whose
contract terminated in 2002, accounted for 2%, 20% and 52% of
total revenue in the year ended December 31, 2003, 2002 and
2001, respectively. Revenue from one customer, Hewlett-Packard
Company, accounted for approximately 15% of the Companys
revenue in 2003.



|         |                                                
|-------- | -----------------------------------------------
|Note 15. | Accounting for and Disclosure of
    Guarantees

Guarantors Accounting for
Guarantees.The Company from
time-to-time enters into certain types of contracts that
contingently require the Company to indemnify parties against
third party claims. These contracts primarily relate to:
(i) certain real estate leases, under which the Company may
be required to indemnify property owners for environmental and
other liabilities, and other claims arising from the
Companys use of the applicable premises; (ii) certain
agreements with the Companys officers, directors and
employees and third parties, under which the Company may be
required to indemnify such persons for liabilities arising out
of their duties to the Company and (iii) agreements under
which the Company indemnifies customers and partners for claims
arising from intellectual property infringement.

The terms of such obligations vary. Generally, a
maximum obligation is not explicitly stated. Because the
obligated amounts of these types of agreements often are not
explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has
not been obligated to make any payments for such obligations,
and no liabilities have been recorded for these obligations on
its balance sheet as of December 31, 2003 and 2002.

The Company warrants to its customers that its
software products will operate substantially in conformity with
product documentation and that the physical media will be free
from defect. The specific terms and conditions of the warranties
are generally 90 days but may vary depending upon the
country in which the software is sold. The Company accrues for
known warranty issues if a loss is probable and can be
reasonably estimated, and accrues for estimated incurred but
unidentified warranty issues based on historical activity. To
date the Company has had no warranty claims. Due to thorough
product testing, the short time between product shipments and
the detection and correction of product failures, no history of
warranty claims, and the fact that no significant warranty
issues have been identified, the Company has not recorded a
warranty accrual to date.

The Company has entered into certain real estate
leases that require the Company to indemnify property owners
against certain environmental and other liabilities and other
claims.

Other Liabilities and Other
Claims.The Company is responsible for
certain costs of restoring leased premises to their original
condition, and in accordance with the recognition and
measurement provisions of FAS 143, Accounting for
Asset Retirement Obligations,the Company measured the
fair value of these obligations and determined them to be
immaterial.

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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.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of disclosure controls and
procedures.Our management, with the
participation of the Companys Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the
Companys disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange
Act)) as of the end of the period covered by this report.
Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such
period, our disclosure controls and procedures were sufficiently
effective in recording, processing, summarizing, and reporting,
on a timely basis, information required to be disclosed in the
reports that we file or submit under the Exchange Act.

Our management, including the Chief Executive
Officer and Chief Financial Officer, does not expect that our
disclosure controls and procedures or our internal controls will
prevent all error and all fraud. In designing and evaluating our
disclosure controls and procedures, management recognized that
disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute,
assurance that the objectives of the disclosure controls and
procedures are met. Further, in designing disclosure controls
and procedures, we were required to apply our judgment in
evaluating the cost-benefit relationship of possible disclosure
controls and procedures. Because of the inherent limitations in
all control systems that are designed based in part upon certain
assumptions about the likelihood of future events, no evaluation
of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within our Company have
been detected.

Our independent auditor, Ernst & Young
LLP, has communicated to our audit committee and management that
it intends to issue its annual management letter which will
include a reportable condition related to the operation of
certain internal controls. At December 31, 2003, certain
account reconciliations, analyses, and supporting documentation
related to our Israeli and European operations from prior years
were not prepared or reviewed on a timely basis due to multiple
higher priorities and as a result of both personnel changes and
changes in the location of personnel responsible for such items
within our accounting organization.

Prior to the issuance of our financial
statements, we completed the account reconciliations, analyses,
and management review such that we can certify that the
information contained in our financial statements as of and for
each of the three years in the period ended December 31,
2003 fairly presents in all material respects our financial
condition and results of operations.

Changes in internal control over financial
reporting.There were no changes in
our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

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PART III






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

Directors and Executive Officers

Our current directors and designated executive
officers, as of March 30, 2004, are:

|                  |  |     |    |          |  |                        
|----------------- |  | --- | -- | -------- |  | -----------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|Eli Barkat        |  |     | 40 |          |  | Chairman of the Board  
|Charles Federman  |  |     | 47 |          |  | Director               
|William L. Larson |  |     | 47 |          |  | Director               
|Isabel Maxwell    |  |     | 53 |          |  | Director               
|Gil Shwed         |  |     | 35 |          |  | Director               
|Erez Lorber       |  |     | 39 |          |  | Chief Executive Officer
|Michael A. Morgan |  |     | 41 |          |  | Chief Financial Officer

Eli Barkathas
served as our Chairman of the Board since 1996. He also served
as our Chief Executive Officer from 1996 through December 2003.
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.

