##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K



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|   |  |                                                                                           
|-- |  | ------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the Fiscal Year Ended December 31,
	2001                                              
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-26241

BACKWEB TECHNOLOGIES LTD.

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                         
|--------------------------------------------------------------- |  | ----------------------------------------
|Israel                                                          |  | 77-0436149                              
|(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

Based on the
closing sales price of March 1, 2002 the aggregate market
value of the voting stock held by nonaffiliates of the
registrant was $27,225,538. As of March 1, 2002, registrant
had outstanding 38,872,292 shares of Ordinary Shares.

DOCUMENTS INCORPORATED BY REFERENCE

None.



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TABLE OF CONTENTS



|              |                                                                                              |  |  |  |  |  |  | 
|------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                            
|              | Item 2. Properties                                                                          
|              | Item 3. Legal Proceedings                                                                   
|              | Item 4. Submission of Matters to a Vote of Security Holders                                 
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                 
|              | Item 11. Executive Compensation                                                             
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                     
|              | Item 13. Certain Relationships and Related Transactions                                     
|PART IV      
|              | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                   
|Exhibit 10.3 
|Exhibit 10.31
|Exhibit 10.32
|Exhibit 10.33
|Exhibit 10.34
|Exhibit 23.1 



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.

ANNUAL REPORT ON FORM 10-K

Year Ended December 31, 2001


TABLE OF CONTENTS

|         |  |                                                                                        |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                        |  | Page
|         |  |                                                                                        |  |     
|PART I  
|Item 1.  |  | Business                                                                               |  |      | 2  | 
|Item 2.  |  | Properties                                                                             |  |      | 25 | 
|Item 3.  |  | Legal Proceedings                                                                      |  |      | 26 | 
|Item 4.  |  | Submission of Matter to a Vote of Security Holders                                     |  |      | 26 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
	Related Stockholder Matters                 |  |      | 27 | 
|Item 6.  |  | Selected Consolidated Financial Data                                                   |  |      | 28 | 
|Item 7.  |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |      | 30 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
	Market Risk                            |  |      | 38 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                            |  |      | 39 | 
|Item 9.  |  | Changes in and Disagreements With Accountants On
	Accounting and Financial Disclosure  |  |      | 62 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                     |  |      | 63 | 
|Item 11. |  | Executive Compensation                                                                 |  |      | 65 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  |      | 69 | 
|Item 13. |  | Certain Relationships and Related Transactions                                         |  |      | 71 | 
|PART IV 
|Item 14. |  | Exhibits, Financial Statement Schedules, and
	Reports on Form 8-K                      |  |      | 73 | 

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This Annual Report on Form 10-K contains
express or implied forward-looking statements. The words
believes, expects,
anticipates, intends,
forecasts, projects, plans,
estimates and similar expressions identify
forward-looking statements. Such statements reflect the
Companys current views with respect to future events and
financial performance or operations and speak only as of the
date the statements are made. Such forward-looking statements
involve risks and uncertainties and readers are cautioned not to
place undue reliance on forward-looking statements. The
Companys actual results may differ materially from such
statements. Factors that cause or contribute to such differences
include those discussed elsewhere in this Form 10-K in the
Section entitled Risk Factors. Although the Company
believes that the assumptions underlying its forward-looking
statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance 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. The Company
undertakes no obligation to publicly update, review or revise
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
is based.

This Report also contains data related to the
portal market. These market data have been included in studies
published by the market research firms of International Data
Corporation, the META Group and The Gartner Group, as well as US
Bancorp Piper Jaffray. These data include projections that are
based on a number of assumptions, including, but not limited to,
increasing worldwide use of business or enterprise portals and
the growth in the number of portal users. If any of these
assumptions is incorrect, actual results may differ from the
projections based on those assumptions.




PART I




Item 1.     Business

General

BackWeb Technologies Ltd. (BackWeb or
the Company) is a leading provider of critical
communications infrastructure software and application-specific
software that enable companies to communicate and distribute
business-critical, time-sensitive information throughout their
extended enterprise of customers, partners and employees.
BackWeb® technology also enables companies to leverage
their enterprise portal by ensuring that critical portal content
is automatically distributed to users across the enterprise even
when a user is offline.

Our BackWeb ProactivePortal solution aims
to extend the reach of corporate portals to mobile or
disconnected users and users who need to be notified of critical
new content, thereby increasing the usage of, and maximizing the
return on investment (or ROI) for, enterprise portals. Our
BackWeb e-Accelerator application allows an extended
enterprise or geographically dispersed organization to manage
and deliver pertinent information and alerts without the use of
a portal. Thus, for example, sales and service organizations,
partners and resellers, and call centers can collect and
distribute key data to customers, partners, and employees,
keeping them updated and with confidence that users will
interact with the data through alerts and notification features.
Our core infrastructure software, BackWeb Foundation, is a
platform that allows organizations to efficiently target and
deliver sizeable digital data of any format to users
desktops throughout the extended enterprise.

The Company sells its products primarily through
its direct sales force, resellers, systems integrators and OEMs.

The Company 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.

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Industry Background

The Internet has changed the nature of business
operations and competition. Companies, their suppliers,
customers and employees now have the means to conduct business
electronically, commonly referred to as e-business. As a result,
it is now possible for new business systems to disrupt
established markets virtually overnight. The spread of
electronic commerce has endowed business customers and consumers
with the ability to change vendors at the click of a button. To
compete effectively, companies need to react quickly to changing
market conditions, accelerate critical business processes and
stay in closer contact with sales people, partners and
customers. To address these challenges, companies must be able
to effectively communicate the right information to the right
people at the right time. Existing Internet communication
methods fall short of the requirements of this new business
environment, as these methods do not overcome the network
congestion, information overload and/or lack of reliability
characteristic of todays networks.

Companies face the complex challenge of reacting
quickly to changes in the competitive landscape and reliably
communicating and tracking time-sensitive, business-critical
information throughout their extended enterprise. The
ineffectiveness of overloaded e-mail systems, passive websites
and other existing means of communication has impeded
communication of information between organizations and their
customers, partners and employees. Companies using existing
means of communication are often unable to prioritize and
personalize a communication so that it receives the appropriate
level of attention. Once a communication is sent, companies
cannot easily track the communication to ensure it was received
and interacted with, and further, are unable to elicit feedback.
In addition, recipients are inundated with information and lack
an effective means of immediately determining the importance and
relevance of information received, assigning priorities to that
information and communicating their responses. Consequently,
recipients often react to this flood of information by ignoring
it or failing to respond in a timely manner. This often results
in lost business opportunities and foregone revenues.

The Web has increasingly become the single point
of interaction for the workplace and the requirements for
web-based portals have grown to include aggregation and
integration of applications, processes and content. Enterprise
portals, in particular, are becoming the front-end integration
to backend applications, content and communications systems. In
a survey conducted, in October 2001, by US Bancorp Piper
Jaffray, 87% of respondents agreed that corporate portals
will eventually constitute the main window through
which users are able to access heterogeneous software
applications, along with relevant content [and] analytics.
META Group estimated in October 2001, that 25% of companies had
deployed a portal entering 2002 but expected that 85% of
companies will do so by 2004 and 90% by 2006.

In 2001, industry analysts, such as International
Data Corporation (IDC), Gartner Group and META
Group, indicated that the portal market was going to experience
significant growth. For example, in 2001, IDC estimated a
compounded annual growth rate for the portal market of 55% with
vendors portal software license and maintenance revenue
increasing from $455 million in 2001 to $705 million
in 2002. The Gartner Group projects that annual portal software
product revenue will grow to more than $1.8 billion in new
license revenue by 2005, from $200 million in 1999.
Analysts also predicted that three technology capabilities would
emerge as must-have components for any portal
strategy: offline portal access for disconnected users;
proactive notifications about critical portal content; and
closed loop delivery and reporting system.

Enterprise portals serve as a key to unified
applications access and information and knowledge management
across the enterprise and yield tangible ROI, such as improved
worker productivity, increased customer satisfaction, and
accelerated business velocity. Usage of the enterprise portal
has therefore become associated with new levels of efficiency
and integration. Portal projects are judged on whether they are
being used productively by key employees or partners. To achieve
the objectives set for their portals, enterprises must extend
their portals to their high-value, revenue generating users,
such as executives, sales and field personnel, who are mobile
and disconnected. They cannot rely on only a passive Web
approach that requires the user to be online to use the portal.

One of the primary challenges in extending a
portal to disconnected users is the need to communicate large
amounts of digital data via network connections and resources
that are limited. Bandwidth-intensive data, such as sections of
websites, audio, video and multimedia presentations, software
applications and

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updates, can overload the constrained network
resources of an extended enterprise. Meanwhile, the recipients
of large data files are forced to either disrupt their work in
progress or to postpone the download of the file. These problems
are compounded when users are remote or mobile.


We believe that in order for the Internet to be
used efficiently as an effective communication medium across the
extended enterprise, a complementary, more sophisticated
infrastructure must be introduced. This new communication
infrastructure must:



| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | permit the prioritization of communications to
	ensure that users interact with critical content in a timely
	manner;                                                        
|
| |  | provide offline access to critical content with a
	user experience that is similar, whether a user is online or
	offline;                                                    
|
| |  | distribute large amounts of digital data in any
	format quickly and efficiently to many users with a minimal
	impact on the network of a company and its extended enterprise;
|
| |  | permit tracking of the data distribution and
	usage of data; and                                                                                                             
|
| |  | be an extendable system that facilitates the
	integration of different applications.                                                                                         

Strategy

Our objective is to establish BackWeb as the
leading provider of critical communications infrastructure
software. The key elements of this strategy include:

Become the
De-Facto Standard for Critical Portal
Communications

In 2001, the Company re-positioned itself to
focus on the enterprise portal space. We intend to establish
BackWeb ProactivePortal technology as the leading software
system for offline enterprise portal communications and
enterprise portal notification. We believe that the adoption of
our BackWeb Foundation software and BackWeb e-Accelerator
application by leading companies and partners across various
industries validates our technology and should facilitate broad
market acceptance of our ProactivePortal solution. In addition,
we believe that the selection of our products by industry
leaders should promote the adoption of our critical
communications solution by these companies, as well as their
partners, suppliers and distributors. We also believe that this
adoption, along with the competitive advantages achieved with
our products, will drive other industry participants to adopt
our products as their preferred solution. We intend to continue
to focus our development efforts on increasing the functionality
and flexibility of BackWeb ProactivePortal technology to
facilitate its adoption and to increase technological barriers
to entry.

Expand
Leadership Position through Strategic Partnerships

We intend to expand our position in the portal
market through our partnerships with leading portal framework
vendors and system integrators such as SAP Portals, Inc., IBM,
Plumtree Software, Inc. and PwC Consulting. To complement our
direct sales force in the United States, Canada and Europe, we
will also continue to establish multiple indirect distribution
channels worldwide through original equipment manufacturers and
large applications vendors. These indirect channels are intended
to increase geographic sales coverage and address potential
customers that would otherwise be beyond the reach of our direct
sales organization.

Extend
Technological Leadership Position

We intend to continue to devote substantial
resources to the development of new and innovative software
products and technologies. We believe that our early
understanding and penetration of the market for critical
communication software has allowed us to establish technological
leadership and a time-to-market advantage. We intend to extend
our leadership position and build further technological barriers
to entry by enhancing the

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functionality of our current infrastructure
software and developing innovative applications on top of it. We
intend to leverage our proprietary BackWeb ProactivePortal
technology to become the offline portal vendor of choice. In
addition, we aim to make our OTML (Offline Tagging Markup
Language) technology an industry standard for specifying portal
content to be distributed for offline use.


Leverage
Infrastructure Platform to Introduce Multiple Internet
Communication Applications

Our core technology has been designed as an open
platform upon which BackWeb, our customers, our partners and
third-party vendors can develop critical communication
applications that are easy to deploy, can link to any portal
framework or Web-based content and to which additional
capabilities can easily be added. We actively market and support
applications built on top of our infrastructure software. Such
applications enable companies to focus the attention of their
extended enterprise or geographically dispersed employees,
members, organizations, partners and customers on timely,
business-critical information. We intend to increase our product
offerings by introducing new applications, developed internally
and through third parties, targeted at various business
functions throughout the extended enterprise.

The BackWeb Solution

We develop, market and support critical
communication software that enables companies to communicate
business-critical information to their customers, partners and
employees. Our software enables companies to efficiently target,
deliver and track the use of sizeable digital data in any format
throughout their extended enterprise. Using our products and
technology, companies can ensure that the right information
reaches the right people at the right time.

Our products and technology provide the following
benefits:

Network
Efficiency and Bandwidth Utilization

Our unique communications technology enables
efficient and reliable distribution of data over IP networks.
Our Polite Agent® technology manages the communication
between the user desktop and the BackWeb server so that it
occurs only when the network connection is idle. This ensures
that BackWeb-generated traffic does not interfere with other
network traffic on the desktop connection so that the
users other network applications are not impacted. Our
Polite Proxy® server technology adapts BackWeb traffic to
utilize available bandwidth on the wide area network, or WAN,
connection. Our Polite Neighborcast® technology enables
each BackWeb plug-in to serve as an intelligent cache for other
BackWeb plug-ins. As a result, data is delivered only once to a
local area network, or LAN, after which it is intelligently
distributed to neighboring plug-ins, thereby resulting in a fast
and efficient distribution of data. Our network efficiency is
further enhanced by our ability to reduce redundant network
traffic by automatically transmitting only the information that
has changed since the users previous download. In
addition, if a transmission is interrupted, it resumes at the
point where it was cut off, thereby eliminating the need to
re-send the entire transmission. As a result of these
capabilities, data transmission across the extended enterprise
is scalable, transparent and efficient.

Capture
Immediate Attention to Critical Information

Our attention management technology incorporates
intelligent notification techniques to address the challenge of
capturing attention in a world of growing information overload.
Our software increases the effectiveness of communications
throughout the extended enterprise by personalizing the
distribution of information. For example, the communication can
be customized to require the user to acknowledge receipt of the
information or to automatically launch a designated application.
In addition, not only can business managers determine the
recipients of particular information, but recipients can also
subscribe to various information sources. These capabilities
ensure recipients that the information being received is
important to them, and, as a result, significantly increases the
likelihood that it will be reviewed and acted upon. In addition,
the ability to elicit return responses results in greater
effectiveness of the overall communication.

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Close the
Loop on the Communications Flow

Our software enhances the management of critical
information throughout the extended enterprise. Companies can
readily control the destination, access rights and priority of
information being communicated. Business managers can use our
software to determine the effectiveness of their communications
through reports on delivery, usage and interactions. In
addition, our products can close the communication loop by
allowing managers to collect feedback from users and process,
review and communicate this feedback throughout the extended
enterprise. Further, business managers can use our tools to
automate the collection and dissemination of information from
digital sources such as news feeds, databases, legacy systems
and competitors websites, resulting in reduced management
time and resources dedicated to data acquisition.

Technology and Products

We currently offer the BackWeb ProactivePortal
ServerTM product, the BackWeb e-Accelerator
application and BackWeb Foundation software. BackWeb
ProactivePortal Server is designed to streamline critical
communications and is aimed at maximizing the ROI for enterprise
portals by actively delivering critical portal content to users
for use when they are offline. BackWeb e-Accelerator provides
our customers with packaged applications that incorporate our
core technology and leverage the Internet to automatically
deliver critical business information to stakeholders across an
enterprise without utilizing a portal. We license BackWeb
Foundation to customers, developers and independent software
vendors, thereby enabling them to integrate their own
applications or third-party applications with our infrastructure
software platform.

Technology

Our infrastructure software platform is powered
by three core technologies that we have developed: Polite®
Communications, Attention Management and Closed-Loop Reporting.

Polite Communications.Polite Communications enables the
transmission of significant volumes of digital data from BackWeb
Polite Communication Servers to BackWeb plug-ins on personal
computers through existing networks without interfering with
normal network applications and traffic. Polite Communications
enables companies to provide any user with rapid communication
of bandwidth-intensive data, regardless of whether they utilize
high-speed or low-speed data access services. 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 Communication
	Servers only when the connection is idle. It is able to
	interrupt BackWeb communications when other applications request
	use of the users network connection.                                                                                                                   
|
| |  | Polite Proxyallows
	communication between the BackWeb proxy server and BackWeb
	Polite Communication Servers only when WAN bandwidth utilization
	is below a specified threshold. It achieves this by monitoring
	the wide area network or WAN.                                                                                                                                                  
|
| |  | Polite Neighborcastenables the automatic transmission of
	digital data from one BackWeb plug-in to others on the same
	local area network, or LAN, obviating the need for transmission
	of the data from the server to each BackWeb plug-in. The
	transmission from BackWeb plug-in to BackWeb plug-in on the same
	LAN is a fast, efficient and cost-effective means of
	disseminating the data.
|
| |  | Polite
	Upstream®enables the automatic
	transmission of digital data from BackWeb plug-ins to the
	BackWeb Polite Communication Server when the network connection
	is idle.                                                                                                                                                                                                                     

Polite Communications further improves the
efficiency of transmission by reducing the amount of data to be
transmitted through various techniques, including:



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | compression of data;                                                                                                                           
|
| |  | updating only the information which has changed
	since the users previous download; and                                                       
|
| |  | eliminating the need to re-send an interrupted
	transmission by progressively resuming the transmission at the
	point where it was interrupted.

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Attention Management.BackWeb products are often used by
customers for notification applications, where people need to be
notified of time-sensitive or otherwise critical information.
Attention Management is an automatic notification system
supported by the BackWeb plug-in software on personal computers.
When content items are pushed to the personal computer, the
BackWeb attention management capability is able to alert users
with the information if appropriate for that user and content
item. It alerts users to the delivery of business-critical
information through a variety of display techniques including
Flash Alerts. These techniques enable companies to attract
immediate attention to time-sensitive information. 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 information. For example, the recipient can be
required to acknowledge their 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.

Closed-Loop
Reporting.BackWeb Polite
Communications is a two-way technology that allows companies to
build a closed-loop communication system for sophisticated
standard and custom reporting on users interactions with
delivered content. Standard reports specify the number of users
who received a content item, identify individual users and
indicate who interacted with the content and when.

Products

BackWeb ProactivePortal Server.In September 2001, we introduced the
BackWeb ProactivePortal Server product, which is designed to
streamline critical communications and maximize the return on
investment for an enterprise portal by actively finding users
and delivering crucial portal content to them 
whether they are online or offline.

BackWeb ProactivePortal Server is comprised of 3
major components:



| |    |                                                                                                                                                                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Portal Integration System: a new component that
	is designed for highly scalable Web content acquisition from
	corporate portals. The Portal Integration System includes:
	Content Retrieval, Content Transformation, Content Consolidation
	and Differencing, and Content Packaging.

 Content Acquisition



| |                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On an on-going basis, the BackWeb ProactivePortal
	Server logs in as individual portal users, and begins retrieving
	HTML pages from the portal by using standard HTTP or HTTPS
	protocols (either secure or non-secure). Each portal page links
	to more web pages or documents that will be retrieved once the
	links are identified.

 Content Transformation and OTML
Tags



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | This involves parsing the portal HTML pages and
	creating an offline equivalent of the page that will be sent to
	users. The Content Acquisition Manager retrieves additional
	pages when it identifies links to more portal pages, external
	documents or web pages. Since the presentation of portal content
	sometimes changes, it is necessary to keep the content
	transformation correct regardless of visual presentation
	changes. Content transformation is accomplished by embedding
	special tags to the portal page. These are called Offline
	Tagging Markup Language or OTML tags. OTML tags control the
	optimized transformation of the pages for offline viewing. OTML
	is an extension to HTML, and applications other than our
	ProactivePortal software, such as the browser, simply
	ignore the OTML tags.

 Content Consolidation and
Differencing



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Although portals include both personalized and
	non-personalized content, ProactivePortal acquires content in
	the context of individual users and creates a single
	personalized information package for each user. Yet a large
	portion of the content is shared among many users. Since 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. ProactivePortal stores content in separate
	information packages that are sent to more than one user.
	Consolidated content includes documents and web pages.