William L. Larsonhas been a director of BackWeb since
September 1997. Since February 2001, Mr. Larson has served
on the Board of Directors of several technology companies. 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 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 January
2004, Ms. Maxwell has served as Vice President of Strategy
at Celltick Technologies, Ltd., a private Israeli company,
providing mobile interactive broadcast products and services.
From September 2003 to January 2004, Ms. Maxwell served as
Chief Executive Officer at iCognito, Ltd., a private
Israeli-American company focused on developing internet content
filtering systems. From March 2001 until September 2003,
Ms. Maxwell 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

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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 Bachelor of Arts and Master
of Arts 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, holding
office until the Annual Meeting of Shareholders to be held in
2006.

Erez Lorberbecame
our Chief Executive Officer as of January 1, 2004. Prior to
that, he served as our Vice President, Worldwide Sales and
Business Development from October 2002 through December 2003.
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.

Michael A. Morganhas served as our Chief Financial
Officer since August 2002. 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.

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

Audit Committee Financial Expert

The Board of Directors of the Company has
determined that each of William Larson, Gil Shwed and Isabel
Maxwell, who are all the members of the Audit Committee of the
Companys Board of Directors, qualify as audit
committee financial experts, as defined under
Item 401(h) of Regulation S-K, by reason of each of
their relevant business experience, which is set forth above,
and that they are independent as defined under applicable Nasdaq
listing standards and as required under Rule 10A-3(b)(1)
under the Securities Exchange Act of 1934.

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.

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 2003, all filing requirements

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applicable to its executive officers, directors
and 10 percent shareholders were met, except for a late
filing of a Form 4 by each of Messrs. Federman and
Shwed and Ms. Maxwell, relating to an option grant in July
2003 to each of the non-employee directors following the annual
meeting of shareholders, and a late filing of a Form 4 by
Mr. Morgan relating to an option grant in October 2003.


Code of Ethics

The Company has adopted a Code of Ethics for all
of its directors and employees, including its principal
executive officer, principal financial officer, and principal
accounting officer. A copy of this Code of Ethics is available
at the Companys website, www.backweb.com. Any substantive
amendments to the code and any grant of waiver from a provision
of the code requiring disclosure under applicable SEC or Nasdaq
rules will be disclosed on such website.






|         |                       
|-------- | ----------------------
|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, 2003, December 31,
2002 and December 31, 2001, by our former Chief Executive
Officer and the Companys two other current executive
officers (collectively, our Named Executive
Officers):

Summary Compensation Table

|                            |                           |  |      |                     |  |              |         |            |     |             |        |         |  |  |        |        |  |  |         |         | 
|--------------------------- | ------------------------- |  | ---- | ------------------- |  | ------------ | ------- | ---------- | --- | ----------- | ------ | ------- |  |  | ------ | ------ |  |  | ------- | ------- | 
|                            |                           |  |      |                     |  |              |         |            |     | Long Term  
|                            |                           |  |      |                     |  | Compensation
|                            |                           |  |      | Annual Compensation |  | Awards      
|                            |                           |  |      |                     |  |             
|                            |                           |  |      |                     |  | Other Annual |         | Securities
|                            |                           |  |      |                     |  | Compensation |         | Underlying
|Name and Principal Position |                           |  |      | Salary ($)          |  | Bonus ($)    |         | ($)(4)     |     | Options (#)
|                            |                           |  |      |                     |  |              |         |            |     |            
|Eli Barkat(1)               |                           |  | 2003 |                     |  |              | 207,360 |            |     |             | 85,000 |         |  |  | 0      |        |  |  | 0       |        
|                            | Chairman and former Chief |  |      | 2002                |  |              |         | 281,264    |     |             |        | 0       |  |  |        | 0      |  |  |         | 725,000 | 
|                            | Executive Officer         |  |      | 2001                |  |              |         | 144,000    | (2) |             |        | 0       |  |  |        | 0      |  |  |         | 225,000 | 
|Erez Lorber(2)              |                           |  | 2003 |                     |  |              | 193,500 |            |     |             | 25,755 |         |  |  | 69,600 |        |  |  | 400,000 |        
|                            | Chief Executive Officer   |  |      | 2002                |  |              |         | 199,771    |     |             |        | 29,812  |  |  |        | 19,377 |  |  |         | 37,500  | 
|                            |                           |  |      | 2001                |  |              |         | 215,000    |     |             |        | 142,273 |  |  |        | 7,200  |  |  |         | 275,000 | 
|Michael A. Morgan(3)        |                           |  | 2003 |                     |  |              | 190,000 |            |     |             | 41,120 |         |  |  | 0      |        |  |  | 40,000  |        
|                            | Chief Financial Officer   |  |      | 2002                |  |              |         | 69,910     |     |             |        | 12,380  |  |  |        | 0      |  |  |         | 250,000 | 
|                            |                           |  | 2001 |                     |  |              |        |            |     |             |       |         |  |  |       |        |  |  |        |        



---



|    |                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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. Lorber succeeded Mr. Barkat as
    Chief Executive Office in January 2004. Prior thereto, he served
    as Vice President, Worldwide Sales and Business Development from
    October 2002 through December 2003. From May 2000 to September
    2002, he served as our Vice President, Business Development.
|   
|(3) | Mr. Morgan joined BackWeb in August 2002.                                                                                                                                                                                                                                                                       
|   
|(4) | The Other Annual Compensation paid to
    Mr. Lorber were commissions.                                                                                                                                                                                                                                        

Stock Option Grants in Fiscal 2003

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, 2003, 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

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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 1,191,388 options granted to employees of the
Company under the Option Plans during the fiscal year ended
December 31, 2003.

The exercise price of each option was equal to
the closing sale price of our Ordinary Shares as quoted on the
Nasdaq SmallCap Market 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 2003

|                  |  |             |         |               |  |             |      |            |  |            |      |                        |  |     |          |  |  |  |          |  |  |   |         |  |  |   |         | 
|----------------- |  | ----------- | ------- | ------------- |  | ----------- | ---- | ---------- |  | ---------- | ---- | ---------------------- |  | --- | -------- |  |  |  | -------- |  |  | - | ------- |  |  | - | ------- | 
|                  |  |             |         |               |  |             |      |            |  |            |      |                       
|                  |  |             |         |               |  |             |      |            |  |            |      | Potential Realizable  
|                  |  |             |         |               |  |             |      |            |  |            |      | Value at Assumed      
|                  |  | Number of   |         | Percent of    |  |             |      |            |  |            |      | Annual Rates of Stock 
|                  |  | Securities  |         | Total Options |  |             |      |            |  |            |      | Price Appreciation for
|                  |  | Underlying  |         | Granted to    |  | Exercise or |      |            |  |            |      | Option Term           
|                  |  | Options     |         | Employees in  |  | Base Price  |      |            |  | Expiration |      |                       
|Name              |  | Granted (#) |         | Fiscal Year   |  | ($/Share)   |      | Grant Date |  | Date       |      | 5%                     |  | 10%
|                  |  |             |         |               |  |             |      |            |  |            |      |                        |  |    
|Eli Barkat        |  |             | 0       |               |  |             |     |            |  | $          |     |                        |  |     |         |  |  |  |         |  |  | $ |        |  |  | $ |        | 
|Erez Lorber       |  |             | 400,000 |               |  |             | 33.6 | %          |  | $          | 1.15 |                        |  |     | 10/25/03 |  |  |  | 10/25/10 |  |  | $ | 187,266 |  |  | $ | 436,410 | 
|Michael A. Morgan |  |             | 40,000  |               |  |             | 3.4  | %          |  | $          | 1.15 |                        |  |     | 10/25/03 |  |  |  | 10/25/10 |  |  | $ | 18,727  |  |  | $ | 43,641  | 

The 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. Mr. Lorbers grant was contingent on his
accepting and assuming the position of Chief Executive Officer
on January 1, 2004.

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 options during the fiscal year ended December 31, 2003.
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, 2003.

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 as quoted on the Nasdaq SmallCap Market on
December 31, 2003 (which was $1.30 per Ordinary
Share), less the exercise price payable for such Ordinary Shares.