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 Content Packaging



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | Once content has been acquired, transformed and
	consolidated, it is packaged for offline delivery into units
	called InfoPaks. Packaging includes:



| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ü | Recording  creates database records
	for targeting, delivery tracking, user interaction reporting and
	version control of the content.                                                                                                
|
| | ü | Version Differencing  calculates
	byte-level differences between versions of the content. This
	process is extremely important when only a small portion of a
	document is modified (e.g., text was updated on a large
	presentation).
|
| | ü | Compression  allows for optimized
	storage and communication with users plug-ins.                                                                                                                                                    



| |    |                                                                                                                                                                                                                                    
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | BackWeb Proactive Management Server: a management
	engine that invokes content integration servers, and then
	manages the delivery of the content packages to the end
	users/subscribers. The Proactive Management Server contains:

 Content Targeting Manager



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | Stores targeting information about acquired
	content in the database and dispatches the content for delivery
	to the end users.

 BackWeb Subscription Manager



| |                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Manages users subscriptions to portal
	content. First, portal developers and administrators can define
	which portal components (portlets) should be made available
	offline. Users can then subscribe to portlets for offline access
	and for notification for critical content. The subscription
	manger stores all users subscription information.

 Content Tracking Manager



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Tracks who received what content and how they
	interacted with it. When a user clicks on a link that refers to
	a document in the offline view or on a notification, the
	interaction information is recorded by the plug-in and then
	forwarded to the server when the plug-in reconnects to the
	server. This information is stored in the server database and
	can be queried to create offline interaction reports, which can
	be viewed and exported to the portals reporting system and
	merged with online portal click-through reports.



| |    |                                                                                                                                                                                                                                   
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. | BackWeb Polite Communication System: a highly
	scalable content delivery engine to users desktops/ laptops that
	enables offline access to the portal content via the BackWeb
	plug-in and the BackWeb Polite Communication Server



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The BackWeb Polite Communications System manages
	delivery of tens through thousands of gigabytes of data every
	day to end-users via both fat or thin and intermittent
	connections. The server consults the BackWeb ProactivePortal
	Server database to find out whether there is new content
	relevant to the corresponding user. The BackWeb plug-in then
	begins downloading InfoPaks (Information Packages) incrementally
	via Polite Communications Server to ensure scalable content
	delivery. The Polite Communication System includes several key
	features:



| |   |                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ü | Idle-time communication  interruptible
	content delivery that activates only when the network connection
	is idle.                                                                                                                                   
|
| | ü | Byte-level differentiation  delivery
	of modified content. This method determines which content is
	modified based on the content already stored on the users
	PC and ensures the delivery of only the changes rather than the
	entire content item.
|
| | ü | Polite Neighborcast  distribution of
	content over a LAN using distributed client-based caching
	system. This approach reduces the amount of WAN traffic.                                                                                            

8



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##### Table of Contents



BackWeb e-Accelerator.In December 1998, we introduced
BackWeb Sales Accelerator (now BackWeb e-Accelerator), our first
packaged application built on BackWeb Foundation. BackWeb
e-Accelerator allows companies to keep their extended enterprise
equipped with the most up-to-date documents, market information
and management announcements by automating the collection 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. Components of
the BackWeb e-Accelerator include:

 Content



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | BackWeb e-Accelerator collects information from
	different sources: the Internet, intranet sites, databases,
	applications and legacy systems.



| |   |                         
| | - | ------------------------
| |  | Manual Publishing Server



| |                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The BackWeb Publishing Server allows content
	publishers to use a customized browser-based interface to
	quickly create and distribute targeted critical information to
	individual users, topics and groups. The published content items
	have a title and summary and are assigned to one or more topics.
	They may also contain file attachments and links to online URLs.



| |   |                           
| | - | --------------------------
| |  | Automatic Publishing Tools



| |                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Content can be published automatically by
	monitoring directories for new and updated files. Each time an
	existing file is updated or a new one is added, the BackWeb
	Publishing Server automatically delivers it to all subscribed
	and targeted users. Automated publishing can be scheduled based
	on external events and can be configured to occur when specific
	users are online.



| |   |                                
| | - | -------------------------------
| |  | Subscription & Targeting Server



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | BackWeb Subscription Server allows users to
	personalize the information received. Users can subscribe to the
	topics or to content items available in the e-Accelerator to
	automatically receive additional information published to the
	topic or to receive updates on an ongoing basis. The BackWeb
	e-Accelerator is built around a user database that defines user
	permissions and targeting settings, which determine how
	information is directed to individual users. By configuring
	topics, users and groups via the Subscription and Targeting
	Manager, the BackWeb e-Accelerator administrator can control
	which user or group has access to publish to which
	topic/user/group/distribution list, and with what editorial
	limitations. The administrator can also restrict a users
	ability to target topics, users or groups.



| |   |                
| | - | ---------------
| |  | Delivery Server



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | When a user subscribes to a file or a file has
	been targeted to user, BackWeb delivers the current version of
	the file, and then automatically delivers all subsequent updates
	to it. The BackWeb Polite Communication Server makes this
	automatic information delivery system efficient and practical
	through its Polite communications. This patented Polite
	communications technology delivers content in the background,
	and regardless of the size of delivered files, does not
	interfere with other network applications in use on the
	users machine.                                                                                                                  
|
| | Developing a high performance communication
	system for BackWeb required a new communications protocol
	optimized for automatic delivery of content. This
	protocol  the BackWeb Polite Agent, which uses the
	BackWeb Transfer Protocol (BWTP)  allows the BackWeb
	communication system to offer capabilities not found in other
	Internet protocols such as HTTP. BWTP is based on UDP rather
	than TCP. Since UDP alone does not provide a reliable transport
	mechanism, BWTP implements other reliability mechanisms at the
	application layer. BWTP was created and optimized for background
	communication that does not interfere with other applications or
	communications

9



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##### Table of Contents





| |   |                
| | - | ---------------
| |  | BackWeb Plug-in



| |                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The BackWeb e-Accelerator Browser User Interface
	is a web browser user interface that provides access to all of
	the BackWeb e-Accelerator functionality through one interface.
	The BackWeb Plug-in enables users to work with content while
	working offline or online. The Plug-in also manages the display
	of Notifications, and reporting back to the BackWeb Polite
	Communication Server.

BackWeb e-Accelerator consists of Enterprise
Video Communications, Market Intelligence, Priority Publishing,
Rapid Survey and Automated Encyclopedia modules:



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

BackWeb Foundation.Our infrastructure software platform,
BackWeb Foundation, is based on a set of flexible components
including BackWeb Polite Communication Server, BackWeb
Development Tools, BackWeb Plug-in and BackWeb Add-On
Components. These components enable an organization to capture
information from virtually any data source, including web sites,
file servers, databases, applications and legacy systems, and
efficiently and reliably deliver it throughout its extended
enterprise. BackWeb Polite Communication Server is a software
server that runs on standard hardware servers, and communicates
with BackWeb plug-in, our software program operating on personal
computers or workstations.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | BackWeb Polite Communication
	Server.BackWeb Polite Communication
	Server communicates with BackWeb plug-ins and is capable of
	receiving digital data from various sources, such as the
	Internet, intranet sites, databases, applications and legacy
	systems and automatically distributes that data to BackWeb
	plug-ins. The BackWeb Polite Communication Server is highly
	scalable and optimized to support a large number of plug-ins
	concurrently. Components of BackWeb Polite Communication Server
	include:



| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ü | BackWeb Server Console.A console that allows a system
	administrator to manage the BackWeb Polite Communication Server
	and control the information flow across the enterprise through a
	point-and-click graphical user interface.
|
| | ü | BackWeb Polite Proxy Server.A software server that:                                                                                                                                                                                



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | caches frequently accessed material for a group
	of BackWeb plug-ins, eliminating the need for redundant data
	transfers from a companys server; and

10



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##### Table of Contents





| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | monitors the WAN connection and communicates only
	when the network connection is below a certain threshold.



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | BackWeb Development
	Tools.BackWeb Development Tools are
	used to customize the BackWeb Foundation. Components of BackWeb
	Development Tools include:



| |   |                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ü | BackWeb Server Extension API.An application programming interface
	that allows companies to integrate the BackWeb Polite
	Communication Server with any digital data source, enabling
	automated publishing of content or files from any source to the
	BackWeb Polite Communication Server.
|
| | ü | BackWeb Automation SDK and Automation Editor.Includes application programming
	interfaces and a library of BackWeb supplied programs that
	perform tasks between the BackWeb Polite Communication Server
	and external data sources.                                                        
|
| | ü | BackWeb BALI Editor.Our BackWeb Authoring Language
	Interface Editor is used by companies to create and modify Flash
	Alerts.                                                                                                                                                               



| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | BackWeb Plug-in.BackWeb plug-in, our software program operating on personal
	computer or workstations, operates in the background and
	communicates with designated BackWeb Polite Communication
	Servers during the idle time of a users network
	connection, thereby allowing the user to receive data
	transparently while using other applications without disruption.
	BackWeb plug-in:



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | ü | displays information through Flash Alerts and
	other displays and user interfaces, which may be customized;                                              
|
| | ü | provides an application programming interface to
	enable customer and third-party applications to integrate with
	BackWeb plug-in; and                   
|
| | ü | can be deployed by a single automatic
	installation file of less than 100K in size that can be sent to
	the user via the Internet, e-mail or floppy disk.



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | BackWeb Add-on Components.BackWeb Foundation, our infrastructure
	software platform, also includes the following add-on components:



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

Customers

We sell our products to a broad base of customers
from a variety of industries. Our customers generally operate in
competitive environments, including financial services
(BancBoston Robertson Stephens), technology (Cisco Systems,
Inc.) and telecommunications (Nortel Networks). Our customers
include industry leaders, such as AT&T Corp., British
Telecommunications Plc, Goldman, Sachs & Co., NBC, Siemens,
Electronic Data Systems, Ericsson, Fidelity Investments
Institutional Services, Co., Guidant, IBM and Logitech, as well
as the United States Social Security Administration.

In 2001 and 2000, one OEM, whose contract with
the Company terminated in early 2002, accounted for more than
52% and 27% of our revenues, respectively. We are working to
negotiate a new contract with this customer; however, we cannot
assure you that we will be able to conclude a new agreement or
that we will derive future revenues from this OEM. In 1999,
revenues from one end-user customer represented 13% of our
revenues.

11



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For a more complete discussion of related party
transactions and their affect on the Company, please refer to
Note 8 of the Notes to the Consolidated Financial
Statements elsewhere in this Report. For a more complete
discussion of external customers transactions by geography,
please refer to Note 14 of the Notes to the Consolidated
Financial Statements.

Alliances with Business Partners

In order to accelerate market awareness and
acceptance of our products, we have developed cooperative
alliances with leading technology vendors, original equipment
manufacturers, applications vendors, Internet-based solutions
providers, portal framework vendors and system integrators. We
believe that these alliances will provide additional marketing
and sales channels for our products, will position BackWeb as
the offline vendor of choice and will facilitate broad market
acceptance for BackWebs products. The benefits of this
approach include enabling BackWeb to concentrate on its core
competencies while allowing the development of applications by
business partners and reducing the time-to-market for
applications based on BackWebs products. As of
December 31, 2001, we have signed agreements for business
alliances with companies such as SAP Portals, Inc.,
Plumtree Software, Inc., IBM and PwC Consulting.

Marketing and Sales

Marketing

In mid-2001, BackWeb shifted its focus to the
portal space with the goal of establishing itself as the leading
provider of critical communications infrastructure software.
Since then, BackWeb has worked to educate industry analysts,
portal framework vendors and integrators, and portal customers
about our ProactivePortal technology.

Our marketing efforts are directed at promoting
our solutions and services, creating market awareness and
generating leads, with a particular focus on our ProactivePortal
technology. In addition, our strategy is designed to promote
offline access and notifications as must-have
technologies for portal implementations, position BackWeb as the
leading vendor of choice for such components and leverage the
potential growth of the emerging portal market. Our marketing
activities include Web seminars, print and Internet advertising
and attendance at industry trade show events and trade
conferences. We use the Internet to communicate with potential
customers, existing customers, partners and others. We also
conduct comprehensive public relations programs that establish
and maintain relationships with key trade press, business press
and industry analysts. We also view our website as an important
marketing tool for customer relations and to support our market
position through quality content, including providing market
information, as well as product and industry trends.

Sales

Our sales strategy is to pursue opportunities
with large accounts and industry leaders through our direct
sales force and to penetrate various targeted market segments
through multiple indirect distribution channels and strategic
partnerships.

We maintain direct sales personnel in the United
States, Canada and Europe. The direct sales force consists of
sales representatives and system engineers.

We also partner with large applications vendors
and systems integrators that serve our target markets. Through
these strategic partnerships, we are able to significantly
expand our installed base as our products are incorporated into
the vendors products and systems integrators
custom-developed applications. This installed base can, in turn,
be leveraged by us and our partners to develop and market
BackWeb ProactivePortal technology and other additional
BackWeb-based applications and products. We are in the early
stages of building these channels and currently have entered
into written agreements with a limited number of companies. We
may not be able to enter into agreements or establish
relationships with desired strategic and

12



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##### Table of Contents



distribution partners on a timely basis or ensure
that such distribution and strategic partners will devote
adequate resources to selling our products.


We believe it is important to have a strong
international presence. We have established sales offices in the
United States, Canada, United Kingdom and Germany.

Customer Service and Support

We have a comprehensive service and support
organization. Our services are primarily comprised of
maintenance, consulting and training. Maintenance is provided to
our customers on an annual basis for an additional fee. This
maintenance includes remote assistance with configuration and
initial set-up of the application, run-time support and software
maintenance releases. We also provide consulting, training and
on-site installation services. We expect to expand our variety
of services both directly and through third-party relationships
in order to meet the growing needs of our customers.

Research and Development

We believe that strong product development
capabilities are essential to our strategy of enhancing our core
technology, developing additional applications, incorporating
that technology 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.

In addition, we have actively recruited key
computer scientists, engineers and software developers and have
complemented these individuals by hiring senior management with
backgrounds in the commercial software development industries.
Our research and development expenses, net totaled
$9.2 million for the year ended December 31, 2001;
$8.7 million for the year ended December 31, 2000; and
$5.5 million for the year ended December 31, 1999.

Competitive Landscape

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



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

Additional competition could come from operating
system vendors, online service providers, plug-in/ server
applications and tools vendors, 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.

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. We may not be able to compete successfully, and
competitive pressure may harm our business. In addition, our

13



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##### Table of Contents



market is characterized by rapid technological
change, dynamic client needs and frequent introductions of new
products and product enhancements, which can make existing
products, including ours, obsolete or unmarketable.


Intellectual Property and Proprietary
Rights

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. These claims have
been brought and sometimes successfully pressed against online
service providers in the past. It is also possible that if any
such information, or information that is copied and stored by
customers that have deployed our products, contains errors,
third parties could make claims against us for losses incurred
in reliance on such information. Although we carry general
liability 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.

Our success and ability to compete are
substantially dependent upon our internally developed
technology. We rely on patent, copyright, trade secret and
trademark law to protect our technology. However, 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.

We generally enter into confidentiality or
license agreements with our employees, consultants and corporate
partners, and generally control access to and distribution of
our software, documentation and other proprietary information.
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 United States of America.

Our end-user licenses are designed to prohibit
unauthorized use, copying and disclosure of our software and
technology in the United States, Israel and other foreign
countries. However, these provisions may be unenforceable under
the laws of some jurisdictions and foreign countries.
Unauthorized third parties may be able to copy some portions of
our products or reverse engineer or obtain and use information
and technology that we regard as proprietary. Third parties
could also independently develop competing technology or design
around our technology. If we are unable to successfully detect
infringement and/or to enforce our rights to our technology, we
may lose competitive position in the market. In addition, some
of our licensed users may allow additional unauthorized users to
use our software, and if we do not detect such use, we could
lose potential license fees.

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.

14



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##### Table of Contents



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, 2001, we had a total of
180 employees, 177 of whom were full-time employees and 3 of
whom were temporary employees. Of the total number of employees,
66 were engaged in research and development, 52 in sales,
marketing and business development including 1 temporary
employee, 25 in professional services and technical support and
37 in finance, administration and operations, including
2 temporary employees. Our future performance depends in
part upon the continued service of our key technical, sales and
senior management personnel, none of whom is bound by an
employment agreement requiring service for any defined period of
time. The loss of the services of one or more of our key
employees could have a material adverse effect on our business,
financial condition and results of operations. Our future
success also depends on our continuing ability to attract, train
and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense, and we may
not be able to retain our key personnel in the future. None of
our employees is represented by a labor union. We have not
experienced any work stoppages and consider our relations with
our employees to be good.

In addition, 78 of our employees are 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.

RISK FACTORS

The Company operates in a rapidly changing
environment that involves numerous risks and uncertainties, some
of which are beyond the Companys control. The following
discussion highlights some of these risks and uncertainties.

You should consider the following factors, as
well as other information set forth in this 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. Although we
believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements, or other future
events. Moreover, neither we nor anyone else assumes
responsibility for the accuracy or completeness of
forward-looking statements. You should consider our
forward-looking statements in light of the following risk
factors and other information in this Report. If any of the
risks described below occurs, our business, results of operation
and financial condition could differ from those projected in our
forward-looking statements. We are under no duty to update any
of our forward-looking statements after the date of this Report.
You should not place undue reliance on forward-looking
statements.

15



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Risks Relating to Our Business



| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | The economic outlook may adversely affect
	the demand for our current products and the Companys
	results of operations

Current predictions for the general economy
indicate uncertain economic conditions. Weak economic conditions
may cause a reduction in information technology spending
generally. Consequently, there may be 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 such
changing conditions in a timely manner that may result in an
adverse impact on our results of operations. Any such adverse
impacts to our results of operations from a changing economy may
cause the price of our Ordinary Shares to decline.



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

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

We have a history of losses and we expect
future losses

We have not achieved profitability and expect to
continue to incur net losses for at least the fiscal year 2002.
We incurred net losses of approximately $34.7 million for
the year ended December 31, 2001, $19.2 million for
the year ended December 31, 2000, and $11.5 million
for the year ended December 31, 1999. As of
December 31, 2001, we had an accumulated deficit of
approximately $102.9 million. We expect to continue to
incur significant sales and marketing, product development and
administrative expenses and expect such expenses to decrease in
2002. As a result, we will need to generate significant revenues
to achieve and maintain profitability. In addition, some of our
customers continue to operate based on internet-centric business
models and are experiencing a significant economic slowdown and
an inability to raise additional capital, which could have a
material adverse effect on our revenue and earnings.

Our quarterly operating results are subject
to fluctuations and seasonality

Our operating results are difficult to predict.
Our revenues and operating results may vary significantly from
quarter to quarter due to a number of factors, inter alia:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | demand for our products and services;                                                        
|
| |  | internet budget constraints and approval
	processes of our current and prospective customers;
|
| |  | the timing and mix of revenues generated by
	product licenses and professional services;     
|
| |  | the length and unpredictability of our sales
	cycle;                                         
|
| |  | loss of customers;                                                                           
|
| |  | changes in the growth rate of Internet usage;                                                
|
| |  | delays in introducing new products and services;                                             
|
| |  | new product introductions by competitors;                                                    
|
| |  | changes in our pricing policies or the pricing
	policies of our competitors;                 

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| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | 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. It is likely that
in some future quarter, our operating results may be below the
expectation of public market analysts and investors.

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

We may derive a significant portion of our
product license revenues in each quarter from a small number of
relatively large orders. Our operating results for a particular
fiscal quarter could be materially 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 affect operating margins.

If we lose a major customer, our revenues
could suffer because of our customer concentration

We have generated a substantial portion of our
annual and quarterly historical revenues from a limited number
of customers. As a result, if we lose a major customer, or if
there is a decline in end-users in any of our customers
licenses, our revenues would be adversely affected. In 2001, one
OEM customer, whose contract with the Company terminated in
early 2002, accounted for more than 52% of our revenues. We are
currently in negotiations with this customer for a new contract;
however, there can be no assurance that a new contract will be
signed or that we will generate revenue from this customer in
the future. In addition, in 2001, two other customers together
accounted for an aggregate of 11% of our revenues. In 2000, one
OEM customer accounted for more than 27% of our revenues. In
1999, revenues from one end-user customer represented 13% of our
revenues. It is possible that a small number of customers will
continue to account for a substantial portion of revenues for
the foreseeable future and revenues from one or more of these
customers may represent more than 10% of our revenues in future
years.

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 on expanded use of
our products within our existing customers organizations.
If we fail to grow our customer base or 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 may not acquire additional licenses to
expand their use of our products.

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

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

Our future revenues and profits, if any, depend
upon the widespread acceptance and use of the Internet as an
effective medium of business and communication by our customers.
Rapid growth in the use of and interest in the Internet has
occurred only recently. As a result, acceptance and use may not
continue to develop at historical rates, and a sufficiently
broad base of consumers may not adopt, and continue to use, the
Internet and other online services as a medium of commerce and
communication. Our success will depend, in large part, on the
acceptance of the Internet in the commercial marketplace and on
the ability of third parties to provide 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 of users, the Internet
infrastructure may not be able to support the demands placed on
it and the performance or reliability of the Internet could
suffer.

Rapid technological changes could cause our
products to become obsolete

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

Our failure to adapt to technology trends
and evolving industry standards would hinder our
competitiveness

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. We will need to use
leading technologies effectively, continue to develop our
technical expertise and enhance our existing products on a
timely basis to compete successfully in this industry. We cannot
be certain that we will be successful in using new technologies
effectively, developing new products or enhancing existing
products on a timely basis or that any new technologies or
acceptance.

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

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

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

Many of our products run on the Microsoft Windows
NT, Microsoft Windows 2000 or certain versions of the Sun
Solaris Unix operating systems, and some require the use of
third party software. Any change to our customers
operating systems could require us to modify our products and
could cause us to delay product releases. In addition, any
decline in the market acceptance of these operating systems we
support may force 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

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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.


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 of the attention the
Internet is currently receiving and 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 new. 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. We may not be able to compete successfully, and
competitive pressures may harm our business. 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.

We anticipate decreased operating expenses,
which could cause our business to suffer if we do not maintain
sufficient revenues

We plan to significantly decrease our operating
expenses on a going forward basis, but our revenues must be in
alignment with such decreased expenses, or our business will
suffer.

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 production
on a timely and cost-effective basis and respond to emerging
industry standards and other technological changes.

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

The use of our products by our customers often
requires implementation services. Although we currently provide
implementation services sufficient to meet our current business
level, our growth will be limited in the event we are unable to
expand our implementation services personnel or subcontract
these services to qualified third parties.

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

Applicable accounting policies may cause us to
report new license agreements as deferred revenue. We generally
recognize revenue from a customer sale when persuasive evidence
of an agreement exists, the product has been delivered, the
arrangement does not involve significant customization of the
software, the license fee is fixed or determinable and
collection of the fee is probable. If an arrangement requires
acceptance testing or customization services, recognition of the
associated license and service revenue could be delayed. The
timing of the commencement and completion of the these services
is subject to factors that may be beyond our control, as this
process may require access to the customers facilities and
coordination with the customers personnel after delivery
of the software. In addition, customers could delay product
implementations. Implementation typically involves working with
sophisticated software, computing 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. If new or existing customers have
difficulty deploying our products or require significant

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amounts of our professional services support for
customized features, our revenue recognition could be further
delayed and our costs could increase, causing increased
variability in our operating results.


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

To date, our customers have taken a long time to
evaluate our products before making their purchase decisions.
The long, and often unpredictable, sales and implementation
cycles for our products may cause license revenues 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 efforts of business
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 distribution partners, we
spend a lot of 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
BackWeb Foundation slowly, depending upon the skill set of the
customer, the size of the deployment, the complexity of the
customers network environment and the quantity of hardware
and the degree of hardware configuration necessary to deploy the
products. We anticipate that we will have a similar situation
with the deployment of our ProactivePortal software.

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

If we fail to substantially expand our direct and
indirect sales and marketing operations in our existing markets,
our growth will be limited. Currently, we believe we will need
to expand our sales and marketing organization for significant
revenue growth. We might not be able to hire or retain the kind
and number of sales and marketing personnel that could be
required because competition for qualified sales and marketing
personnel in the Internet communications market is intense.

Failure to develop key strategic
relationships could limit our growth

We believe that our success in penetrating our
target markets depends in part on our ability to develop and
maintain strategic relationships with key independent software
vendors (ISVs), resellers, systems integrators, distribution
partners and customers. If we fail to develop these strategic
partnerships, our growth could be limited. As of
December 31, 2001, we had entered in various alliance,
remarketing and partnership agreements with certain portal
framework vendors and system integrators. We do not know if
these will prove to be successful relationships in the future or
if they will result in any material revenue for the Company.

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

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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

Revenues from customers outside the United States
represented approximately $14.4 million, or 70% of our
total revenues for the year ended December 31, 2001. Our
international operations will continue to be subject to a number
of other 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                    
|
| |  | investing at appropriate levels in foreign
	operations to compete effectively
|
| |  | political and economic instability                                           

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

Our intellectual property could be used by
third parties without our consent because protection of our
intellectual property is limited

Our success and ability to compete are
substantially dependent upon our internally developed
technology, which we protect through a combination of patent,
copyright, trade secret and trademark law. However, we may not
be able to adequately protect our proprietary rights, which may
harm our business. Unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Policing
unauthorized use of our products is difficult, and we cannot be
certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights
as fully as in the United States.

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. We have not signed such agreements in
every case. Despite our efforts to protect our proprietary
rights, unauthorized parties may copy aspects of our products
and obtain and use information that we regard as proprietary.
Other parties may breach such confidentiality agreements and
other protective contracts. We may not become aware of, or have
adequate remedies in the event of, such breaches.

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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
segment 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 to defend against any claims relating to
proprietary rights, which could materially and adversely affect
our financial condition and operations. Royalty or licensing
agreements, if required, may not be available on acceptable
terms, if at all. 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. 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 could spend a significant amount
of time and money defending against these legal claims.

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

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

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

Although the Company carries D&O insurance,
our insurance may not cover all potential claims against our
directors and officers. There is no assurance we could renew
such policy. As a result, it may be difficult to retain or
attract qualified directors or officers.

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

If we fail to attract qualified personnel or
retain current employees, including, our executive officers and
other key employees, our revenues may not increase and could
decline. 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.

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Terrorists attacks such as the attacks that
occurred in New York and Washington, D.C. on
September 11, 2001 and other attacks or acts of war may
adversely affect the markets on which our Ordinary Shares trade,
our financial condition and our results of
operations

On September 11, 2001, the United States was
the target of terrorist attacks of unprecedented scope. These
attacks have caused major instability in the U.S. and other
financial markets. There could be further acts of terrorism in
the United States or elsewhere that could have a similar impact.
Leaders of the U.S. government have announced their
intention to actively pursue and take military and other action
against those behind the September 11, 2001 attacks and to
initiate broader action against national and global terrorism.
Armed hostilities or further acts of terrorism would cause
further instability in financial markets and could directly
impact our financial condition and our results of operations.

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 principal research and development facilities as
well as significant executive offices are located in Israel.
Although substantial portions of our sales currently are 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. Inflation
in Israel and any devaluation of the New Israeli Shekel, or NIS,
against the U.S. dollar could have an impact on our
financial results. Since a significant portion of our research
and development expenses are incurred in NIS, we may be
negatively affected by fluctuations in the exchange rate between
the U.S. dollar and the NIS. If Israels economy is
hurt by a high inflation rate, our operations and financial
condition could suffer.

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 Israel 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. These tax
benefits may be cancelled in the event of changes in Israeli
government policies or 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, maintaining the
development and production nature of our facilities, and
financing of at least 30% of these investments through the
issuance of capital stock.

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
of and export of the encryption technology incorporated in our
products. Our current government license to engage in these
activities expires May 2002. 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

We are incorporated in Israel. 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 our non-U.S.
resident directors and executive officers, and enforcement of
judgments obtained in the United States against us, and our
directors and executive officers, may be difficult to obtain
within the United States.

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BackWeb Technologies, Inc., our U.S. subsidiary,
is the U.S. agent authorized to receive service of process in
any action against us in any federal or state court arising out
of our initial public offering or any related purchase or sale
of securities. We have not given consent for this agent to
accept service of process in connection with any other claim.


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



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

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



| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the judgment was obtained by fraud;                                                                                                                               
|
| |  | there was no due process;                                                                                                                                         
|
| |  | the judgment was rendered by a court not
	competent to render it according to the laws of private
	international law in Israel;                                   
|
| |  | the judgment is at variance with another judgment
	that was given in the same matter between the same parties and
	which is still valid; or                       
|
| |  | at the time the action was brought in the foreign
	court a suit in the same matter and between the same parties was
	pending before a court or tribunal in Israel.

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

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

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

The new Israel Companies Law may cause
uncertainties regarding corporate governance

The new Israel Companies Law, which became
effective on February 1, 2000, has brought about
significant changes to Israel corporate law. Under this new law,
there may be uncertainties regarding corporate governance in
some areas. These uncertainties will persist until this new law
has been adequately interpreted, and these uncertainties could
inhibit takeover attempts or other transactions and inhibit
other corporate decisions.

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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                                                                     
|
| |  | 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 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. See the
discussion of the Companys pending legal matter in
Item 3 Legal Proceedings.

Our continued Nasdaq National Market
listing is not assured

Our Ordinary Shares are presently authorized for
quotation on the Nasdaq National Market. We remain subject to
all requirements of our listing agreement with The Nasdaq Stock
Market, Inc. Among the events which could cause us to have our
status as a Nasdaq National Market issuer terminated are:



| |   |                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | failure to maintain a minimum bid price for the
	Ordinary Shares of either $1.00 per share or $3.00 per share,
	depending on, among other things, whether or not tangible net
	assets for the company are greater than $4 million or
	stockholders equity is greater than $10 million;
|
| |  | failure to maintain an audit committee which
	comports to the independence and other standards of the Nasdaq
	and the U.S. Securities and Exchange Commission (SEC); and                                                                                                               
|
| |  | failure to timely hold annual meetings of
	stockholders and comply with other corporate governance
	requirements.                                                                                                                                                                      

Our Ordinary Shares have at times been trading
below the $1.00 minimum bid requirement, which could lead to
Nasdaq initiating delisting procedures at any time. Our failure
to maintain a sufficient number of independent directors on the
board of directors to satisfy Nasdaqs audit committee
requirements could also lead to Nasdaq initiating delisting
procedures.

If we lose our Nasdaq National Market status, our
Ordinary Shares would trade either as a Nasdaq Small Cap issue
or in the over-the-counter market, both of which are viewed by
most investors as less desirable, less liquid marketplaces.
Among other things, our Ordinary Shares would then constitute
penny stock, which would place increased regulatory
burden upon brokers, making them less likely to make a market in
the stock.

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

There is a substantial risk that we are 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

25



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##### Table of Contents



which produces passive income. Passive income
also includes dividends, interest, royalties, rents, annuities
and the excess of gains over losses from the disposition of
assets, which produce passive income. As a result of our
substantial cash position and the decline in the value of our
stock, we are 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.

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

Our executive officers, directors and entities
affiliated with them, in the aggregate, beneficially own
approximately 40% of our outstanding Ordinary Shares. These
shareholders, if acting together, would be able to significantly
influence all matters requiring approval by our shareholders,
including the election of directors and the approval of mergers
or other business combination transactions.




Item 2.     Properties

As of December 31, 2001, BackWeb leased
approximately 8,500 square feet in a single office building
located in Ramat Gan, Israel; approximately 34,000 square feet
in a single office building located in San Jose, California; and
approximately 8,500 square feet in a single office building in
Toronto, Canada. The office space in Ramat Gan, Israel is leased
pursuant to a lease that terminates in May 2004. The office
space in San Jose, California is leased pursuant to a lease that
expires in March 2007. The office space in Toronto, Canada is
leased pursuant to a lease that expires in August 2006. In July
2001, we rented an additional 2009 square feet

26



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##### Table of Contents



in Toronto pursuant to a lease that expires in
July 2002. As of December 31, 2001, BackWeb also rented
sales and office space in the following cities:


|                  |  |               
|----------------- |  | --------------
|City              |  | Country       
|                  |  |               
|New York City, NY |  | U.S.A.        
|Chicago, IL       |  | U.S.A.        
|McLean, VA        |  | U.S.A.        
|Atlanta, GA       |  | U.S.A.        
|Austin, TX        |  | U.S.A.        
|Paris             |  | France        
|Swindon           |  | United Kingdom
|Amsterdam         |  | Netherlands   
|Hamburg           |  | Germany       

We believe that our existing facilities are
adequate and that additional space will be available as needed.




Item 3.     Legal
Proceedings

On November 13, 2001, a securities class
action lawsuit was filed in the United States District Court for
the Southern District of New York on behalf of all persons who
acquired our stock between June 8, 1999 and
December 6, 2000. The Company, certain of our executive
officers and directors, and certain underwriters involved in our
initial public offering are named as defendants in the
complaint. The complaint alleges that certain conduct of the
underwriters in connection with the allocation of shares of our
initial public offering violated the federal securities laws.
The complaint also alleges that the defendants violated the
federal securities laws by issuing a registration statement that
contained material misstatements and/ or omissions because it
did not disclose the alleged conduct by the underwriters that is
at issue in the lawsuit. The complaints seek damages on behalf
of all those who purchased or otherwise acquired our securities
during the period covered by the complaint. The deadline for
defendants to respond to the complaint has not yet expired, and
it is likely that this response will not be due for several
months, after certain procedural issues are resolved. We believe
we have meritorious defenses and intend to defend this action
vigorously; however, the results of any litigation are
inherently uncertain and can require significant management
attention, and we could be forced to incur substantial
expenditures, even if we ultimately prevail. In the event there
were an adverse outcome, our business could be harmed. Thus, we
cannot provide assurances that this lawsuit will not materially
and adversely affect our business, results of operations or our
share price.




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

There were no matters submitted to a vote of the
shareholders during the fourth quarter of the fiscal year ended
December 31, 2001.

27



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##### Table of Contents



PART II



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

The Companys Ordinary Shares are traded on
the Nasdaq National Market under the symbol BWEB.
Public trading of Ordinary shares commenced on June 8,
1999. Prior to that, there was no public market for the Ordinary
Shares. According to the records of the Companys transfer
agent, the Company had approximately 168 shareholders of record
as of March 1, 2002. Because many of our Ordinary Shares
are held by brokers and other institutions on behalf of
shareholders, the Company is unable to estimate the total number
of shareholders represented by these record holders. The
following table sets forth the Nasdaq National Market low and
high sales price of the Companys Ordinary Shares for the
periods indicated below:

|               |  |            |       |            |  |   |       | 
|-------------- |  | ---------- | ----- | ---------- |  | - | ----- | 
|               |  | Low        |       | High      
|               |  | Sale Price |       | Sale Price
|               |  |            |       |           
|2001           |  |            |       |            |  |   |       | 
|Fourth Quarter |  | $          | 0.64  |            |  | $ | 1.99  | 
|Third Quarter  |  | $          | 0.43  |            |  | $ | 1.60  | 
|Second Quarter |  | $          | 1.38  |            |  | $ | 3.33  | 
|First Quarter  |  | $          | 1.44  |            |  | $ | 6.75  | 
|2000           |  |            |       |            |  |   |       | 
|Fourth Quarter |  | $          | 5.75  |            |  | $ | 11.38 | 
|Third Quarter  |  | $          | 10.14 |            |  | $ | 25.00 | 
|Second Quarter |  | $          | 12.56 |            |  | $ | 29.94 | 
|First Quarter  |  | $          | 31.56 |            |  | $ | 58.00 | 

The Companys policy is to reinvest earnings
to fund future growth. Accordingly, the Company has not paid
dividends and does not anticipate declaring dividends on its
Ordinary Shares in the foreseeable future.

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

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

Until May 1998, Israel imposed restrictions on
transactions in non-Israeli currency. Those restrictions
affected our operations in various ways, and also affected the
right of non-residents of Israel to convert into non-Israeli
currency amounts they received in Israeli currency. Currently,
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 August 2001, BackWeb filed a Registration
Statement on Form S-8, pursuant to which BackWeb registered
an additional 5,187,919 Ordinary Shares for issuance under the
Companys 1996 Israel Stock Option Plan, 1998
U.S. Stock Option Plan and 1999 Employee Stock Purchase
Plan. For each named Plan, the additional shares registered were
1,575,983, 2,843,959 and 767,977, respectively.

28



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##### Table of Contents



Item 6.     Selected
Consolidated Financial Data

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

BackWeb Technologies Ltd.

Consolidated Statements of
Operations

|                                                                                             |                                                                                                     |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |        |        | 
|-------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                             |                                                                                                     |                                      
|                                                                                             |                                                                                                     | Years Ended December 31,             
|                                                                                             |                                                                                                     |                                      
|                                                                                             |                                                                                                     | 2001                                  |         | 2000   |        | 1999 |         | 1998   |        | 1997
|                                                                                             |                                                                                                     |                                       |         |        |        |      |         |        |        |     
|                                                                                             |                                                                                                     |                                      
|                                                                                             |                                                                                                     | (In thousands, except per share data)
|Revenues:                                                                                    |                                                                                                     |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                                             | License                                                                                             |                                       | $       | 13,807 |        |      | $       | 29,294 |        |      | $       | 18,514 |        |   | $       | 7,980  |        |   | $       | 5,311  |       
|                                                                                             | Service                                                                                             |                                       |         | 6,831  |        |      |         | 9,052  |        |      |         | 4,749  |        |   |         | 1,557  |        |   |         | 290    |       
|                                                                                             |                                                                                                     |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                                             |                                                                                                     | Total revenues                        |         |        | 20,638 |      |         |        | 38,346 |      |         |        | 23,263 |   |         |        | 9,537  |   |         |        | 5,601  | 
|Cost of revenues:                                                                            |                                                                                                     |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                                             | License                                                                                             |                                       |         | 443    |        |      |         | 249    |        |      |         | 266    |        |   |         | 266    |        |   |         | 182    |       
|                                                                                             | Service                                                                                             |                                       |         | 5,238  |        |      |         | 6,051  |        |      |         | 3,911  |        |   |         | 1,353  |        |   |         | 796    |       
|                                                                                             |                                                                                                     |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                                             |                                                                                                     | Total cost of revenues                |         |        | 5,681  |      |         |        | 6,300  |      |         |        | 4,177  |   |         |        | 1,619  |   |         |        | 978    | 
|                                                                                             |                                                                                                     |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Gross profit                                                                                 |                                                                                                     |                                       | 14,957  |        |        |      | 32,046  |        |        |      | 19,086  |        |        |   | 7,918   |        |        |   | 4,623   |       
|                                                                                             |                                                                                                     |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Operating expenses:                                                                          |                                                                                                     |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                                             | Research and development, net                                                                       |                                       |         | 9,230  |        |      |         | 8,672  |        |      |         | 5,519  |        |   |         | 4,555  |        |   |         | 3,955  |       
|                                                                                             | Sales and marketing                                                                                 |                                       |         | 22,882 |        |      |         | 28,479 |        |      |         | 18,876 |        |   |         | 13,182 |        |   |         | 12,224 |       
|                                                                                             | General and administrative                                                                          |                                       |         | 7,546  |        |      |         | 6,749  |        |      |         | 3,947  |        |   |         | 2,505  |        |   |         | 2,496  |       
|                                                                                             | Bad debt expense                                                                                    |                                       |         | 2,948  |        |      |         | 731    |        |      |         | 533    |        |   |         | 677    |        |   |         | 485    |       
|                                                                                             | Restructuring charge                                                                                |                                       |         | 2,825  |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |       |       
|                                                                                             | Amortization of goodwill, intellectual property,
	other intangibles and deferred stock compensation |                                       |         | 3,806  |        |      |         | 11,377 |        |      |         | 3,640  |        |   |         | 1,824  |        |   |         | 557    |       
|                                                                                             |                                                                                                     |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                                             |                                                                                                     | Total operating expenses              |         |        | 49,237 |      |         |        | 56,008 |      |         |        | 32,515 |   |         |        | 22,743 |   |         |        | 19,717 | 
|                                                                                             |                                                                                                     |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Loss from operations                                                                         |                                                                                                     |                                       | (34,280 | )      |        |      | (23,962 | )      |        |      | (13,429 | )      |        |   | (14,825 | )      |        |   | (15,094 | )     
|Finance and other income (expense), net                                                      |                                                                                                     |                                       | 2,037   |        |        |      | 4,749   |        |        |      | 1,940   |        |        |   | 218     |        |        |   | 132     |       
|Write down of an equity investment                                                           |                                                                                                     |                                       | (2,500  | )      |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |       
|                                                                                             |                                                                                                     |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Net loss                                                                                     |                                                                                                     | $                                     | (34,743 | )      |        | $    | (19,213 | )      |        | $    | (11,489 | )      |        | $ | (14,607 | )      |        | $ | (14,962 | )     
|                                                                                             |                                                                                                     |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Basic and diluted net loss per share                                                         |                                                                                                     | $                                     | (0.91   | )      |        | $    | (0.52   | )      |        | $    | (0.59   | )      |        | $ | (6.07   | )      |        | $ | (6.96   | )     
|                                                                                             |                                                                                                     |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Weighted average number of shares used in
	computing basic and diluted net loss per share(1) |                                                                                                     |                                       | 38,225  |        |        |      | 37,205  |        |        |      | 19,575  |        |        |   | 2,408   |        |        |   | 2,151   |       
|                                                                                             |                                                                                                     |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       