Aggregate Option Exercises in Fiscal
2003

|                  |  |              |   |              |  |                            |   |                      |  |             |         |               |  |  |         |  |  |   |        |  |  |   |         | 
|----------------- |  | ------------ | - | ------------ |  | -------------------------- | - | -------------------- |  | ----------- | ------- | ------------- |  |  | ------- |  |  | - | ------ |  |  | - | ------- | 
|                  |  |              |   |              |  |                            |   |                     
|                  |  |              |   |              |  | Number of Securities       |   | Value of Unexercised
|                  |  |              |   |              |  | Underlying Unexercised     |   | In-the-Money Options
|                  |  | Shares       |   |              |  | Options at Fiscal Year End |   | at Fiscal Year End  
|                  |  | Acquired on  |   | Value        |  |                            |   |                     
|Name              |  | Exercise (#) |   | Realized ($) |  | Exercisable                |   | Unexercisable        |  | Exercisable |         | Unexercisable
|                  |  |              |   |              |  |                            |   |                      |  |             |         |              
|Eli Barkat        |  |              | 0 |              |  | $                          | 0 |                      |  |             | 842,187 |               |  |  | 857,813 |  |  | $ | 29,109 |  |  | $ | 22,641  | 
|Erez Lorber       |  |              | 0 |              |  | $                          | 0 |                      |  |             | 281,874 |               |  |  | 565,626 |  |  | $ | 84,687 |  |  | $ | 167,688 | 
|Michael A. Morgan |  |              | 0 |              |  | $                          | 0 |                      |  |             | 83,333  |               |  |  | 206,667 |  |  | $ | 88,333 |  |  | $ | 182,667 | 

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Employment Agreements and Change of Control
Arrangements

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

Mr. Lorbers offer letter with respect
to the Chief Executive Officer position sets his gross annual
salary at $230,000, with a 2004 annual incentive bonus of
$137,000 in the event that he attains certain goals to be set by
the Board of Directors. In the event that we terminate his
employment without cause, Mr. Lorber will receive six
(6) months base pay as a severance package. In the
event that we are acquired by merger, consolidation, or an asset
sale and a comparable position is not available in the new
company, the vesting period for any unvested options held by
Mr. Lorber will automatically accelerate to be 100% vested
as of the date of the closing of any such transaction.

Mr. Morgans initial employment offer
letter sets his initial annual salary at $190,000, with
individual and Company performance related bonuses totaling
$80,000 annually if certain individual and corporate goals are
met. In the event that the Company is acquired by merger,
consolidation, or an asset sale and a comparable position is not
available in the new company, the vesting period for any
unvested options held by Mr. Morgan will automatically
accelerate to be 100% vested as of the date of the closing of
any such transaction.

Compensation of Directors

Directors who are not employees of BackWeb are
compensated for their services as follows:



| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A retainer fee of $1,000, per fiscal quarter;                                                                                                               
|
| |  | A fee of $1,000 for each meeting of the Board of
    Directors attended; and                                                                                
|
| |  | A fee of $1,000 for each committee meeting
    attended, with the Chair of the Audit Committee being paid an
    additional $500 for each committee meeting.

In addition, non-employee directors receive a
non-discretionary option grant under the Companys Option
Plans to acquire 50,000 Ordinary Shares upon their initial
election or appointment to the Board of Directors and annual
option grants of 15,000 Ordinary Shares at each Annual General
Meeting of Shareholders thereafter during their term of service.
Grants are not be made in cases where the initial term is
shorter than six months. These grants vest over a period of four
years, with one-quarter of the shares underlying the option
becoming vested and exercisable after one year and monthly
thereafter over the remaining period of thirty-six months,
subject to continued service as a Director of the Company. The
grant date of any such options is deemed to be the date that the
non-employee director is initially elected or appointed to the
Board. The per share exercise price is the closing sale price of
the Companys Ordinary Shares on The Nasdaq SmallCap Market
the day before the grant date.

Reasonable expenses incurred by each director in
connection with his or her duties as a director are also
reimbursed. A Board member who is also an employee of BackWeb
does not receive compensation for service as a director.

Compensation Committee Interlocks and Insider
Participation

Messrs. Federman and Larson are members of
the Compensation Committee of our Board of Directors. Neither
has ever been one of our officers or employees nor during the
past fiscal year had any other interlocking relationships as
defined by the SEC. None of our executive officers currently
serves or in the past has served as a member of the board of
directors or compensation committee of any entity that has one
or more executive officers serving on our board or compensation
committee.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|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 15, 2004,
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

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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 15, 2004, but excludes
Ordinary Shares underlying options or warrants held by any other
person. Percentage of beneficial ownership is based on
40,708,414 Ordinary Shares outstanding as of March 15, 2004.

|                                                                      |                                  |                    |           |                    |  |  |      |     |  
|--------------------------------------------------------------------- | -------------------------------- | ------------------ | --------- | ------------------ |  |  | ---- | --- | -
|                                                                      |                                  | 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          |  |  |      | 8.2 | %
|                                                                      | 8 Hamarpe Street                 |                    |           |                    |  |  |      |     |  
|                                                                      | Har Hotzvim                      |                    |           |                    |  |  |      |     |  
|                                                                      | Jerusalem 91450 Israel           |                    |           |                    |  |  |      |     |  
|                                                                      | Yuval 63 Holdings (1995) Ltd.(2) |                    |           | 3,352,342          |  |  |      | 8.2 | %
|                                                                      | 8 Hamarpe Street                 |                    |           |                    |  |  |      |     |  
|                                                                      | Har Hotzvim                      |                    |           |                    |  |  |      |     |  
|                                                                      | Jerusalem 91450 Israel           |                    |           |                    |  |  |      |     |  
|                                                                      | NirBarkat Holdings Ltd.(3)       |                    |           | 3,352,342          |  |  |      | 8.2 | %
|                                                                      | 8 Hamarpe Street                 |                    |           |                    |  |  |      |     |  
|                                                                      | Har Hotzvim                      |                    |           |                    |  |  |      |     |  
|                                                                      | Jerusalem 91450 Israel           |                    |           |                    |  |  |      |     |  
|Named Executive Officers and
    Directors                            |                                  |                    |           |                    |  |  |      |    
|Eli Barkat(4)                                                         |                                  |                    | 4,924,910 |                    |  |  | 11.8 | %  
|Erez Lorber(5)                                                        |                                  |                    | 328,881   |                    |  |  | *    |    
|Michael A. Morgan(6)                                                  |                                  |                    | 114,166   |                    |  |  | *    |    
|Charles Federman(7)                                                   |                                  |                    | 274,301   |                    |  |  | *    |    
|William L. Larson(8)                                                  |                                  |                    | 47,673    |                    |  |  | *    |    
|Isabel Maxwell(9)                                                     |                                  |                    | 12,500    |                    |  |  | *    |    
|Gil Shwed(10)                                                         |                                  |                    | 86,562    |                    |  |  | *    |    
|Named Executive Officers and directors as a group
    (7 persons)(11) |                                  |                    | 5,788,993 |                    |  |  | 13.7 | %  



---



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



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Eli Barkat substantially controls the voting
    power of EliBarkat Holdings Ltd. The shares listed in the table
    above for EliBarkat Holdings Ltd. do not include
    (i) 548,131 Ordinary Shares owned directly by
    Mr. Barkat, (ii) 1,000 Ordinary Shares owned directly
    by Mr. Barkats wife, with respect to which he
    disclaims beneficial ownership, (iii) and 606,592 Ordinary
    Shares held by BRM Technologies Ltd. in which EliBarkat Holdings
    Ltd. is a shareholder, with respect to which shares
    Mr. Barkat and EliBarket Holdings Ltd. disclaim control and
    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 606,592
    Ordinary Shares held by BRM Technologies Ltd. in which
    Yuval 63 Holdings (1995) Ltd. is a shareholder, with
    respect to which shares Mr. Rakay and Yuval 63 Holdings
    (1995) Ltd. disclaim control and beneficial ownership.                                                                                         

76



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##### Table of Contents





| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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 Chairman and former Chief
    Executive Officer. The shares listed in the table above for Nir
    Barkat Ltd. do not include 606,592 Ordinary Shares held by BRM
    Technologies Ltd. in which Nir Barkat Ltd. is a shareholder,
    with respect to which shares Mr. Barkat and Nir Barkat Ltd.
    disclaim control and beneficial ownership.
|
| | (4) | 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 1,023,437 Ordinary Shares that
    are exercisable within sixty days of March 15, 2004.                                                                                                                             
|
| | (5) | The shares listed in the table above for
    Mr. Lorber include options to purchase 316,2508 Ordinary
    Shares that are exercisable within sixty days of March 15,
    2004.                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (6) | The shares listed in the table above for
    Mr. Morgan include options to purchase 104,166 Ordinary
    Shares that are exercisable within sixty days of March 15,
    2004.                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (7) | The shares listed in the table above for
    Mr. Federman include options to purchase 45,728 Ordinary
    Shares that are exercisable within sixty days of March 15,
    2004.                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (8) | The shares listed in the table above for
    Mr. Larson include options to purchase 47,673 Ordinary
    Shares that are exercisable within sixty days of March 15,
    2004.                                                                                                                                                                                                                                                                                                                                                                                            
|
| | (9) | The shares listed in the table above for Isabel
    Maxwell consist of options to purchase 12,500 Ordinary Shares
    that are immediately exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                 



|     |                                                                                                                                                                                                                  
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | The shares listed in the table above for
    Mr. Shwed include options to purchase 86,562 Ordinary
    Shares that are exercisable within sixty days of March 15,
    2004.                                      
|    
|(11) | The shares listed in the table above for our
    executive officers and directors as a group include 1,636,316
    Ordinary Shares subject to options which are exercisable within
    60 days of March 15, 2004.