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|                                                     |  |                             |        |      |  |      |        |      |  |      |        |  |  |  |         |   |  |  |         |  
|---------------------------------------------------- |  | --------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------- | - |  |  | ------- | -
|                                                     |  |                            
|                                                     |  | December 31,               
|                                                     |  |                            
|                                                     |  | 2001                        |        | 2000 |  | 1999 |        | 1998 |  | 1997
|                                                     |  |                             |        |      |  |      |        |      |  |     
|                                                     |  |                            
|                                                     |  | (U.S. dollars in thousands)
|Condensed Consolidated Balance Sheet
	Data:          |  |                             |        |      |  |      |        |      |  |      |        |  |  |  |         |   |  |  |         |  
|Cash, cash equivalents and short-term investments    |  |                             | 41,824 |      |  |      | 64,734 |      |  |      | 75,607 |  |  |  | 6,449   |   |  |  | 6,377   |  
|Working capital                                      |  |                             | 37,906 |      |  |      | 63,916 |      |  |      | 71,323 |  |  |  | 1,596   |   |  |  | 3,024   |  
|Total assets                                         |  |                             | 56,512 |      |  |      | 90,374 |      |  |      | 86,049 |  |  |  | 12,701  |   |  |  | 15,097  |  
|Long-term obligations, net of current                |  |                             |       |      |  |      |       |      |  |      |       |  |  |  | 327     |   |  |  | 1,156   |  
|Redeemable convertible preferred stock               |  |                             |       |      |  |      |       |      |  |      |       |  |  |  | 37,304  |   |  |  | 25,532  |  
|Total shareholders equity (net capital
	deficiency) |  |                             | 46,582 |      |  |      | 78,430 |      |  |      | 73,129 |  |  |  | (33,178 | ) |  |  | (18,915 | )



---



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

Unaudited Quarterly Financial Data for 2001
and 2000

The following are summaries of quarterly
financial data for the years ended December 31, 2001 and
2000 as reported by the Company:

|     |                                                            |                                                 |  |        |   |       |  |         |   |  |  |        |   |  |  |        |  
|---- | ---------------------------------------------------------- | ----------------------------------------------- |  | ------ | - | ----- |  | ------- | - |  |  | ------ | - |  |  | ------ | -
|     |                                                            | First                                           |  | Second |   | Third |  | Fourth 
|     |                                                            | Qtr                                             |  | Qtr    |   | Qtr   |  | Qtr    
|     |                                                            |                                                 |  |        |   |       |  |        
|     |                                                            |                                                
|     |                                                            | Unaudited                                      
|     |                                                            | (US dollar in thousands, except per share data)
|2001 |                                                            |                                                 |  |        |   |       |  |         |   |  |  |        |   |  |  |       
|     | Revenues                                                   |                                                 |  | 7,221  |   |       |  | 4,575   |   |  |  | 4,481  |   |  |  | 4,361  |  
|     | Gross profit                                               |                                                 |  | 5,373  |   |       |  | 3,065   |   |  |  | 3,287  |   |  |  | 3,232  |  
|     | Net loss                                                   |                                                 |  | (7,936 | ) |       |  | (11,607 | ) |  |  | (9,245 | ) |  |  | (5,955 | )
|     | Basic and diluted net loss per share (after
	amortization) |                                                 |  | (0.21  | ) |       |  | (0.30   | ) |  |  | (0.24  | ) |  |  | (0.15  | )
|2000 |                                                            |                                                 |  |        |   |       |  |         |   |  |  |        |   |  |  |       
|     | Revenues                                                   |                                                 |  | 8,903  |   |       |  | 10,632  |   |  |  | 11,738 |   |  |  | 7,073  |  
|     | Gross profit                                               |                                                 |  | 7,542  |   |       |  | 8,994   |   |  |  | 10,007 |   |  |  | 5,503  |  
|     | Net loss                                                   |                                                 |  | (2,152 | ) |       |  | (9,759  | ) |  |  | (1,531 | ) |  |  | (5,771 | )
|     | Basic and diluted net loss per share (after
	amortization) |                                                 |  | (0.06  | ) |       |  | (0.26   | ) |  |  | (0.04  | ) |  |  | (0.15  | )

30



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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 herein, as well as the section on Risk
Factors that is set forth in Item 1 of Part I of this
Form 10-K. In addition, this discussion contains
forward-looking statements and is, therefore, subject to the
overall qualification on forward-looking statements that appears
at the beginning of this Form 10-K.

Overview

BackWeb Technologies Ltd. (BackWeb or
the Company) is a provider of critical
communications infrastructure software and application-specific
software that enable companies to communicate and distribute
business-critical, time-sensitive information throughout their
extended enterprise of customers, partners and employees.
BackWeb® technology also enables companies to leverage
their enterprise portal by ensuring that critical portal content
is automatically distributed to users across the enterprise even
when a user is offline.

Our BackWeb ProactivePortalTM solution
aims to extend the reach of corporate portals to mobile or
disconnected users and users who need to be notified of critical
new content, thereby increasing usage of the portal and critical
communications maximizing the return on investment for
enterprise portals. Our BackWeb e-AcceleratorTM
application allows an extended enterprise or geographically
dispersed organization to manage and deliver pertinent
information and alerts without the use of a portal. Thus, for
example, sales and service organizations, partners and
resellers, and call centers can collect and distribute key data
to customers, partners, and employees, keeping them updated and
with confidence that users will interact with the data through
alerts and notification features. Our core infrastructure
software, BackWeb FoundationTM, is a platform that
allows organizations to efficiently target and deliver sizeable
digital data of any format to users desktops throughout
the extended enterprise.

We were incorporated on August 31, 1995 and
commenced our operations in November 1995. During the period
from commencement of operations through December 31, 1996,
we were in a development stage and had insignificant revenues.
Operating activities during this period related primarily to
developing our products, building our corporate infrastructure
and raising capital. In December 1996, we shipped the first
commercial version of our software.

In August 1997, in an effort to expand the
features and functionalities of our product offerings, we
acquired all the outstanding shares of Lanacom Inc., a Canadian
corporation. The acquisition has been accounted for using the
purchase method of accounting, and accordingly the purchase
price has been allocated to the tangible and intangible assets
acquired and the liabilities assumed on the basis of their
respective fair value on the acquisition date. The purchase
price of $3.9 million was determined based on the value of
shares originally issued and options granted. Of the total
purchase price, approximately $3.2 million was allocated to
goodwill, representing the excess of the aggregate purchase
price on the fair value of tangible and intangible assets. The
remainder of the purchase price was allocated to net tangible
liabilities assumed ($103,000), developed technology ($400,000)
and other identifiable intangible assets ($383,000). Goodwill,
developed technology and other identified intangibles are
amortized on a straight-line basis over the estimated useful
life which ranges from 24 to 30 months. The first BackWeb
product, Version 4.0, incorporating Lanacoms
Headliner product, was released in January 1998.

In early 1998, we engaged in a comprehensive
re-examination of our business strategy and changed our
strategic focus from a consumer-oriented to an
enterprise-oriented Internet communication company. In
connection with this change in strategy, we undertook a
fundamental repositioning and reorganization of our work force,
particularly in our sales organization. During 1998, we
continued to enhance our infrastructure software, BackWeb
Foundation Version 5.0, and in December 1998 released our first
packaged application, BackWeb Sales Accelerator.

On June 27, 2000, BackWeb completed its
acquisition of the software and intellectual property owned,
licensed or developed by Mobix Communications Ltd. for an
aggregate amount of $16.4 million pursuant to a Software
and Asset Purchase Agreement among the Company, Mobix and the
principal shareholder of

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


In 2001, the Company re-positioned itself to
focus on the enterprise portal space, which market analysts
generally expect to be one of the fastest-growing software
markets in the foreseeable future. We intend to establish
BackWeb ProactivePortal technology as the leading software
system for offline enterprise portal communications and
enterprise portal ratification. We believe that the adoption of
our system BackWeb Foundation, and our BackWeb e-Accelerator
application by leading companies and partners across various
industries validates our technology and should facilitate broad
market acceptance of our ProactivePortal solution. In addition,
we believe that the selection of our products by industry
leaders should promote the adoption of our critical
communications solution by these companies, as well as their
partners, suppliers and distributors. We also believe that this
adoption, along with the competitive advantages achieved with
our products, will drive other industry participants to adopt
our products as their preferred solution. We intend to continue
to focus our development efforts on increasing the functionality
and flexibility of BackWeb ProactivePortal technology to
facilitate its adoption and to increase technological barriers
to entry. For a further discussion on Strategy see Part I,
Item 1. Business, Strategy.

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

Critical Accounting Policies

Our critical accounting policies are as follows:



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

Revenue
recognition

We recognize software license revenue in
accordance with Statement of Position 97-2 Software
Revenue Recognition (SOP 97-2), as
amended. SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements to be
allocated to each element based on the relative fair value of
the elements. We have also adopted SOP 98-9,
Modification of SOP 97-2, Software Revenue
Recognition with Respect to Certain Transactions
(SOP 98-9), for all transactions entered into
after January 1, 2000. SOP 98-9 requires that revenue
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.

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We derive our revenue from license fees of our
products, maintenance, customer training and the rendering of
consulting services. Our products are generally sold through the
direct sales force, resellers and OEMs. As described
below, management estimates must be made and used in connection
with the revenue recognized in any accounting period.

We license our products on a perpetual and on a
term basis. License revenue arising from the sale of perpetual
licenses is recognized in the accounting period that the sale
takes place. License revenue arising from term licenses is
recognized over the contractual term of the license. Management
defines a term license that is less than two years from the date
of the official order form and sale taking place and revenue
arising during this period is ratably recognized over the
license period. Management determines a perpetual license that
is two years or more, in which case revenue is recognized in the
accounting period in which the official order form and sale
takes place.

The determination criterion for the definition of
a license sale is when persuasive evidence of an agreement has
been delivered, the fee is fixed and determinable and the
collection of the resulting receivable is reasonable assured.
Delivery generally occurs when the product is delivered to a
common carrier.

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

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

For all sales through the direct channel we use a
Software License Service Agreement
(SLSA) signed by both parties and an Official order
form for each sale made signed by both parties. For sales
through a reseller a standard reseller is executed and evidence
of orders from customers is supplied before revenue is
recognized.

We recognize maintenance over the contractual
period for the maintenance, which is generally one-year.
Maintenance is available at multiple levels of support and is
priced as a percentage of the license revenue. For those
agreements where the maintenance and license is quoted as one
fee, we value the maintenance as an undelivered element at
standard rates and defer this over the contractual maintenance
period for revenue recognition purposes. It is optional whether
a customer chooses to buy a maintenance contract.

Our arrangements do not generally include
acceptance. However if such an acceptance provision exists, then
revenue recognition is deferred until written acceptance of the
product has been received from the customer. All agreements we
make are non-refundable and non-cancelable.

We also recognize revenue from consulting
activities, which is generally evidenced by a signed
Statement of Work (SOW). A SOW may be
time and materials based and the revenue is recognized at the
time of invoicing the customer. If an acceptance clause is
contained in the SOW, revenue is deferred until written
acceptance is obtained from the customer. A SOW may
also be a fixed bid. Management interprets fixed bids in a
similar manner to a SOW containing an acceptance clause and
defers revenue recognition until the customer supplies a
certificate of work completion, at which time the revenue is
recognized. The majority of the SOW that are written are based
on a time and materials basis.

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Revenue recognition for training to customers is
determined when the training has been delivered to the customer.

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



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

Management reviews on a continuing basis the
uncollectibility of the trade accounts receivable and the
adequacy of the allowance for doubtful debts against the trade
receivables. Management specifically analyzes customer accounts,
account receivable aging reports, history of bad debts and the
business or industry sector to which they belong, customer
concentrations, customer credit-worthiness, current economic
trends and any other pertinent factors that come to light.
Generally a provision will be made when a trade receivable
becomes 90 days past due. In exceptional cases a provision
after 90 days past due will be waived when in the judgement of
management after due diligence with the customer management is
confident that the receivable is still collectible and the
customer has demonstrated that payment is forthcoming. During
the year management provided for approximately $2.9 million
of doubtful debt provision arising primarily from the
Internet-centric business in the business to
consumer market, that arose primarily as a result of the
economic uncertainty leading to certain customers no longer
being able to continue business. This provision applied to
revenue of which a majority was generated during the fiscal year
ending December 31, 2000.

Management is able to make reasonably objective
judgments on the adequacy of other provisions relating to trade
accruals. In the case of contingent liabilities, no provision
has been made. This has involved significant management judgment
that either management will prevail in the case of litigation or
has sufficient insurance to cover an adverse outcome of any such
material proceeding. A discussion of the outstanding material
litigation is contained in Note 10 of the Notes to the
Consolidated Financial Statements.

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

We assess the impairment of long-lived assets and
related goodwill, intellectual property and other intangibles
whenever an event occurs that indicates that the carrying value
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 the company.
|
| |  | Significant negative industry or economic trends;                                                   

The determination that the carrying value of
intangibles, long-lived assets and goodwill arising on the
purchase of intellectual property may not be recoverable is
based upon the existence of one or more of the above factors. An
impairment review based on a projected discounted cash flow
method using a discount rate commensurate with the risk inherent
in our current business model is performed to determine the
impaired amount that needs to be recorded. Net intangible assets
at December 31, 2001 amounted to $3.3 million.

In 2002, a Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets became effective and is not
expected to have an effect on the company statement of
operations.

We currently do not expect to record an
impairment charge upon completion of the current review being
undertaken. There can be no assurance that at the time the
review is completed a material impairment charge may have to be
accounted for.

Review of
Equity Investments for impairment

Management has made certain equity investments in
other Companys that it believes are in the interests of
the company and its strategic objectives. Before the
investment(s) are executed, they are approved by the
Companys executive management and the Companys Board
of Directors. Generally, management

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designates an executive staff member to either
serve on the Board of Directors of the investee as a voting
member or as an observer. This process serves management to
monitor the investment and to determine when an impairment
review of the investment may be needed. Management performs a
review of equity investments on a quarterly basis to determine
if a provision for impairment is required. This process while
based on reasonably objective evidence supplied by the investee
is combined with due diligence sought from general economic
trends and indicators. During the year management carried out
such reviews and accounted for an impairment charge against one
of its equity investments for the full amount of the equity
investment in the amount of $2.5 million. Significant
management judgment is made when conducting these reviews and
future developments in the investee may result in the impairment
provision becoming a write-off or reversed to some extent.


Results of Operations

Revenues

Our revenues are derived primarily from licensing
of BackWeb Foundation, BackWeb e-Accelerator suite and the Push
Application Server and to a lesser extent from maintenance,
consulting and training services. Total revenues for the twelve
months ended December 31, 2001 was $20.6 million, a
decrease of approximately $17.7 million or 46% from
$38.3 million in the twelve months ended December 31,
2000. Total revenues increased approximately $15.0 million
or 64% during 2000 as compared to 1999. The decrease in 2001 and
increase in 2000 was due to the volume of license and service
revenues. Customers outside of the United States accounted for
70% of revenues in the twelve months ended December 31,
2001 compared to 27.6% and 29.0% of revenues in the twelve
months ended December 31, 2000 and 1999, respectively.

License revenues were $13.8 million or 66.9%
of revenues in the twelve months ended December 31, 2001
compared to $29.3 million or 76.4% and $18.5 million
or 79.6% of revenues in the twelve months ended
December 31, 2000 and 1999, respectively. The decreases in
license revenue as a percentage of total revenue were primarily
due to decreased license revenue compared to the decrease in
service revenue. Service revenues were $6.8 million or
33.1% of revenues in the twelve months ended December 31,
2001 compared to $9.1 million or 23.6% and
$4.7 million or 20.4% of revenues in the twelve months
ended December 31, 2000 and 1999, respectively.

In 2001 and 2000, one OEM customer accounted for
52% or $10.7 million and 27% or $10.4 million of our
revenues, respectively. In addition in 2001, two other customers
together accounted for an aggregate of 11% of our revenues. In
1999, revenues from one end-user customer represented 13% or
$3.0 million of our revenues. We expect that a small number
of customers will continue to account for a substantial portion
of revenues for the foreseeable future and revenues from one or
more of these customers may represent more than 10% of our
revenues in future years.

Cost of Revenues

Cost of revenues was $5.7 million or 27.5%
of revenues for the twelve months ended December 31, 2001
compared to $6.3 million or 16.4% and $4.2 million or
18.0% of revenues for the twelve months ended December 31,
2000 and 1999, respectively. In 2001, the increase in cost of
revenues as a percentage of revenues was due to the larger
decrease in revenues compared to cost of revenues and the
decrease in total dollars was due to the reduction in the
services organization. In 2000, the decrease in cost of revenues
as a percentage of revenues was due to a larger increase in
revenues compared to cost of revenues, and the increase in total
dollars was due to the growth of the services organization.

Cost of license revenues consists primarily of
expenses related to media duplication, packaging of products and
in 1999 only, amortization of capitalized developed technology
(i.e., 1997 Lanacom acquisition related). Cost of license
revenues was $443,000 or 3.2% of license revenues for the twelve
months ended December 31, 2001 compared to $249,000 or 0.9%
of license revenues for the twelve months ended
December 31, 2000 and $266,000 or 1.4% of license revenues
for the twelve months ended December 31, 1999. Cost of
service revenues consists primarily of expenses related to
salaries and expenses of the customer support and professional
service organizations, including related expenses of BackWeb
consultants and third

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party consultants. Cost of service revenues was
$5.2 million, or 76.7% of service revenues, in the twelve
months ended December 31, 2001 compared to
$6.1 million or 66.8% of service revenues, in the twelve
months ended December 31, 2000 and $3.9 million or
82.4% of service revenues, in the twelve months ended
December 31, 1999. The decrease in cost of service revenues
in 2001 was primarily due to the reduced level of head count.
The increase in cost of service revenues in 2000 was primarily
due to the growth of the service organization during 2000. We
expect the cost of service revenues to decrease primarily as a
result of lower service revenue, reorganization, improved
utilization and more effective cost management.


Operating Expenses

Research and
Development, net

Research and development expenses consist of
personnel and related costs of our research and development
employees, equipment and supply costs for our development
efforts. These expenses are charged to operations as incurred.
We have research and development facilities in Israel. Research
and development expenses were $9.2 million in the twelve
months ended December 31, 2001 compared to
$8.7 million and $5.5 million in the twelve months
ended December 31, 2000 and 1999, respectively. We expect
our research and development expenses will marginally decrease
on an absolute basis over the next year as we continue to
implement more effective cost management.

Sales and
Marketing

Sales and marketing expenses consist of personnel
and related costs for our direct sales force and marketing
employees, together with marketing programs, including trade
shows, advertising, collateral, sales materials, seminars and
public relations. We have sales personnel in offices located in
the United States, Canada and Europe. Sales and marketing
expenses were $22.9 million for the twelve months ended
December 31, 2001 compared to $28.5 million and
$18.9 million in the twelve months ended December 31,
2000 and 1999, respectively. We expect that sales and marketing
expenses will decrease on an absolute basis over the next year
due to reorganization and more effective cost management.

General and
Administrative

General and administrative expenses consist
primarily of personnel and related costs for general corporate
functions, including finance, accounting, general management,
human resources, information services and legal. General and
administrative expenses were $7.5 million in the twelve
months ended December 31, 2001 compared to
$6.7 million and $4.1 million in the twelve months
ended December 31, 2000 and 1999, respectively. We expect
general and administrative expenses to decrease on an absolute
basis as a result of the reorganization and more effective cost
management.