Equity Compensation Plan Information

Our shareholders have approved all our equity
compensation plans.

The following table summarizes the number of our
Ordinary Shares that may be issued under our equity compensation
plans as of December 31, 2003.

|                                                               |  |                      |           |                      |  |                       |      |  |  |  |           | 
|-------------------------------------------------------------- |  | -------------------- | --------- | -------------------- |  | --------------------- | ---- |  |  |  | --------- | 
|                                                               |  |                      |           |                      |  | 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)  |  |                      | 6,791,080 |                      |  | $                     | 3.62 |  |  |  | 6,737,446 | 
|Equity compensation plans not approved by
    security holders |  |                      | -0-       |                      |  |                       | -0-  |  |  |  | -0-       | 
|                                                               |  |                      |           |                      |  |                       |      |  |  |  |           | 
|Total                                                          |  |                      | 6,791,080 |                      |  | $                     | 3.62 |  |  |  | 6,737,446 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
    1,820,608 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

77



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##### Table of Contents



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | 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 was secured by the
Ordinary Shares acquired by the executive officers as a result
of the option exercise. Generally, each note was to be repaid in
equal installments over a four-year period that coincides with
the vesting schedule for the options. Each payment was to
consist of one-quarter of the outstanding principal, plus all
accrued unpaid interest as of the date of payment. Payments were
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, 2003, the largest amount of
Mr. Barkats indebtedness was $533,368, including
interest. Mr. Barkat paid the last installment of his loan
in 2003, and such loan has been fully paid.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Principal Accountant Fees and
Services

The following table summarizes the aggregate fees
billed to the Company by its independent auditor
Ernst & Young LLP, the member firms of Ernst &
Young Global, and their respective affiliates (collectively,
Ernst & Young Entities):

|                   |  |      |         |      |  |   |         | 
|------------------ |  | ---- | ------- | ---- |  | - | ------- | 
|                   |  | 2003 |         | 2002
|                   |  |      |         |     
|Audit Fees         |  | $    | 240,000 |      |  | $ | 199,000 | 
|Audit-Related Fees |  |      | 24,000  |      |  |   | 256,000 | 
|Tax Fees           |  |      | 166,000 |      |  |   | 147,000 | 
|All Other Fees     |  |      | 198,000 |      |  |   | 367,000 | 
|                   |  |      |         |      |  |   |         | 
|Total              |  | $    | 628,000 |      |  | $ | 969,000 | 
|                   |  |      |         |      |  |   |         | 

Audit Fees.This
category includes the audit of BackWebs annual financial
statements and review of financial statements included in
BackWebs Quarterly Reports on Form 10-Q. This
category also includes advice on audit and accounting matters
that arose during, or as a result of, the audit or the review of
interim financial statements, and statutory audits.

Audit-Related Fees.This category consists of assurance and related services by the
Ernst & Young Entities that are reasonably related to
the performance of the audit or review of BackWebs
financial statements and are not reported above under
Audit Fees. The services for the fees disclosed
under this category related to preparation of financial
statements in the Companys international subsidiaries and
other local compliance activities.

Tax Fees.This
category consists of professional services rendered by
Ernst & Young Entities for tax compliance and tax
advice. The services for the fees disclosed under this category
include tax return preparation and technical tax advice.

All Other Fees.This
category consists of the aggregate fees billed during the prior
two fiscal years for professional services rendered by
Ernst & Young Entities, other than the services
reported above. The services for the fees disclosed under this
category include liquidation services for certain international
subsidiaries, as well as other consulting services unrelated to
audit and tax services.

The services performed by the independent auditor
in 2003 were pre-approved in accordance with the pre-approval
procedures adopted by the Audit Committee, with the exception of
certain limited payroll tax work in the United Kingdom for the
Companys subsidiary located in the United Kingdom, which
work was

78



---



##### Table of Contents



approved by the Audit Committee at its
January 27, 2004 meeting. All requests for audit,
audit-related, tax, and other services must be submitted to the
Audit Committee for pre-approval with an estimate of fees for
the services. Pre-approval is generally provided at regularly
scheduled meetings.





PART IV






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

(a) The following documents are included in
this annual report on Form 10-K:



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Financial Statements.                                                                                                                                                                                                    
|
| | The Consolidated Financial Statements filed as
    part of this Annual Report on Form 10-K are included at
    Part II, Item 8, as listed at
    Part II, Item 8 (b), and such list is
    incorporated herein by reference.
|
| | 2. Financial Statement Schedules.                                                                                                                                                                                           



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Schedule II: Schedule of Valuation and
    Qualifying Accounts at December 31, 2003

SCHEDULE II

BACKWEB TECHNOLOGIES, LTD.