Bad Debt
Expense

The bad and doubtful debt for the years ended
December 31, 2001, 2000 and 1999 was $2,948,000, $732,000
and $553,000, respectively. During 2001, management provided for
doubtful debts arising primarily from revenues generated in the
year ended December 31, 2000. This was due to the
Internet-centric business in the business to
consumer market, that arose primarily as a result of the
economic uncertainty leading to certain customers no longer
being able to continue business.

Restructuring
Charge

During the three months ending September 30,
2001, the Company approved a restructuring plan to reduce the
workforce, vacate certain facilities, and cancel office service
leases. A restructuring charge of $2.8 million was recorded
which included $1.3 million related to severance and
benefits, $1.4 million related to facility cost, and
$100,000 of other related restructuring costs. For further
information see Note 9 of the Notes to the Consolidated
Financial Statements.

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

Amortization of goodwill, intellectual property,
other intangible assets and deferred stock compensation consists
of amortization of goodwill and other intangibles associated
with our acquisition of Lanacom in August 1997, deferred stock
compensation in 1999, initial write-off of the acquisition of
intellectual property from Mobix Communications Ltd. in June
2000 and amortization of intellectual property and other
intangibles associated with the acquisition of intellectual
property from Mobix Communications Ltd. in June 2000. Deferred
stock compensation represents the aggregate differences between
the respective exercise price of options at their dates of grant
and the deemed fair market value of our Ordinary Shares for
accounting purposes. Goodwill, intellectual property and other
intangibles are being amortized on a straight-line basis over
the estimated useful life, generally two to three years.
Deferred stock compensation is presented as a reduction of
shareholders equity and is amortized over the vesting
period of the underlying options based on an accelerated vesting
method. The total amortization expense related to one-time
write-off of in-process research and development was
$8.4 million in June 2000. Amortization expense was
$3.8 million for the twelve months ended December 31,
2001 compared to $11.4 million and $3.6 million in the
twelve months ended December 31, 2000 and 1999,
respectively.

Finance and
Other Income and Expense, Net

Finance and other income and expenses (net)
includes interest income earned on our cash, cash equivalents
and short-term investments offset by interest expense. In
addition, the amortization of the fair value of the warrants
issued in connection with borrowings from financial institutions
is also charged to finance and other income and expense. Finance
and other income and expense (net) also includes the effects of
exchange gains and losses arising from the re-measurement of
transactions in foreign currencies. For the twelve months ended
December 31, 2001, finance and other income was
$2.0 million compared to $4.7 million and
$1.9 million in the twelve months ended December 31,
2000 and 1999, respectively. The decrease in finance and other
income during 2001 was due to the decrease of cash, cash
equivalents and short-term investments. The increase in finance
and other income during 2000 and 1999 was due to interest income
generated from the proceeds of the initial public offering.

Write-Down of
an Equity Investment

The Company invested during the year ended
December 31, 2000 an aggregate of $3.0 million in
certain development companies in Internet centric businesses in
which the company believed it had a significant strategic
interest. However, due to the economic slowdown and the
significant decline in capital available to and in the
valuations of the privately funded Internet centric businesses,
the Company believes that the investment in 3Path, Inc. had
become impaired. Accordingly, in the three-months ended
June 30, 2001 the Company has recorded a charge of
$2.5 million to reflect impairment of these assets below
their recorded cost to represent what the Companys
management considers to be fair value.

Income
Taxes

As of December 31, 2001, we had
approximately $58 million of Israeli net operating loss
carry forwards and $2.3 million of U.S. federal net
operating loss carryforwards for tax reporting purposes
available to offset future taxable income. The U.S. net
operating loss carryforwards expire in various amounts between
the years 2011 and 2020. The Israeli net operating loss
carryforwards have no expiration date.

Liquidity and Capital Resources

As of December 31, 2001, the Company had
$41.8 million of cash, cash equivalents and short-term
investments, which represents a decrease of $22.9 million
as compared to December 31, 2000.

Net cash used in operating activities was
$22.2 million and $11.0 million for the twelve-months
ended December 31, 2001 and 2000, respectively. Cash
provided by investing activities was $17.1 million for the
twelve months ended December 31, 2001, and was primarily from
proceeds from the sale of short term investments, cash used in
investing activities was $5.6 million for the twelve months
ended December 31, 2000

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and was primarily for capital expenditures,
purchase of intellectual property and partially offset by
proceeds from the sale of short-term investments. Cash provided
by financing activities was $1.2 million and
$18.8 million for the twelve months ended December 31,
2001 and 2000, respectively, and consists primarily of proceeds
from the issuance of Ordinary Shares.


As of December 31, 2001, the Company had no
material commitments for capital expenditures. Our capital
requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to
developing, marketing, selling and supporting our products, the
timing and extent of establishing additional international
operations and other factors. We believe that our current cash
balances will be sufficient to fund our operations for at least
the next 24 months.

Effective Corporate Tax Rates

Our tax rate will reflect a mix of the U.S.
statutory tax rate on our U.S. income, versus European country
tax rates on our individual European country income and the
Israeli tax rate discussed below. We expect that most of our
taxable income will be generated in Israel. Israeli companies
are generally subject to income tax at the rate of 36% of
taxable income. The majority of our income, however, is derived
from our Companys 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 will have a
tax exemption on income derived during the first two years in
which this investment program produces taxable income, provided
that we do not distribute such income as a dividend, and a
reduced tax rate of 10%  25% for the next 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 Israeli Taxation and
Investment Programs-Law for the Encouragement of Capital
Investments Act 1959. There can be no assurance 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, 2001, we have not yet used the tax benefits
for which we are eligible. See Item 1,
Business  Risk Factors.

Impact of Inflation and Currency
Fluctuations

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

The annual rate of inflation in Israel was 1.0%
in 2001, 0% in 2000 and 1.3% in 1999. The NIS was devalued
against the U.S. dollar by approximately 9.3% in 2001, -2.7% in
2000, and -17% in 1999. The representative dollar exchange rate
for converting the NIS to U.S. dollars, as reported by the Bank
of Israel, was NIS 4.416 for one U.S. dollar on
December 31, 2001.

Recently Issued Accounting
Pronouncements

In June 2001, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards
No. 141, Business Combinations; and No. 142, Goodwill
and Other Intangible Assets (the new rules),
effective for the fiscal years beginning after December 15,
2001. Under the new rules, goodwill (and intangible assets
deemed to have indefinite lives) will no longer be amortized but
will be subject to impairment tests in accordance with the new
rules. Intangible assets with finite lives will continue to be
amortized over their estimated useful lives. The Company will
apply the new rules on accounting for goodwill and other

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intangible assets beginning in the first quarter
of fiscal year 2002. Application of the new rules is not
expected to have an effect on the consolidated operations.


In October 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144)
which supercedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. SFAS 144 requires, among other things,
that long-lived assets be measured at the lower of carrying
amount or fair value, less cost to sell, whether reported in
continuing operations or in discontinued operations.
SFAS 144 is effective for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal
years, and thereafter an annual impairment review. At this time
the Company has not assessed if it will have a material impact
on the Company.



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

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

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##### Table of Contents



Item 8.     Financial
Statements and Supplementary Data

REPORT OF INDEPENDENT AUDITORS

To the Shareholders

BackWeb Technologies Ltd.


We have audited the accompanying consolidated
balance sheets of BackWeb Technologies Ltd. (the
Company) and its subsidiaries as of
December 31, 2001 and 2000, and the related consolidated
statements of operations, changes in shareholders equity
and cash flows for each of the three years in the period ended
December 31, 2001. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements 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,
2001 and 2000 and the consolidated results of their operations
and cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles
generally accepted in the United States.



| |                                        
| | ---------------------------------------
| | /s/ Kost Forer & Gabbay                
|
| | KOST FORER & GABBAY                    
| | A Member of Ernst & Young International

Tel-Aviv, Israel

January 29, 2002


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BACKWEB TECHNOLOGIES LTD.

CONSOLIDATED BALANCE SHEETS

|                                                            |                                                                                                                                                                                                                        |                                            |       |          |        |  |       |         |        | 
|----------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | -------- | ------ |  | ----- | ------- | ------ | 
|                                                            |                                                                                                                                                                                                                        |                                           
|                                                            |                                                                                                                                                                                                                        | December 31,                              
|                                                            |                                                                                                                                                                                                                        |                                           
|                                                            |                                                                                                                                                                                                                        | 2001                                       |       | 2000    
|                                                            |                                                                                                                                                                                                                        |                                            |       |         
|                                                            |                                                                                                                                                                                                                        |                                           
|                                                            |                                                                                                                                                                                                                        | (In thousands, except                     
|                                                            |                                                                                                                                                                                                                        | share and per share data)                 
|ASSETS                                                     
|Current assets:                                             |                                                                                                                                                                                                                        |                                            |       |          |        |  |       |        
|                                                            | Cash and cash equivalents                                                                                                                                                                                              |                                            | $     | 17,209   |        |  | $     | 21,076  |       
|                                                            | Short-term investments                                                                                                                                                                                                 |                                            |       | 24,615   |        |  |       | 43,658  |       
|                                                            | Trade accounts receivable, net of allowance for
	doubtful accounts of $2,957 and $1,038 at December 31, 2001
	and 2000, respectively                                                                                   |                                            |       | 3,529    |        |  |       | 8,400   |       
|                                                            | Other accounts receivables and prepaid expenses                                                                                                                                                                        |                                            |       | 2,015    |        |  |       | 2,370   |       
|                                                            |                                                                                                                                                                                                                        |                                            |       |          |        |  |       |        
|                                                            |                                                                                                                                                                                                                        | Total current assets                       |       |          | 47,368 |  |       |         | 75,504 | 
|Long-term investments and other long term assets            |                                                                                                                                                                                                                        |                                            | 2,458 |          |        |  | 4,383 |        
|Property and equipment, net                                 |                                                                                                                                                                                                                        |                                            | 3,356 |          |        |  | 4,025 |        
|Intellectual property and other purchased
	intangibles, net |                                                                                                                                                                                                                        |                                            | 3,330 |          |        |  | 6,462 |        
|                                                            |                                                                                                                                                                                                                        |                                            |       |          |        |  |       |        
|                                                            |                                                                                                                                                                                                                        | Total assets                               |       | $        | 56,512 |  |       | $       | 90,374 | 
|                                                            |                                                                                                                                                                                                                        |                                            |       |          |        |  |       |        
|LIABILITIES AND SHAREHOLDERS
	EQUITY                      
|Current liabilities:                                        |                                                                                                                                                                                                                        |                                            |       |          |        |  |       |        
|                                                            | Accounts payable and accrued liabilities                                                                                                                                                                               |                                            | $     | 7,192    |        |  | $     | 7,260   |       
|                                                            | Deferred revenue                                                                                                                                                                                                       |                                            |       | 2,271    |        |  |       | 3,957   |       
|                                                            | Current portion of shareholders loans                                                                                                                                                                                 |                                            |       |         |        |  |       | 371     |       
|                                                            |                                                                                                                                                                                                                        |                                            |       |          |        |  |       |        
|                                                            |                                                                                                                                                                                                                        | Total current liabilities                  |       |          | 9,463  |  |       |         | 11,588 | 
|Accrued severance pay, net                                  |                                                                                                                                                                                                                        |                                            | 240   |          |        |  | 243   |        
|Long-term deferred revenue                                  |                                                                                                                                                                                                                        |                                            | 228   |          |        |  | 113   |        
|Commitments and contingencies                               |                                                                                                                                                                                                                        |                                            |       |          |        |  |       |        
|Shareholders equity:                                       |                                                                                                                                                                                                                        |                                            |       |          |        |  |       |        
|                                                            | Series E preferred shares, nominal value NIS
	0.03 per share; one share authorized and issued and outstanding
	at December 31, 2001 and 2000                                                                           |                                            |       | 3,454    |        |  |       | 3,454   |       
|                                                            | Ordinary shares, nominal value NIS 0.03 per
	share; 150,067,829 shares authorized at December 31, 2001
	and 2000; 38,613,328 and 38,047,738 shares issued and
	outstanding at December 31, 2001 and 2000, respectively |                                            |       | 147,114  |        |  |       | 146,751 |       
|                                                            | Notes receivable from shareholders                                                                                                                                                                                     |                                            |       | (1,235   | )      |  |       | (2,486  | )     
|                                                            | Deferred stock compensation                                                                                                                                                                                            |                                            |       | (216     | )      |  |       | (890    | )     
|                                                            | Accumulated other comprehensive income (loss)                                                                                                                                                                          |                                            |       | 400      |        |  |       | (206    | )     
|                                                            | Accumulated deficit                                                                                                                                                                                                    |                                            |       | (102,936 | )      |  |       | (68,193 | )     
|                                                            |                                                                                                                                                                                                                        |                                            |       |          |        |  |       |        
|                                                            |                                                                                                                                                                                                                        | Total shareholders equity                 |       |          | 46,581 |  |       |         | 78,430 | 
|                                                            |                                                                                                                                                                                                                        |                                            |       |          |        |  |       |        
|                                                            |                                                                                                                                                                                                                        | Total liabilities and shareholders equity |       | $        | 56,512 |  |       | $       | 90,374 | 
|                                                            |                                                                                                                                                                                                                        |                                            |       |          |        |  |       |        

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

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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                          |                                                                                                                                 |                                       |         |        |        |      |         |        |        |   |         |        |        | 
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                          |                                                                                                                                 |                                      
|                                                                                          |                                                                                                                                 | Year Ended December 31,              
|                                                                                          |                                                                                                                                 |                                      
|                                                                                          |                                                                                                                                 | 2001                                  |         | 2000   |        | 1999
|                                                                                          |                                                                                                                                 |                                       |         |        |        |     
|                                                                                          |                                                                                                                                 |                                      
|                                                                                          |                                                                                                                                 | (In thousands, except per share data)
|Revenues:                                                                                 |                                                                                                                                 |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                          | License                                                                                                                         |                                       | $       | 13,807 |        |      | $       | 29,294 |        |   | $       | 18,514 |       
|                                                                                          | Service                                                                                                                         |                                       |         | 6,831  |        |      |         | 9,052  |        |   |         | 4,749  |       
|                                                                                          |                                                                                                                                 |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                          |                                                                                                                                 | Total revenues                        |         |        | 20,638 |      |         |        | 38,346 |   |         |        | 23,263 | 
|                                                                                          |                                                                                                                                 |                                       |         |        |        |      |         |        |        |   |         |       
|Cost of revenues:                                                                         |                                                                                                                                 |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                          | License                                                                                                                         |                                       |         | 443    |        |      |         | 249    |        |   |         | 266    |       
|                                                                                          | Service                                                                                                                         |                                       |         | 5,238  |        |      |         | 6,051  |        |   |         | 3,911  |       
|                                                                                          |                                                                                                                                 |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                          |                                                                                                                                 | Total cost of revenues                |         |        | 5,681  |      |         |        | 6,300  |   |         |        | 4,177  | 
|                                                                                          |                                                                                                                                 |                                       |         |        |        |      |         |        |        |   |         |       
|Gross profit                                                                              |                                                                                                                                 |                                       | 14,957  |        |        |      | 32,046  |        |        |   | 19,086  |       
|                                                                                          |                                                                                                                                 |                                       |         |        |        |      |         |        |        |   |         |       
|Operating expenses:                                                                       |                                                                                                                                 |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                          | Research and development, net                                                                                                   |                                       |         | 9,230  |        |      |         | 8,672  |        |   |         | 5,519  |       
|                                                                                          | Sales and marketing                                                                                                             |                                       |         | 22,882 |        |      |         | 28,479 |        |   |         | 18,876 |       
|                                                                                          | General and administrative                                                                                                      |                                       |         | 7,546  |        |      |         | 6,749  |        |   |         | 3,947  |       
|                                                                                          | Bad debt expense                                                                                                                |                                       |         | 2,948  |        |      |         | 731    |        |   |         | 533    |       
|                                                                                          | Restructuring charge                                                                                                            |                                       |         | 2,825  |        |      |         |       |        |   |         |       |       
|                                                                                          | In-process research and development write-off and
	amortization of goodwill, intellectual property and other
	intangible assets |                                       |         | 3,132  |        |      |         | 10,163 |        |   |         | 1,498  |       
|                                                                                          | Amortization of deferred stock compensation                                                                                     |                                       |         | 674    |        |      |         | 1,214  |        |   |         | 2,142  |       
|                                                                                          |                                                                                                                                 |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                          |                                                                                                                                 | Total operating expenses              |         |        | 49,237 |      |         |        | 56,008 |   |         |        | 32,515 | 
|                                                                                          |                                                                                                                                 |                                       |         |        |        |      |         |        |        |   |         |       
|Loss from operations                                                                      |                                                                                                                                 |                                       | (34,280 | )      |        |      | (23,962 | )      |        |   | (13,429 | )     
|Finance and other income (expense), net                                                   |                                                                                                                                 |                                       | 2,037   |        |        |      | 4,749   |        |        |   | 1,940   |       
|Write down of an equity investment                                                        |                                                                                                                                 |                                       | (2,500  | )      |        |      |        |        |        |   |        |       
|                                                                                          |                                                                                                                                 |                                       |         |        |        |      |         |        |        |   |         |       
|Net loss                                                                                  |                                                                                                                                 | $                                     | (34,743 | )      |        | $    | (19,213 | )      |        | $ | (11,489 | )     
|                                                                                          |                                                                                                                                 |                                       |         |        |        |      |         |        |        |   |         |       
|Basic and diluted net loss per share                                                      |                                                                                                                                 | $                                     | (0.91   | )      |        | $    | (0.52   | )      |        | $ | (0.59   | )     
|                                                                                          |                                                                                                                                 |                                       |         |        |        |      |         |        |        |   |         |       
|Weighted average number of shares used in
	computing basic and diluted net loss per share |                                                                                                                                 |                                       | 38,225  |        |        |      | 37,205  |        |        |   | 19,575  |       
|                                                                                          |                                                                                                                                 |                                       |         |        |        |      |         |        |        |   |         |       

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

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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                                                                          |                          |                                   |             |                 |  |            |       |          |  |         |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |         |   |   |         |   | 
|--------------------------------------------------------------------------------------------------------- | ------------------------ | --------------------------------- | ----------- | --------------- |  | ---------- | ----- | -------- |  | ------- | ---------- | ------------ |  | ------------- | ------- | ------------- |  | ------------- | ------ | ------ |  | - | ------ | - |  | - | ---- | - |  | - | -------- | - |  | - | ------- | ------- | - | - | ------- | - | 
|                                                                                                          |                          |                                  
|                                                                                                          |                          | Shareholders Equity             
|                                                                                                          |                          |                                  
|                                                                                                          |                          |                                   |             | Accum-          |  |           
|                                                                                                          |                          |                                   |             | ulated          |  |           
|                                                                                                          |                          |                                   |             | Notes           |  |            |       | Other    |  |        
|                                                                                                          |                          |                                   |             |                 |  | Receivable |       |          |  | Compre- |            |             
|                                                                                                          |                          | Preferred Shares                  |             | Ordinary Shares |  | From       |       | Deferred |  | hensive |            |              |  | Total        
|                                                                                                          |                          |                                   |             |                 |  | Share-     |       | Stock    |  | Income/ |            | Accumulated  |  | Comprehensive |         | Shareholders
|                                                                                                          |                          | Shares                            |             | Amount          |  | Shares     |       | Amount   |  | holders |            | Compensation |  | (Loss)        |         | Deficit       |  | Income/(Loss) |        | Equity
|                                                                                                          |                          |                                   |             |                 |  |            |       |          |  |         |            |              |  |               |         |               |  |               |        |       
|                                                                                                          |                          |                                  
|                                                                                                          |                          | (In thousands, except share data)
|Balance at January 1, 1999                                                                                |                          |                                   | 25,464,111  |                 |  | $          | 3,949 |          |  |         | 2,518,443  |              |  | $             | 2,002   |               |  | $             |       |        |  | $ | (1,638 | ) |  | $ |     |   |  | $ | (37,491  | ) |  |   |        |         |   | $ | (33,178 | )
|Conversion of preferred stock to Ordinary Shares                                                          |                          |                                   | (25,464,110 | )               |  |            | (495  | )        |  |         | 23,090,238 |              |  |               | 47,770  |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |         |   |   | 47,275  |  
|Issuance of Ordinary Shares, net of $8,339 of
	issuance costs                                             |                          |                                   |            |                 |  |            |      |          |  |         | 6,325,000  |              |  |               | 67,561  |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |         |   |   | 67,561  |  
|Issuance of Ordinary Shares upon exchange of
	Series E preferred shares                                   |                          |                                   |            |                 |  |            |      |          |  |         | 1,169,242  |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |         |   |   |        |  
|Issuance of Ordinary Shares pursuant to options
	and warrants exercised                                   |                          |                                   |            |                 |  |            |      |          |  |         | 2,050,479  |              |  |               | 4,192   |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |         |   |   | 4,192   |  
|Notes receivable from shareholders                                                                        |                          |                                   |            |                 |  |            |      |          |  |         |           |              |  |               |        |               |  |               | (3,538 | )      |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |         |   |   | (3,538  | )
|Repayment of notes receivable from shareholders                                                           |                          |                                   |            |                 |  |            |      |          |  |         |           |              |  |               |        |               |  |               | 222    |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |         |   |   | 222     |  
|Deferred stock compensation                                                                               |                          |                                   |            |                 |  |            |      |          |  |         |           |              |  |               | 2,608   |               |  |               |       |        |  |   | (2,608 | ) |  |   |     |   |  |   |         |   |  |   |        |         |   |   |        |  
|Amortization of deferred stock compensation (net)
	and warrant                                            |                          |                                   |            |                 |  |            |      |          |  |         |           |              |  |               | 168     |               |  |               |       |        |  |   | 2,142  |   |  |   |     |   |  |   |         |   |  |   |        |         |   |   | 2,310   |  
|Comprehensive loss:                                                                                       |                          |                                   |             |                 |  |            |       |          |  |         |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |         |   |   |         |  
|Net loss                                                                                                  |                          |                                   |            |                 |  |            |      |          |  |         |           |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   | (11,489  | ) |  | $ | (11,489 | )       |   |   | (11,489 | )
|Unrealized loss on available for sale marketable
	securities                                              |                          |                                   |            |                 |  |            |      |          |  |         |           |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   | (226 | ) |  |   |         |   |  |   | (226    | )       |   |   | (226    | )
|                                                                                                          |                          |                                   |             |                 |  |            |       |          |  |         |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |         |   |   |         |  
|                                                                                                          | Total comprehensive loss |                                   |             |                |  |            |       |         |  |         |            |             |  |               |         |               |  |               |        |       |  |   |        |  |  |   |      |  |  |   |          |  |  |   | $       | (11,715 | ) |   |         |  | 
|                                                                                                          |                          |                                   |             |                 |  |            |       |          |  |         |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |         |   |   |         |  
|Balance at December 31, 1999                                                                              |                          |                                   | 1           |                 |  |            | 3,454 |          |  |         | 35,153,402 |              |  |               | 124,301 |               |  |               | (3,316 | )      |  |   | (2,104 | ) |  |   | (226 | ) |  |   | (48,980  | ) |  |   |        |         |   |   | 73,129  |  
|Issuance of Ordinary Shares, net of $4,688 of
	issuance costs                                             |                          |                                   |            |                 |  |            |      |          |  |         | 458,000    |              |  |               | 14,779  |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |         |   |   | 14,779  |  
|Issuance of Ordinary Shares upon exchange of
	Series E preferred shares                                   |                          |                                   |            |                 |  |            |      |          |  |         | 932,770    |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |         |   |   |        |  
|Issuance of Ordinary Shares pursuant to options
	and warrants exercised                                   |                          |                                   |            |                 |  |            |      |          |  |         | 1,468,153  |              |  |               | 4,130   |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |         |   |   | 4,130   |  
|Issuance of shares and stock options in respect
	of Intellectual Property acquisition                     |                          |                                   |            |                 |  |            |      |          |  |         | 155,914    |              |  |               | 4,000   |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |         |   |   | 4,000   |  
|Forfeiture of restricted shares                                                                           |                          |                                   |            |                 |  |            |      |          |  |         | (120,501   | )            |  |               | (459    | )             |  |               | 459    |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |         |   |   |        |  
|Repayment of notes receivable from shareholders                                                           |                          |                                   |            |                 |  |            |      |          |  |         |           |              |  |               |        |               |  |               | 371    |        |  |   |       |   |  |   |     |   |  |   |         |   |  |   |        |         |   |   | 371     |  
|Amortization of deferred stock compensation                                                               |                          |                                   |            |                 |  |            |      |          |  |         |           |              |  |               |        |               |  |               |       |        |  |   | 1,214  |   |  |   |     |   |  |   |         |   |  |   |        |         |   |   | 1,214   |  
|Comprehensive loss:                                                                                       |                          |                                   |             |                 |  |            |       |          |  |         |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |         |   |   |         |  
|Net loss                                                                                                  |                          |                                   |            |                 |  |            |      |          |  |         |           |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   |     |   |  |   | (19,213  | ) |  | $ | (19,213 | )       |   |   | (19,213 | )
|Unrealized income on available for sale
	marketable securities                                            |                          |                                   |            |                 |  |            |      |          |  |         |           |              |  |               |        |               |  |               |       |        |  |   |       |   |  |   | 20   |   |  |   |         |   |  |   | 20      |         |   |   | 20      |  
|                                                                                                          |                          |                                   |             |                 |  |            |       |          |  |         |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |         |   |   |         |  
|                                                                                                          | Total comprehensive loss |                                   |             |                |  |            |       |         |  |         |            |             |  |               |         |              |  |               |        |       |  |   |        |  |  |   |      |  |  |   |          |  |  |   | $       | (19,193 | ) |   |         |  | 
|                                                                                                          |                          |                                   |             |                 |  |            |       |          |  |         |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |         |   |   |         |  
|Balance at December 31, 2000                                                                              |                          |                                   | 1           |                 |  |            | 3,454 |          |  |         | 38,047,738 |              |  |               | 146,751 |               |  |               | (2,486 | )      |  |   | (890   | ) |  |   | (206 | ) |  |   | (68,193  | ) |  |   |        |         |   |   | 78,430  |  
|Issuance of Ordinary Shares pursuant to options
	exercised 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  |  
|                                                                                                          |                          |                                   |             |                 |  |            |       |          |  |         |            |              |  |               |         |               |  |               |        |        |  |   |        |   |  |   |      |   |  |   |          |   |  |   |         |         |   |   |         |  

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

43



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                       |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |       |        |         |  
|-------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------------------- | ----- | ------ | ------- | ------- | ------ | ------ | ------- | ------- | ----- | ------ | ------- | -
|                                                                                       |                                                                                                                                 |                                                                         
|                                                                                       |                                                                                                                                 | Year Ended December 31,                                                 
|                                                                                       |                                                                                                                                 |                                                                         
|                                                                                       |                                                                                                                                 | 2001                                                                     |                                                         | 2000  |        | 1999   
|                                                                                       |                                                                                                                                 |                                                                          |                                                         |       |        |        
|                                                                                       |                                                                                                                                 |                                                                         
|                                                                                       |                                                                                                                                 | (In thousands)                                                          
|Operating activities                                                                   |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|Net loss                                                                               |                                                                                                                                 | $                                                                        | (34,743                                                 | )     |        | $       | (19,213 | )      |        | $       | (11,489 | )    
|Adjustments to reconcile net loss to net cash
	used in operating activities:           |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|                                                                                       | In-process research and development write-off and
	amortization of goodwill, intellectual property and other
	intangible assets |                                                                          |                                                         | 3,132 |        |         |         | 10,163 |        |         |         | 369   |       
|                                                                                       | Amortization of deferred stock compensation and
	premium on investments                                                         |                                                                          |                                                         | 1,136 |        |         |         | 1,214  |        |         |         | 3,640 |       
|                                                                                       | Bad debt expense                                                                                                                |                                                                          |                                                         | 2,948 |        |         |         | 731    |        |         |         | 533   |       
|                                                                                       | Depreciation                                                                                                                    |                                                                          |                                                         | 2,235 |        |         |         | 906    |        |         |         | 760   |       
|                                                                                       | Write down of an equity investment                                                                                              |                                                                          |                                                         | 2,500 |        |         |         |       |        |         |         |      |       
|                                                                                       | Changes in operating assets and liabilities:                                                                                    |                                                                          |                                                         |       |        |         |         |        |        |         |         |       |       
|                                                                                       |                                                                                                                                 | Trade accounts receivable                                                |                                                         |       | 1,923  |         |         |        | (2,989 | )       |         |       | (4,085 | )      
|                                                                                       |                                                                                                                                 | Other accounts receivables, prepaid expenses and
	other long-term assets |                                                         |       | 280    |         |         |        | (1,265 | )       |         |       | (1,680 | )      
|                                                                                       |                                                                                                                                 | Payable to related parties                                               |                                                         |       |       |         |         |        | (50    | )       |         |       | (254   | )      
|                                                                                       |                                                                                                                                 | Accounts payable and accrued liabilities                                 |                                                         |       | (68    | )       |         |        | (1,316 | )       |         |       | 5,219  |        
|                                                                                       |                                                                                                                                 | Deferred revenue                                                         |                                                         |       | (1,571 | )       |         |        | 749    |         |         |       | 1,655  |        
|                                                                                       |                                                                                                                                 | Accrued severance pay, net                                               |                                                         |       | (3     | )       |         |        | 93     |         |         |       | 57     |        
|                                                                                       |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|                                                                                       |                                                                                                                                 |                                                                          | Net cash used in operating activities                   |       |        | (22,231 | )       |        |        | (10,977 | )       |       |        | (5,275  | )
|                                                                                       |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|Investing activities                                                                   |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|Purchases of property and equipment                                                    |                                                                                                                                 |                                                                          | (1,566                                                  | )     |        |         | (3,300  | )      |        |         | (1,361  | )    
|Purchases of short-term investments                                                    |                                                                                                                                 |                                                                          | (27,581                                                 | )     |        |         | (21,725 | )      |        |         | (64,015 | )    
|Proceeds from sales of short-term investments                                          |                                                                                                                                 |                                                                          | 46,768                                                  |       |        |         | 34,876  |        |        |         | 7,000   |      
|Purchase of Mobix intellectual property                                                |                                                                                                                                 |                                                                          |                                                        |       |        |         | (12,444 | )      |        |         |        |      
|Purchases of long term investments                                                     |                                                                                                                                 |                                                                          | (500                                                    | )     |        |         | (3,000  | )      |        |         |        |      
|                                                                                       |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|                                                                                       |                                                                                                                                 |                                                                          | Net cash provided by or (used in) investing
	activities |       |        | 17,121  |         |        |        | (5,593  | )       |       |        | (58,376 | )
|                                                                                       |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|Financing activities                                                                   |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|Repayment of bank line of credit                                                       |                                                                                                                                 |                                                                          |                                                        |       |        |         |        |        |        |         | (2,000  | )    
|Repayment of shareholders loans                                                       |                                                                                                                                 |                                                                          | (371                                                    | )     |        |         | (452    | )      |        |         | (332    | )    
|Proceeds from shareholders notes receivable                                           |                                                                                                                                 |                                                                          | 1,013                                                   |       |        |         | 371     |        |        |         | 222     |      
|Proceeds from issuance of preferred shares, net                                        |                                                                                                                                 |                                                                          |                                                        |       |        |         |        |        |        |         | 9,915   |      
|Proceeds from issuance of Ordinary Shares and
	exercise of stock options, net          |                                                                                                                                 |                                                                          | 601                                                     |       |        |         | 18,909  |        |        |         | 68,215  |      
|                                                                                       |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|                                                                                       |                                                                                                                                 |                                                                          | Net cash provided by financing activities               |       |        | 1,243   |         |        |        | 18,828  |         |       |        | 76,020  |  
|                                                                                       |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|Net increase or (decrease) in cash and cash
	equivalents                               |                                                                                                                                 |                                                                          | (3,867                                                  | )     |        |         | 2,258   |        |        |         | 12,369  |      
|Cash and cash equivalents at beginning of the year                                     |                                                                                                                                 |                                                                          | 21,076                                                  |       |        |         | 18,818  |        |        |         | 6,449   |      
|                                                                                       |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|Cash and cash equivalents at end of the year                                           |                                                                                                                                 | $                                                                        | 17,209                                                  |       |        | $       | 21,076  |        |        | $       | 18,818  |      
|                                                                                       |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|Supplemental Disclosure of non-cash Investing
	and Financing Transactions              |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|Conversion of redeemable preferred stock to
	Ordinary Shares                           |                                                                                                                                 | $                                                                        |                                                        |       |        | $       |        |        |        | $       | 47,275  |      
|                                                                                       |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|Issuance of Ordinary Shares for notes receivables                                      |                                                                                                                                 | $                                                                        |                                                        |       |        | $       |        |        |        | $       | 3,538   |      
|                                                                                       |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|Issuance of Ordinary Shares in respect of the
	purchase of Mobix intellectual property |                                                                                                                                 | $                                                                        |                                                        |       |        | $       | 4,000   |        |        | $       |        |      
|                                                                                       |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      
|Forfeiture of restricted shares                                                        |                                                                                                                                 | $                                                                        | 238                                                     |       |        | $       | 459     |        |        | $       |        |      
|                                                                                       |                                                                                                                                 |                                                                          |                                                         |       |        |         |         |        |        |         |         |      

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

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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Organization
and Basis of Presentation

BackWeb Technologies Ltd. was incorporated under
the laws of Israel in August 1995 and commenced operations in
November 1995. BackWeb Technologies Ltd. and its subsidiaries
(collectively, BackWeb or the Company)
is a provider of Internet communication infrastructure and
applications software that enables companies to communicate
business-critical, time-sensitive information throughout their
enterprise of customers, partners and employees. BackWeb sells
its products primarily to end users from a variety of
industries, including the telecommunications, financial,
computer industries; and through OEM arrangements.

The BackWeb group of companies consist of wholly
owned subsidiaries registered as follows: BackWeb Technologies,
Inc., a U.S. corporation; BackWeb Canada, Inc., a Canadian
corporation; BackWeb Technologies B.V., a Netherlands
corporation; BackWeb Technologies (U.K.) Ltd., a United Kingdom
corporation; BackWeb Technologies GmbH, a German corporation;
BackWeb Technologies S.a.r.l., a French corporation. The
following subsidiaries ceased operation in September 2001 but
continue to be wholly owned subsidiaries and registered as
BackWeb Technologies A.B., a Swedish corporation and BackWeb
K.K. Ltd., a Japanese corporation.

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

2.     Summary of
Significant Accounting Policies



| |                 
| | ----------------
| | Use of Estimates

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



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

BackWeb prepares its financial statements in
U.S. dollars, which is also BackWebs functional
currency. Most of the revenue generated is in U.S. dollars.
A significant portion of the Companys research and
development expenses is generated in New Israeli Shekels
(NIS). 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 each of its
subsidiaries.

Monetary accounts maintained in currencies other
than the U.S. dollar are re-measured using the foreign
exchange rate at the balance sheet date in accordance with
Statement of Financial Accounting Standard (SFAS)
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 financial and other income or
expense for the years ended December 31, 2001, 2000 and
1999 was a loss of $201,000, a gain of $305,000 and a loss of
$117,000, 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.

45



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Short-Term
Investments

The Company accounts for investments in debt and
equity securities in accordance with SFAS 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, if any, included as 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
income or expense. 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 and other long-term
investments in which the Company holds less than 20% are
recorded at the lower of cost or estimated fair value, since the
Company does not have the ability to exercise significant
influence over operating and financial policies of the investee.

The Company periodically assesses the
recoverability of the carrying amount of long-term investments
and provides for any possible impairment loss based upon the
difference between the carrying amount and fair value of such
assets, in accordance with SFAS No. 121 Accounting
for the Impairment of Long Lived Assets and Long Lived Assets to
be Disposed Of. During 2001, based on a review of the
Companys investments, the Company recorded a non-cash
charge of $2.5 million to write-down an equity investment.

Other
Long-Term Assets

Other long term assets is primarily comprised of
security deposits related to leased facilities.

Property and
Equipment

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 periodically assesses the
recoverability of the carrying amount of property and equipment
and provides for any possible impairment loss based upon the
difference between the carrying amount and fair value of such
assets, in accordance with SFAS No. 121 Accounting
for the Impairment of Long Lived Assets and Long Lived Assets to
be Disposed Of. As of December 31, 2001, no
impairment losses had been identified.

Intellectual
Property and Other Purchased Intangible Assets

Intellectual property and other intangible assets
acquired in purchase and other transactions are amortized on a
straight-line method over the estimated useful lives of the
assets between two to three years.

The carrying value of intellectual property and
other purchased intangible assets are periodically reviewed by
management in accordance with Accounting Principles Board
Opinion (APB) No. 17 Intangible

46



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Assets, based on the expected future
undiscounted operating cash flows over the remaining
amortization period. As of December 31, 2001, no impairment
losses had been identified.

Revenue
Recognition

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

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

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

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

We license our products on a perpetual and on a
term basis. License revenue arising from the sale of perpetual
licenses is recognized in the accounting period that the sale
takes place. License revenue arising from term license is
recognized over the contractual term of the license. Management
defines a term license that is less than two years from the date
of the official order form and sale taking place and revenue
arising during this period is ratably recognized over the
license period..

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

Service revenues are primarily comprised of
revenues from standard maintenance agreements, consulting and
training fees. Customers licensing our products generally
purchase the standard annual maintenance agreement for the
products. Revenues from maintenance agreements are recognized on
a straight-line basis over the life of the maintenance period.
Consulting services are billed at an agreed upon rate plus
out-of-pocket expenses and training services on a per session
basis. The Company recognizes service revenues from consulting
and training when provided to the customer.

47



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

Research and
Development expenses

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 BackWebs product development process,
technological feasibility is established upon the completion of
a working model. BackWeb generally does not incur any
significant costs between the completion of the working model
and the point at which the product is ready for general release.
Through December 31, 2001 BackWeb had recognized all
software development costs to research and development expense
in the period incurred.

Advertising
Costs

BackWeb accounts for advertising costs as expense
in the period in which the costs are incurred. Advertising
expense for the years ended December 31, 2001, 2000 and
1999 were $48,000, $1,849,000 and $528,000, respectively.

Finance and
Other Income and Expense, Net

Interest and other income was $2,420,000,
$4,952,000 and $2,409,000 for the twelve months ended December
31, 2001, 2000 and 1999, respectively. Interest and other
expense was $383,000, $203,000 and $469,000 for the twelve
months ended December 31, 2001, 2000 and 1999, respectively.

Income
taxes

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

Concentration
of Credit Risk

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

BackWeb sells its products to customers primarily
in North America and Europe. BackWeb performs ongoing credit
reviews of its customers financial condition and generally
does not require collateral. BackWeb maintains reserves to
provide for estimated credit losses. The Company from time to
time engages in selling of

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

receivables on a non-recourse basis with
established commercial banking institutions. An allowance for
doubtful accounts is determined with respect to those amounts
that the Company has determined to be doubtful of collection.
Provision for bad and doubtful debts in the years ended
December 31, 2001, 2000 and 1999 were $2,948,000, $731,000
and $533,000, respectively. Bad debt write-offs of accounts in
the years ended December 31, 2001, 2000 and 1999 totaled
$1,029,000, $612,000 and $175,000, 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,
|                                                               |                                                    |                        
|                                                               |                                                    | 2001                    |         | 2000   |   | 1999
|                                                               |                                                    |                         |         |        |   |     
|Net loss                                                       |                                                    | $                       | (34,743 | )      |   | $    | (19,213 | )      |   | $ | (11,489 | )     
|                                                               |                                                    |                         |         |        |   |      |         |        |   |   |         |       
|Basic and diluted:                                             |                                                    |                         |         |        |   |      |         |        |   |   |         |       
|                                                               | Weighted-average shares                            |                         |         | 38,393 |   |      |         | 37,307 |   |   |         | 20,421 |  
|                                                               | Less weighted-average shares subject to repurchase |                         |         | (168   | ) |      |         | (102   | ) |   |         | (846   | )
|                                                               |                                                    |                         |         |        |   |      |         |        |   |   |         |       
|Shares used in computing basic and diluted net
	loss per share |                                                    |                         | 38,225  |        |   |      | 37,205  |        |   |   | 19,575  |       
|                                                               |                                                    |                         |         |        |   |      |         |        |   |   |         |       
|Basic and diluted net loss per share                           |                                                    | $                       | (0.91   | )      |   | $    | (0.52   | )      |   | $ | (0.59   | )     
|                                                               |                                                    |                         |         |        |   |      |         |        |   |   |         |       

All preferred stock, outstanding stock options
and warrants have been excluded from the calculation of the
diluted net loss per ordinary share because all such securities
are considered to be anti-dilutive for all periods presented in
the statements of operations. The total number of Ordinary
Shares related to preferred stock, outstanding options and
warrants excluded from the calculations of diluted net loss per
share were 10,433,294, 9,822,359 and 7,672,723 for the years
ended December 31, 2001, 2000 and 1999, respectively.