SCHEDULE OF VALUATION AND QUALIFYING
ACCOUNTS

At December 31, 2003


|                                                                 |  |                |       |               |  |              |       |            |  |   |        |   |  |   |       | 
|---------------------------------------------------------------- |  | -------------- | ----- | ------------- |  | ------------ | ----- | ---------- |  | - | ------ | - |  | - | ----- | 
|                                                                 |  |                |       |               |  | Write-off of |       |           
|                                                                 |  | Balance at     |       | Provision for |  | Previously   |       | Balance at
|                                                                 |  | Beginning      |       | Doubtful      |  | Provided     |       | End of    
|                                                                 |  | of Period      |       | Accounts      |  | Accounts     |       | Period    
|                                                                 |  |                |       |               |  |              |       |           
|                                                                 |  |               
|                                                                 |  | (In thousands)
|Year Ended December 31, 2003 Allowance for
    Doubtful Accounts |  | $              | 2,046 |               |  | $            | 104   |            |  | $ | 0      |   |  | $ | 2,150 | 
|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 | 



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 exhibits filed as part of this annual report
    on Form 10-K are listed in the Exhibit Index
    immediately preceding the exhibits and are incorporated herein.

(b) Reports on Form 8-K

On October 22, 2003, the Company filed a
current report on Form 8-K that (1) furnished under
Item 12 a press releases issued by the Company announcing
its financial results for the quarter ended September 30,
2003 and (2) filed under Item 5 a press release issued by
the Company announcing that BackWebs Vice President of
Worldwide Sales and Business Development, Erez Lorber, was
promoted to Chief Executive Officer of BackWeb, effective
January 1, 2004, and that Eli Barkat, BackWebs
Chairman of the Board and current Chief Executive Officer, would
maintain his role as Chairman of the Board.

79



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##### 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 30, 2004



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



| |     |                 
| | --- | ----------------
| | By: | /s/ EREZ LORBER,

| |                        
| | -----------------------
| |                        
| | Erez Lorber,           
| | Chief Executive Officer

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.

|                                       |  |                                                                              |  |                |  |     
|-------------------------------------- |  | ---------------------------------------------------------------------------- |  | -------------- |  | ----
|                                       |  | Signature                                                                    |  | Title          |  | Date
|                                       |  |                                                                              |  |                |  |     
|                                      
|/s/ EREZ LORBERErez Lorber             |  | Chief Executive Officer
    (Principal Executive Officer)                    |  | March 30, 2004
|                                      
|/s/ MICHAEL A. MORGANMichael A. Morgan |  | Chief Financial Officer
    (Principal Financial and
    Accounting Officer) |  | March 30, 2004
|                                      
|/s/ ELI BARKATEli Barkat               |  | Chairman of the Board of Directors                                           |  | March 30, 2004
|                                      
|/s/ CHARLES FEDERMANCharles Federman   |  | Director                                                                     |  | March 30, 2004
|                                      
|/s/ WILLIAM L. LARSONWilliam L. Larson |  | Director                                                                     |  | March 30, 2004
|                                      
|/s/ GIL SHWEDGil Shwed                 |  | Director                                                                     |  | March 30, 2004
|                                      
|/s/ ISABEL MAXWELLIsabel Maxwell       |  | Director                                                                     |  | March 30, 2004