Accounting
for Stock-Based Compensation

BackWeb has elected to follow Accounting
Principles Board Opinion No. 25 Accounting for Stock
Issued to Employees (APB 25) and FASB
Interpretation No. 44 Accounting for Certain
Transactions Involving Stock Compensation (FIN
44) in accounting for its employee stock options. Under
APB 25, when the exercise price of the Companys share
options is less than the market price of the underlined shares
on the date of grant, compensation expense is recognized. The
pro forma disclosures required by SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS
123) are provided in Note 11.

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

Government
Grants

The Company received non-royalty bearing grants
from the Government of Israel for funding approved research and
development projects. The grants are recognized at the time the
Company is entitled to such grants, on the basis of the costs
incurred and included as a deduction of research and development
costs,

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Research and development grants amount to $0,
$150,000 and $397,000 in the years ending December 31,
2001, 2000 and 1999, respectively.

Severance
Pay

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

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

Severance expenses relating to Israeli employees
for the years ended December 31, 2001, 2000 and 1999
amounted to approximately $856,000, $671,000 and $174,000,
respectively.

Fair Value of
Financial Instruments

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

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.

Recently
Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards
No. 141, Business Combinations; and No. 142, Goodwill
and Other Intangible Assets (the new rules),
effective for the fiscal years beginning after December 15,
2001. Under the new rules, goodwill (and intangible assets
deemed to have indefinite lives) will no longer be amortized but
will be subject to impairment tests in accordance with the new
rules. Intangible assets with finite lives will continue to be
amortized over their estimated useful lives. The Company will
apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal year
2002. Application of the new rules is not expected to have an
effect on the consolidated statement of operations.

In October 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144) which
supercedes SFAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. SFAS 144 requires, among other things, that
long-lived assets be measured at the lower of carrying amount or
fair value, less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS 144 is
effective for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. At this time
the Company has not assessed if it will have a material impact
on the Company.

Reclassification

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

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

3.     Short-Term
Investments

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

|                          |        |              |        |            |  |            |     |      |  |            |        |            |  |   |        |        |  |   |      |      |   |   |        |        | 
|------------------------- | ------ | ------------ | ------ | ---------- |  | ---------- | --- | ---- |  | ---------- | ------ | ---------- |  | - | ------ | ------ |  | - | ---- | ---- | - | - | ------ | ------ | 
|                          |        |             
|                          |        | December 31,
|                          |        |             
|                          |        |              |        |           
|                          |        | 2001         |        | 2000      
|                          |        |              |        |           
|                          |        |              |        | Unrealized |  | Estimated  |     |      |  | Unrealized |        | Estimated 
|                          |        | Cost         |        | Gains      |  | Fair Value |     | Cost |  | Losses     |        | Fair Value
|                          |        |              |        |            |  |            |     |      |  |            |        |           
|Money market funds        |        | $            | 6,124  |            |  | $          |    |      |  | $          | 6,124  |            |  | $ | 15,166 |        |  | $ |     |      |   | $ | 15,166 |       
|Corporate debt securities |        |              | 18,091 |            |  |            | 400 |      |  |            | 18,491 |            |  |   | 28,698 |        |  |   | (206 | )    |   |   | 28,492 |       
|                          |        |              |        |            |  |            |     |      |  |            |        |            |  |   |        |        |  |   |      |      |   |   |        |       
|                          | Totals |              | $      | 24,215     |  |            | $   | 400  |  |            | $      | 24,615     |  |   | $      | 43,864 |  |   | $    | (206 | ) |   | $      | 43,658 | 
|                          |        |              |        |            |  |            |     |      |  |            |        |            |  |   |        |        |  |   |      |      |   |   |        |       

At December 31, 2001, the total amounts of
investments due within one year and due after one year through
two years were $18,942,000 and $5,673,000, respectively.

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

4.     Property and
Equipment, net

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

|                                  |  |              |        |      |  |   |        |  
|--------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                  |  |             
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2001         |        | 2000
|                                  |  |              |        |     
|Computer and peripheral equipment |  | $            | 3,958  |      |  | $ | 3,392  |  
|Office, furniture and equipment   |  |              | 2,611  |      |  |   | 2,251  |  
|Leasehold improvements            |  |              | 1,150  |      |  |   | 919    |  
|                                  |  |              |        |      |  |   |        |  
|                                  |  |              | 7,719  |      |  |   | 6,562  |  
|Less: accumulated depreciation    |  |              | (4,363 | )    |  |   | (2,537 | )
|                                  |  |              |        |      |  |   |        |  
|Property and equipment, net       |  | $            | 3,356  |      |  | $ | 4,025  |  
|                                  |  |              |        |      |  |   |        |  

Depreciation expense for the years ended
December 31, 2001, 2000 and 1999 were $2,235,000, $906,000
and $760,000, respectively.

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

5.     Intellectual
Property and Other Purchased Intangible Assets

On June 27, 2000, the Company completed its
acquisition (the Acquisition) of the software and
intellectual property owned, licensed or developed by Mobix
Communications Ltd., a company incorporated under the laws of
the State of Israel (Mobix), for an aggregate amount
of $16.4 million pursuant to a Software and Asset Purchase
Agreement, dated June 4, 2000, among the Company, Mobix and
the principal shareholder of Mobix. As consideration in the
Acquisition, Mobix received (i) a cash payment of
$9.6 million, and (ii) a number of Ordinary Shares of
BackWeb equal to $2.9 million in value (based on the
average daily closing price of BackWeb Ordinary Shares for the
15 consecutive trading days immediately preceding the closing of
the Acquisition) or 155,914 Ordinary Shares. Such shares were
deposited in escrow, together with an additional
$2.4 million in cash, to satisfy Mobixs and the
principal shareholders indemnification obligations and to
secure the retention of certain key employees of Mobix, BackWeb
also granted a number of stock options valued at
$1.1 million to retain two key employees from Mobix.
Acquisition costs amounted to $444,000.

BackWeb allocated the excess purchase price over
the fair value of net tangible assets acquired to the following
intangible assets: $8.4 million to in-process research and
development (IPR&D), $5.3 million to

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

Intellectual property and other purchased
intangible assets are composed as follows:

|                                          |  |             |   |              |  |      |        |   |  |   |        |  
|----------------------------------------- |  | ----------- | - | ------------ |  | ---- | ------ | - |  | - | ------ | -
|                                          |  |             |   |             
|                                          |  | Estimated   |   | December 31,
|                                          |  | Useful Life |   |             
|                                          |  | (In years)  |   | 2001         |  | 2000
|                                          |  |             |   |              |  |     
|Intellectual property                     |  |             | 3 |              |  | $    | 5,525  |   |  | $ | 5,525  |  
|Assembled workforce and other intangibles |  |             | 2 |              |  |      | 2,700  |   |  |   | 2,700  |  
|                                          |  |             |   |              |  |      |        |   |  |   |        |  
|                                          |  |             |   |              |  |      | 8,225  |   |  |   | 8,225  |  
|Less: Accumulated amortization            |  |             |   |              |  |      | (4,895 | ) |  |   | (1,763 | )
|                                          |  |             |   |              |  |      |        |   |  |   |        |  
|Goodwill and other intangibles, net       |  |             |   |              |  | $    | 3,330  |   |  | $ | 6,462  |  
|                                          |  |             |   |              |  |      |        |   |  |   |        |  

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

6.     Long-Term
Investments

The Company was one of a group of lenders
(collectively, the Lenders) that entered into a
Convertible Loan Agreement, dated as of August 1, 2001, by
and between Emony Ltd., now called Red Bend Ltd., an Israeli
private company, and the Lenders pursuant to which the Lenders
granted Emony a convertible loan in the aggregate amount of
US$2,150,000 (the Loan Amount) for working capital
purposes. The Loan Amount bears interest at the LIBOR rate for
6 months loans as quoted by Bank Leumi LeIsrael Ltd. plus
1.5% per annum, compounded monthly, repayable, unless converted,
in full on September 20, 2002. The Loan Amount may not be
prepaid in whole or in part without the Lenders consent. In the
event that Emony closes a financing resulting in a net aggregate
cash proceeds of at least $5 million at a price of at least
US$1.34, the outstanding portion of the Loan Amount is
automatically converted into Series B1 Preferred Shares
(the Preferred Shares) of Emony at a conversion
price of US$1.34 per share. In addition, until such an
investment is received, any of the Lenders can demand through
the exercise of a warrant granted pursuant to the Loan Agreement
to convert its portion of the Loan Amount into such Preferred
Shares. The Companys portion of the Loan Amount was
$500,000, for which the Company received the warrant described
above and a Promissory Note.

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

On October 3, 2000, BackWeb acquired
1,197,679 shares of Series B Preferred Stock of 3Path, Inc.
(formerly DeliverEx, Inc.) representing approximately 12% of its
share capital, in exchange for payment of

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

$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.

Long-term investments are reviewed for impairment
whenever events or changes in circumstances indicate the
carrying amount of such investments may not be recoverable.
Determination of recoverability is based on an estimated fair
value of undiscounted future cash flows resulting from the use
of the investment. Impaired long-term investments are reported
at the lower of carrying amount of fair value less costs to
sell. During 2001 due to the economic slowdown and the
significant decline in capital available to and in the
valuations of the privately funded Internet centric businesses,
the Company believes that an investment had become impaired and
recorded a non-cash charge of $2.5 million to write-down
the investment in 3Path, Inc., in accordance with SFAS
No. 121 Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of.

7.     Accounts
Payable and Accrued Liabilities

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

|                                                   |  |              |       |      |  |   |       | 
|-------------------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                                                   |  |             
|                                                   |  | December 31,
|                                                   |  |             
|                                                   |  | 2001         |       | 2000
|                                                   |  |              |       |     
|Trade accounts payable                             |  | $            | 461   |      |  | $ | 770   | 
|Accrued employees compensation and related expense |  |              | 3,135 |      |  |   | 1,921 | 
|Sales and marketing events                         |  |              | 385   |      |  |   | 377   | 
|Restructuring accrual                              |  |              | 778   |      |  |   |      | 
|Other                                              |  |              | 2,433 |      |  |   | 4,192 | 
|                                                   |  |              |       |      |  |   |       | 
|                                                   |  | $            | 7,192 |      |  | $ | 7,260 | 
|                                                   |  |              |       |      |  |   |       | 

8.     Related
Parties

Shareholders
Loans

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

Services from
Affiliates

BackWeb reimbursed BRM Technologies Ltd.
(BRM), a related party, for technology and
administrative services on the basis of specific cost plus
markup and specifically identified expenses at cost. Amounts
incurred for these services were approximately $0, $3,000 and
$235,000 during the years ended December 31, 2001, 2000 and
1999, respectively.

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

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Stock
Options

Pursuant to the Founding Agreement, BackWeb
granted to its Early Investors the right to grant stock options
for up to 792,167 Ordinary Shares for any person or entity.
Through December 31, 2001 options for 762,672 Ordinary
Shares have been granted and 39,245 shares remain available.
This pool of options has been used by the Early Investors in
granting options to employees and consultants of BRM and other
related companies.

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

Revenue from
Affiliates

During 2001, 2000 and 1999, the Company
recognized revenue of $350,000, $571,000 and $1,132,500
respectively, related to products licensed to a related party.
As of December 31, 2001 and 2000, $0 and $27,900,
respectively, is included in trade accounts receivable.

Purchase with
Affiliates

The Company purchased software from a related
party in the amount of $500,000 in the year ended
December 31, 2001 that is capitalized and amortized over
three years. The software provides a more effective method of
compaction, which BackWeb is planning to use in delivery of
product updates with customers under maintenance agreements.

9.     Restructuring
Charge

On July 2, 2001 the Company announced a
restructuring plan, which was implemented in the three-months
ended September 30, 2001. The restructuring plan included a
reduction in workforce, vacating certain facilities and
canceling of office service leases as a result of employee
terminations and office consolidation. In accordance with
EITF 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs in a Restructuring), and Staff
Accounting Bulletin (SAB) No 100,
Restructuring and Impairment Charges the Company
recorded a charge of $2.8 million of which approximately
$780,000 remains in the accrued liabilities as of
December 31, 2001. The $2.8 million restructuring
charge consists of $1.3 million of severance and benefit
cost, $1.4 million of facility cost and $100,000 related to
other related restructuring cost. The $1.3 million charge
is related to severance and benefits to terminate
63 employees representing approximately 25% of the
Companys global workforce employed as of June 30,
2001. The $1.4 million restructuring charge represents
early termination penalties, office restoration costs and an
accrual of certain lease commitments as a result of the
restructuring plan announced on July 2, 2001 related to the
closure and consolidation of offices in Europe, Japan and the
United States.

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

10.     Commitments
and Contingencies

Leases

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

|               |  |   |        | 
|-------------- |  | - | ------ | 
|2002           |  | $ | 2,793  | 
|2003           |  |   | 2,844  | 
|2004           |  |   | 2,717  | 
|2005           |  |   | 2,665  | 
|2006 and after |  |   | 3,646  | 
|               |  |   |        | 
|               |  | $ | 14,665 | 
|               |  |   |        | 

Rent expense approximated $3,723,000, $1,628,000
and $918,000 for the years ended December 31, 2001, 2000
and 1999, respectively.

Bank Line of
Credit

In December 1998, BackWeb entered into a line of
credit agreement with TransAmerica Business Credit Corporation,
which provides for formula and nonformula revolving credit loans
aggregating up to $6,500,000. The line of credit was secured by
substantially all of BackWebs assets. Borrowings under the
line of credit bear interest at the banks prime rate plus
2%  4%. No amounts were outstanding at
December 31, 2001 and 2000. The amount available under the
formula loans was limited to the lower of $3,000,000 or an
amount equal to 85% of eligible accounts receivable. The amount
available under the formula and nonformula loans are $1,500,000
and $2,000,000, respectively. BackWeb elected to terminate the
line of credit effective December 31, 2001.

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.

On November 13, 2001, a securities class
action lawsuit was filed in the United States District Court for
the Southern District of New York on behalf of all persons who
acquired our stock between June 8, 1999 and
December 6, 2000. The Company, certain of our executive
officers and directors, and certain underwriters involved in our
initial public offering are named as defendants in the
complaint. The complaint alleges that certain conduct of the
underwriters in connection with the allocation of shares of our
initial public offering violated the federal securities laws.
The complaint also alleges that the defendants violated the
federal securities laws by issuing a registration statement that
contained material misstatements and/or omissions because it did
not disclose the alleged conduct by the underwriters that is at
issue in the lawsuit. The complaints seek damages on behalf of
all those who purchased or otherwise acquired our securities
during the period covered by the complaint. The deadline for
defendants to respond to the complaint has not yet expired, and
it is likely that this response will not be due for several
months, after certain procedural issues are resolved. We believe
we have meritorious defenses and intend to defend this action
vigorously; however, we could be forced to incur material
expenses in the litigation, and in the event there is an adverse
outcome, our business could be harmed. As of December 31,
2001 the Company has accrued what it considers to be the
appropriate deductible under the insurance policy with regard to
legal expenses related for the pending class action.

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Floating
Charges, Guaranties and Letter of Credit

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

The Company obtained bank guaranties in the
amount of $162,000 in favor of its lessor in Israel.

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

11.     Shareholders
Equity

Ordinary
Shares

Ordinary shares subject to future issuance are as
follows:

|                                                                                                           |  |              |            |      |  |  |            | 
|---------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---- |  |  | ---------- | 
|                                                                                                           |  |             
|                                                                                                           |  | December 31,
|                                                                                                           |  |             
|                                                                                                           |  | 2001         |            | 2000
|                                                                                                           |  |              |            |     
|Exchange of BWC (as defined below) shares
	(represented by Series E preferred stock) into Ordinary
	Shares |  |              | 422,212    |      |  |  | 493,488    | 
|Exercise of outstanding options                                                                            |  |              | 10,011,082 |      |  |  | 9,214,371  | 
|Ordinary shares available for grant under stock
	option plans                                              |  |              | 4,789,065  |      |  |  | 1,371,038  | 
|Exercise of warrants outstanding to Ordinary
	Shares                                                       |  |              |           |      |  |  | 114,500    | 
|                                                                                                           |  |              |            |      |  |  |            | 
|                                                                                                           |  |              | 15,222,359 |      |  |  | 11,193,397 | 
|                                                                                                           |  |              |            |      |  |  |            | 

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

Preferred
Stock

The Company is authorized to provide for the
issuance of up to 50,000,000 shares of undesignated preferred
stock, none of which had been issued at December 31, 2001.

Immediately prior to the completion of the
Companys initial public offering all outstanding shares of
Series A, B, C and D preferred stock converted into an
aggregate of 23,090,238 Ordinary Shares. At December 31,
2001, one share of Series E preferred stock was outstanding
(representing voting rights with respect to 422,212 Ordinary
Shares).

Series E preferred stock was issued to a
trustee in connection with the 1997 Lanacom acquisition and
represents the voting and exchange rights of the BackWeb Canada
Inc. (BWC) exchangeable common shares. The registered
holder of the Series E preferred stock is entitled to have
a number of votes equal to the number of outstanding
exchangeable shares of BWC. The holder of the Series E
preferred stock shall not be entitled to receive any dividend
declared and paid by BackWeb Technologies Ltd. However, if
BackWeb Technologies Ltd. declares such a dividend an equivalent
dividend will be declared simultaneously by BWC

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

on the exchangeable shares. Series E
preferred stock shall be canceled when there will be no
outstanding exchangeable shares of BWC. The total number of
exchangeable common shares as of December 31, 2001 is
422,212.

Stock
Warrants

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

Stock Option
Plans

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

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

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

Effective July 1, 2000, the Company has
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, (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 or 1.5% of the outstanding shares of
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 or 3.5%

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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% (that is, 1,500,000 Ordinary Shares) to the 1998
Plan and 40% (that is, 1,000,000 Ordinary Shares) to the 1996
Israel Plan.

BackWeb introduced in 1999 an Employee Stock
Purchase Plan, which was adopted by the Board of Directors in
March 1999. BackWeb has reserved a total of 600,000 shares for
issuance under the plan. The number of shares reserved under the
plan is subject to an annual increase on each anniversary
beginning July 1, 2000 equal to the lesser of 833,333
shares, 2% of the then outstanding shares or an amount
determined by the Board of Directors. Eligible employees may
purchase Ordinary Shares at 85% of the lesser of the fair market
value of BackWebs Ordinary Shares on the first day of the
applicable offering period or the last day of the applicable
purchase period. During 2001, 289,526 total shares were issued
of which 119,232 were at $2.81 per share and 170,294 at $0.59
share. As of December 31, 2001 1,679,662 shares were
available for grant under the Employee Stock Purchase Plan.

In February 2001, the Company implemented a
voluntary stock option exchange program for its employees. Under
the program, each employee was offered the opportunity to cancel
all, or part of, outstanding stock options previously granted to
them from June 8, 1999 through and including
January 15, 2001 (but excluding those options granted on
November 1, 2000, with a set vesting schedule) in exchange
for an equal number of new options. As promised to the employees
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 grant of options to acquire 2,340,324 Ordinary
Shares of the Company. The stock option exchange program did not
have an affect on the Companys results of operations.