80



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##### 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*         |  | Appendix A to Israeli Stock Option Plan,
    effective January 1, 2003                                                                                                                                                                   
|        | 10 | .3*         |  | Form of Option Agreement for Israeli Stock Option
    Plan                                                                                                                                                                               
|        | 10 | .4*         |  | 1996 U.S. Stock Option Plan.(4)                                                                                                                                                                                                          
|        | 10 | .5*         |  | 1998 U.S. Stock Option Plan (Amended and
    Restated as of January 1, 2002).(5)                                                                                                                                                         
|        | 10 | .6*         |  | Form of Option Agreement for 1998 U.S. Stock
    Option Plan                                                                                                                                                                             
|        | 10 | .7*         |  | 1999 Employee Stock Purchase Plan.(6)                                                                                                                                                                                                    
|        | 10 | .8          |  | Lease Agreement for 3 Abba Hillel Street, Ramat
    Gan, Israel (English translation).(7)                                                                                                                                                
|        | 10 | .9          |  | 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.(8)                                                    
|        | 10 | .10         |  | 1st Amendment to Lease 
    Expansion, made May 12, 2000, between Speiker Properties,
    L.P. and BackWeb Technologies, Inc.(9)                                                                                                        
|        | 10 | .11         |  | 2nd Amendment to Lease 
    Expansion, made November 7, 2000, between Speiker
    Properties, L.P. and BackWeb Technologies, Inc.(10)                                                                                                   
|        | 10 | .12         |  | 3rd Amendment to Lease, made between
    CA-Gateway Office Limited Partnership, as successor by
    conversion to EOP-Gateway Office, L.L.C., as successor in
    interest to Speiker Properties, L.P., and BackWeb Technologies
    Inc.
|        | 10 | .13         |  | Promissory Note by BackWeb Technologies Inc., as
    Maker, to CA-Gateway Office Limited Partnership, as Payee, date
    October 27, 2003                                                                                                
|        | 10 | .14         |  | Guaranty of Lease by BackWeb Technologies Ltd.                                                                                                                                                                                           
|        | 10 | .15         |  | Guaranty of Note by BackWeb Technologies Ltd.                                                                                                                                                                                            
|        | 10 | .16         |  | Warrant to Purchase 200,000 Ordinary Shares,
    issued by BackWeb Technologies Ltd. to CA-Gateway Office Limited
    Partnership                                                                                                        
|        | 10 | .17         |  | 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.(11)                                                  
|        | 10 | .18         |  | 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.(12)                                                                     
|        | 10 | .19*        |  | Employment Offer Letter, dated December 23,
    2003, between Erez Lorber and the Company                                                                                                                                                
|        | 10 | .20*        |  | Employment Offer Letter, dated July 3, 2002,
    between Michael A. Morgan and the Company                                                                                                                                               
|        | 10 | .21*        |  | Form of Promissory Note and Security Agreement
    for executive officer loans for early exercise of options
    granted prior to initial public offering.(13)                                                                           
|        | 10 | .22         |  | Sublease Agreement, dated as of
    September 27, 1996, between SSA Canada Corporation, Lanacom
    Inc. and Confederation Life Insurance Company.(14)                                                                                   
|        | 10 | .23         |  | Amendment to Sublease Agreement, dated as of
    June 1, 2000, among Zurich Canadian Holdings Limited,
    BackWeb Canada, Inc., and BackWeb Technologies Ltd.(15)                                                                       
|        | 21 | .1          |  | Subsidiaries of the Registrant.(16)                                                                                                                                                                                                      
|        | 23 | .1          |  | Consent of Ernst & Young LLP,
    Independent Auditors                                                                                                                                                                                   
|        | 23 | .2          |  | Consent of Kost Forer Gabbay & Kasierer,
    a member of Ernst & Young Global, Independent
    Auditors                                                                                                                                  
|        | 31 | .1          |  | Certification of Principal Executive Officer,
    pursuant to Rule 13a-14(a) Under the Securities Exchange
    Act of 1934                                                                                                               

81



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                            
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 31 | .2          |  | Certification of Principal Financial Officer,
    pursuant to Rule 13a-14(a) Under the Securities Exchange
    Act of 1934                                                                 
|        | 32 | .1          |  | Certifications of Chief Executive Officer and
    Chief Financial Officer, pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002



---



| |     |                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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
    Exhibit 10.2 from the Companys Registration Statement
    on Form F-1 (File No. 333-10358).                                                                  
|
| | (5) | 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.                    
|
| | (6) | Incorporated herein by reference to
    Exhibit 10.4 from the Companys Registration Statement
    on Form F-1 (File No. 333-10358).                                                                  
|
| | (7) | Incorporated herein by reference to
    Exhibit 10.5 from the Companys Registration Statement
    on Form F-1 (File No. 333-10358).                                                                  
|
| | (8) | Incorporated herein by reference to
    Exhibit 10.7 from the Companys Registration Statement
    on Form F-1 (File No. 333-10358).                                                                  
|
| | (9) | 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.                                



|     |                                                                                                                                                                                    
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | 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.             
|    
|(11) | Incorporated herein by reference to
    Exhibit 10.8 from the Companys Registration Statement
    on Form F-1 (File No. 333-10358).                                               
|    
|(12) | Incorporated herein by reference to
    Exhibit 10.12 from the Companys Registration
    Statement on Form F-1 (File No. 333-10358).                                              
|    
|(13) | 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.             
|    
|(14) | 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.             
|    
|(15) | 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.             
|    
|(16) | Incorporated herein by reference to the
    corresponding Exhibit from the Companys Annual Report on
    Form 10-K for the year ended December 31, 2002, filed
    March 31, 2002.



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

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