In October 2001, the Company instituted a
company-wide incentive program, granting new options to each
employee and the Board under the Companys 1998 U.S. Plan.
With respect to management level employees, at the level of
director and above, the Company granted 2,270,000 options at an
exercise price of $0.60 per share. For employees at the level of
vice president and above the options vest over five years with
12.5% of the Ordinary Shares subject to the option vesting on
each of the first four anniversaries of a defined vesting
commencement date which is January 1, 2003, and 50% of the
Ordinary Shares subject to the option vesting on the fifth
anniversary of the vesting commencement date. Options for
director-level employees also vest over five years, with 16.6%
vesting the first four years and 33.3% vesting in year five.
Notwithstanding this vesting schedule, if certain
pre-established financial targets are achieved the vesting and
exercisability is accelerated 50% on the first anniversary date,
30% on the second anniversary date and 20% on the third
anniversary date.

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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, 1998 |                    |               | 1,027,220 |             |   |                | 5,304,813  |                |   |                | $0.03  $ 2.10 |                |  | $ | 1.32  |       |  | $ | 0.33  | 
|                             | Options authorized |               |           | 3,600,000   |   |                |            |               |   |                |                |               |  |   |       |      |  |   |       |  | 
|                             | Options granted    |               |           | (2,688,886  | ) |                |            | 2,688,886      |   |                |                | $1.50  $38.38 |  |   | $     | 10.66 |  |   |       |  | 
|                             | Options exercised  |               |           |            |   |                |            | (2,036,260     | ) |                |                | $0.03  $ 5.79 |  |   | $     | 2.07  |  |   |       |  | 
|                             | Options canceled   |               |           | 686,308     |   |                |            | (686,308       | ) |                |                | $0.12  $27.19 |  |   | $     | 4.22  |  |   |       |  | 
|                             |                    |               |           |             |   |                |            |                |   |                |                |                |  |   |       |       |  |   |       | 
|Balance at December 31, 1999 |                    |               | 2,624,642 |             |   |                | 5,271,131  |                |   |                | $0.03  $38.38 |                |  | $ | 5.41  |       |  | $ | 10.85 | 
|                             | Options authorized |               |           | 3,771,381   |   |                |            |               |   |                |                |               |  |   |       |      |  |   |       |  | 
|                             | Options granted    |               |           | (6,962,292  | ) |                |            | 6,962,292      |   |                |                | $0.01  $49.25 |  |   | $     | 18.00 |  |   |       |  | 
|                             | Options exercised  |               |           |            |   |                |            | (1,202,246     | ) |                |                | $0.03  $ 8.10 |  |   | $     | 1.90  |  |   |       |  | 
|                             | Options canceled   |               |           | 1,816,806   |   |                |            | (1,816,806     | ) |                |                | $0.24  $42.13 |  |   | $     | 12.01 |  |   |       |  | 
|                             | Forfeited shares   |               |           | 120,501     |   |                |            |               |   |                |                | $1.50  $ 2.10 |  |   |       | 1.56  |  |   |       |  | 
|                             |                    |               |           |             |   |                |            |                |   |                |                |                |  |   |       |       |  |   |       | 
|Balance at December 31, 2000 |                    |               | 1,371,038 |             |   |                | 9,214,371  |                |   |                | $0.01  $49.25 |                |  | $ | 14.11 |       |  | $ | 19.63 | 
|                             | Options authorized |               |           | 4,419,942   |   |                |            |               |   |                |                |               |  |   |       |      |  |   |       |  | 
|                             | Options granted    |               |           | (6,899,562  | ) |                |            | 6,899,562      |   |                |                | $0.60  $ 7.94 |  |   | $     | 1.17  |  |   |       |  | 
|                             | Options exercised  |               |           |            |   |                |            | (282,283       | ) |                |                | $0.03  $ 3.00 |  |   | $     | 0.92  |  |   |       |  | 
|                             | Options canceled   |               |           | 5,820,568   |   |                |            | (5,820,568     | ) |                |                | $0.12  $49.25 |  |   | $     | 17.40 |  |   |       |  | 
|                             | Forfeited shares   |               |           | 77,079      |   |                |            |               |   |                |                | $3.00  $ 3.00 |  |   | $     | 3.00  |  |   |       |  | 
|                             |                    |               |           |             |   |                |            |                |   |                |                |                |  |   |       |       |  |   |       | 
|Balance at December 31, 2001 |                    |               | 4,789,065 |             |   |                | 10,011,082 |                |   |                | $0.01  $35.00 |                |  | $ | 3.66  |       |  | $ | 0.85  | 
|                             |                    |               |           |             |   |                |            |                |   |                |                |                |  |   |       |       |  |   |       | 

Exercise prices for options outstanding and
exercisable as of December 31, 2001 and the
weighted-average remaining contractual life are as follows:

|                |  |                     |            |                     |  |                |      |                |  |                |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ------------------- | ---------- | ------------------- |  | -------------- | ---- | -------------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |                     |            |                    
|                |  | Options Outstanding |            | Options Exercisable
|                |  |                     |            |                    
|                |  | Number              |            | Weighted Average    |  | Weighted       |      | Number         |  | Weighted      
|Range of        |  | Outstanding         |            | Remaining           |  | Average        |      | Exercisable As |  | Average       
|Exercise Prices |  | As of 12/31/01      |            | Contractual Years   |  | Exercise Price |      | of 12/31/01    |  | Exercise Price
|                |  |                     |            |                     |  |                |      |                |  |               
|$ 0.01  $ 0.36 |  |                     | 308,575    |                     |  |                | 2.03 |                |  | $              | 0.07  |  |  |  | 268,252   |  |  | $ | 0.08  | 
|$ 0.60  $ 0.60 |  |                     | 2,955,096  |                     |  |                | 9.10 |                |  | $              | 0.60  |  |  |  | 0         |  |  | $ | 0.00  | 
|$ 0.72  $ 0.76 |  |                     | 1,945,903  |                     |  |                | 5.54 |                |  | $              | 0.76  |  |  |  | 761,686   |  |  | $ | 0.76  | 
|$ 0.81  $ 1.97 |  |                     | 1,026,758  |                     |  |                | 6.19 |                |  | $              | 1.34  |  |  |  | 233,323   |  |  | $ | 1.35  | 
|$ 2.01  $ 6.30 |  |                     | 1,243,246  |                     |  |                | 5.52 |                |  | $              | 2.93  |  |  |  | 736,748   |  |  | $ | 2.54  | 
|$ 7.32  $ 7.32 |  |                     | 1,336,070  |                     |  |                | 5.84 |                |  | $              | 7.32  |  |  |  | 696,244   |  |  | $ | 7.32  | 
|$ 7.94  $17.00 |  |                     | 310,541    |                     |  |                | 5.87 |                |  | $              | 10.07 |  |  |  | 133,014   |  |  | $ | 9.89  | 
|$17.25  $17.25 |  |                     | 830,000    |                     |  |                | 5.65 |                |  | $              | 17.25 |  |  |  | 276,666   |  |  | $ | 17.25 | 
|$19.00  $35.00 |  |                     | 54,893     |                     |  |                | 5.40 |                |  | $              | 19.76 |  |  |  | 19,628    |  |  | $ | 20.31 | 
|                |  |                     |            |                     |  |                |      |                |  |                |       |  |  |  |           |  |  |   |       | 
|$ 0.01  $35.00 |  |                     | 10,011,082 |                     |  |                | 6.60 |                |  | $              | 3.66  |  |  |  | 3,125,561 |  |  | $ | 4.60  | 
|                |  |                     |            |                     |  |                |      |                |  |                |       |  |  |  |           |  |  |   |       | 

Options exercisable were 3,125,561, 1,467,982 and
1,330,491 as of December 31, 2001, 2000 and 1999,
respectively. No options expired during the three years ending
December 31, 2001. During the year ended December 31,
1999 in connection with the grant of certain share options,
BackWeb recorded deferred stock compensation of $2,608,000. Such
amounts represented the difference between the exercise price
and the deemed fair market value of BackWebs ordinary
share on the date such stock options were granted. Such amount
is being amortized based on an accelerated method over the
vesting period of the options, generally four years.

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

During 2001, 6,899,562 options were granted at an
exercise price equal to market value.

Restricted
Shares Issued for Promissory Notes

On March 25, 1999, several key employees
exercised options for 1,141,333 Ordinary Shares for promissory
notes in the aggregate amount of $3,538,000. The notes are full
recourse and are secured by the shares, bear interest at a rate
in the range of 5.25% to 6% per annum and are payable over the
remaining vesting period. The shares are restricted and are
subject to a right of repurchase in favor of BackWeb in
accordance with the original options vesting schedule,
which is generally four years. In the year 2001, two remaining
payments totaling $222,000 for one employee were extended for
one year. Also in 2001, one employee who left the Company
forfeited 77,079 unvested restricted Ordinary Shares, which
represented $238,000 of a promissory note.

Accounting
for Stock-Based Compensation

The Company applies the measurement principles of
APB 25 and FIN 44 in accounting for its stock option
plans. If the compensation expense for options granted for the
years ended December 31, 2001, 2000, and 1999 had been
determined based on the fair market value at the grant dates as
prescribed by SFAS 123, the Companys net loss and net
loss per share would have been increased to the pro forma
amounts indicated below:

|                                               |             |                                       |       |         |   |      |       |         |   |   |       |         |  
|---------------------------------------------- | ----------- | ------------------------------------- | ----- | ------- | - | ---- | ----- | ------- | - | - | ----- | ------- | -
|                                               |             |                                      
|                                               |             | December 31,                         
|                                               |             |                                      
|                                               |             | 2001                                  |       | 2000    |   | 1999
|                                               |             |                                       |       |         |   |     
|                                               |             |                                      
|                                               |             | (in thousands, except per share data)
|Net loss:                                      |             |                                       |       |         |   |      |       |         |   |   |       |        
|                                               | As reported |                                       | $     | (34,743 | ) |      | $     | (19,213 | ) |   | $     | (11,489 | )
|                                               | Pro forma   |                                       | $     | (74,440 | ) |      | $     | (51,940 | ) |   | $     | (15,365 | )
|Pro forma basic and diluted net loss per share |             | $                                     | (1.95 | )       |   | $    | (1.40 | )       |   | $ | (0.78 | )      

Because the determination of fair market value of
all options granted after the time the Company became a public
entity include volatility factors, the above results may not be
representative of future periods.

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,
|                          |  |                        
|                          |  | 2001                    |     | 2000 |  | 1999
|                          |  |                         |     |      |  |     
|Risk-free interest rates  |  |                         | 4   | %    |  |      | 6   | % |  |  | 6   | %
|Expected lives (in years) |  |                         | 5   |      |  |      | 5   |   |  |  | 5   |  
|Dividend yield            |  |                         | 0   | %    |  |      | 0   | % |  |  | 0   | %
|Expected volatility       |  |                         | 138 | %    |  |      | 116 | % |  |  | 100 | %

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

The Company offers a defined contribution plan
for eligible employees in the U.S. During 2001, participants in
the Plan are allowed to contribute up to the lower of 25% of
their W-2 compensation or $10,500 in the Plan. The participants
are 100% vested in the Plan. The Company does not make
contributions to the Plan.

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

13.     Income
Taxes

Israeli
Income Taxes

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

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

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

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

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

BackWeb Technologies Ltd. production facilities
have been granted the status of Approved Enterprise
by the Israel government under the law for the Encouragement of
Capital Investments Act, 1959 (the Law) for two
separate investment programs. Income derived in Israel from the
Approved Enterprise entitles BackWeb Technologies
Ltd. to tax exemption for a period of two years commencing in
the first year that it will earn taxable income. After this
BackWeb Technologies Ltd. is entitled to a reduced tax rate of
10%  25% for an additional 5 to 8 year period
(depending on the rate of foreign investment in BackWeb). The
tax benefit period is limited to the earlier of 12 years
from completion of the investment under the plan or
14 years from receiving the approval. Accordingly, the
period of benefits relating to these investment programs will
expire in the years 2009 through 2014. Thereafter, BackWeb will
be subject to the regular corporate tax rate of 36% on its
Israel income. Income from sources other than the Approved
Enterprise will be subject to tax at the regular rate of
36%. As of December 31, 2001 the tax benefit period has not
commenced.

BackWeb currently has no plans to distribute such
tax-exempt income as dividend and intends to retain future
earnings to finance the development of the business. If the
retained tax-exempt income were distributed in a manner other
than in the complete liquidation of BackWeb, it would be taxed
at the corporate tax rate applicable to such profits (currently
25%). As of December 31, 2001, BackWeb is in the process of
completing the investments required under the program. If
BackWeb fails to meet certain conditions as stipulated by law
and the Approval Certification, it could be subject to corporate
tax in Israel at the corporate rate of 36% and could be required
to refund tax benefits already received at that time (inclusive
of interest and penalties). The conditions that are specified
include inter alia making specified investments in fixed assets,
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, 2001, BackWeb had
approximately $58 million of Israeli net operating loss
carry-forwards. The Israeli loss carryforwards have no
expiration date. The Company expects that during the period
these losses are utilized, its income would be substantially
tax-exempt. Accordingly, there will be no tax benefit available
from such losses and no deferred income taxes have been included
in these financial statements.

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

U.S. Income
Taxes

At December 31, 2001, BackWeb Technologies
Inc. had U.S. federal net operating loss carryforwards of
approximately $2.3 million. The net operating loss carryforwards
expire in various amounts between the years 2011 and 2020.

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

Pretax
loss

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

|                  |  |                         |        |      |  |      |        |  |  |   |        | 
|----------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                  |  |                        
|                  |  | Year Ended December 31,
|                  |  |                        
|                  |  | 2001                    |        | 2000 |  | 1999
|                  |  |                         |        |      |  |     
|Domestic (Israel) |  | $                       | 2,361  |      |  | $    | 1,366  |  |  | $ | 5,002  | 
|Foreign           |  |                         | 32,382 |      |  |      | 17,847 |  |  |   | 6,487  | 
|                  |  |                         |        |      |  |      |        |  |  |   |        | 
|                  |  | $                       | 34,743 |      |  | $    | 19,213 |  |  | $ | 11,489 | 
|                  |  |                         |        |      |  |      |        |  |  |   |        | 

Due to operating losses and the inability to
recognize the benefits there from, there is no provision for
income taxes for the years ended December 31, 2001, 2000 or
1999.

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,
|                                               |  |             
|                                               |  | 2001         |        | 2000
|                                               |  |              |        |     
|U.S. net operating loss carryforwards          |  | $            | 681    |      |  | $ | 2,936  |  
|Reserves not currently deductible              |  |              | 5,297  |      |  |   | 3,120  |  
|Other, net                                     |  |              |       |      |  |   | 364    |  
|                                               |  |              |        |      |  |   |        |  
|Net deferred assets before valuation allowance |  |              | 5,978  |      |  |   | 6,420  |  
|Valuation allowance                            |  |              | (5,978 | )    |  |   | (6,420 | )
|                                               |  |              |        |      |  |   |        |  
|Net deferred tax assets                        |  | $            |       |      |  | $ |       |  
|                                               |  |              |        |      |  |   |        |  

As of December 31, 2001 the Company and its
subsidiaries have provided valuation allowances of approximately
$6.0 million in respect of deferred tax assets resulting from
tax loss carryforwards, tax benefits related to employee stock
option exercises, which will be credited to additional paid-in
capital when realized, and other temporary differences. For the
years ended December 31, 2001, 2000 and 1999, the valuation
allowance (decreased)/ increased by ($442,000), $820,000 and
$2.5 million, respectively. Management currently believes that
since the Company and its subsidiaries have a history of losses,
it is more likely than not that those deferred tax deductions
will not be realized in the foreseeable future.

14.     Geographic
Information and Major Customer

BackWeb operates in one industry segment, the
development and marketing of network application software.
Operations in Israel include research and development and sales.
Operations in North America and Europe include sales and
marketing. The Company has adopted SFAS No. 131
Disclosures About Segments

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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

of an Enterprise and Related Information.
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,
|                                               |               |                        
|                                               |               | 2001                    |        | 2000   |  | 1999
|                                               |               |                         |        |        |  |     
|Revenues from sales to unaffiliated customers: |               |                         |        |        |  |      |        |        |  |   |        |       
|                                               | North America |                         | $      | 6,695  |  |      | $      | 20,926 |  |   | $      | 16,862 | 
|                                               | Israel        |                         |        | 11,809 |  |      |        | 13,020 |  |   |        | 6,401  | 
|                                               | Europe        |                         |        | 2,134  |  |      |        | 4,400  |  |   |        |       | 
|                                               |               |                         |        |        |  |      |        |        |  |   |        |       
|                                               |               | $                       | 20,638 |        |  | $    | 38,346 |        |  | $ | 23,263 |       
|                                               |               |                         |        |        |  |      |        |        |  |   |        |       

|                   |               |              |       |       |  |      |        |        |  |   |       |       | 
|------------------ | ------------- | ------------ | ----- | ----- |  | ---- | ------ | ------ |  | - | ----- | ----- | 
|                   |               |             
|                   |               | December 31,
|                   |               |             
|                   |               | 2001         |       | 2000  |  | 1999
|                   |               |              |       |       |  |     
|Long-lived assets: |               |              |       |       |  |      |        |        |  |   |       |      
|                   | North America |              | $     | 2,038 |  |      | $      | 3,034  |  |   | $     | 1,277 | 
|                   | Israel        |              |       | 5,544 |  |      |        | 10,254 |  |   |       | 517   | 
|                   | Other         |              |       | 104   |  |      |        | 199    |  |   |       | 18    | 
|                   |               |              |       |       |  |      |        |        |  |   |       |      
|                   |               | $            | 7,686 |       |  | $    | 13,487 |        |  | $ | 1,812 |      
|                   |               |              |       |       |  |      |        |        |  |   |       |      

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

Revenue from one customer accounted for 52%, 27%
and 13% of total revenue in the year ended December 31,
2001, 2000 and 1999, respectively.

15.     Subsequent
Events (unaudited)

As of January 8, 2002 BackWeb Technologies
Europe Limited, a United Kingdom corporation with a branch in
Germany was registered and as of January 1, 2002 each of
BackWeb Technologies B.V., a Netherlands 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 ceased commercial
operations.




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.

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PART III




Item 10.     Directors
and Executive Officers of the Registrant

A.     Directors and
Executive Officers

Our current directors and designated executive
officers are:

|                        |  |     |    |          |  |                                                        
|----------------------- |  | --- | -- | -------- |  | -------------------------------------------------------
|Name                    |  | Age |    | Position
|                        |  |     |    |         
|Eli Barkat              |  |     | 38 |          |  | Chairman of the Board and Chief Executive Officer      
|Charles Federman        |  |     | 45 |          |  | Director                                               
|Joseph Gleberman        |  |     | 44 |          |  | Director                                               
|William L. Larson       |  |     | 45 |          |  | Director                                               
|Isabel Maxwell          |  |     | 51 |          |  | Director                                               
|Gil Shwed               |  |     | 33 |          |  | Director                                               
|Gwen B. Spertell        |  |     | 48 |          |  | Chief Operating Officer                                
|Christopher C. Marshall |  |     | 45 |          |  | Chief Accounting Officer and Vice President of
	Finance

Eli Barkathas
served as our Chairman of the Board and Chief Executive Officer
since 1996. From 1988 to February 1996, Mr. Barkat served
as a Managing Director and Vice President of Business
Development of BRM Technologies Ltd., a technology venture firm.
Prior to 1988, Mr. Barkat held various positions with the
Aurec Group, a communications media and information company, and
Daizix Technologies, a computer assisted design applications
company. In addition, Mr. Barkat served as a paratrooper in
the Israel Defense Forces where he attained the rank of
lieutenant. Mr. Barkat holds a Bachelor of Science degree
in computer science and mathematics from the Hebrew University
of Jerusalem. Mr. Barkat serves as a Class III
Director, holding office until the Annual Meeting of
Shareholders to be held in 2002.

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

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

William L. Larsonhas been a director of BackWeb since
September 1997. Since February 2001, Mr. Larson has served
as a consultant to various venture capital firms, including
Summit Partners. 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
and serves on the boards of several technology companies. Mr.

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Larson serves as a Class II Director,
holding office until the Annual Meeting of Shareholders to be
held in 2004.


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

Gil Shwedhas served
as a director of BackWeb since March 1999. Since July 1993,
Mr. Shwed has served as Chief Executive Officer of Check
Point Software Technologies Ltd., a network security and VPN
software company, of which he is a co-founder and where he also
currently serves as Chairman of the Board. From June 1992 to
June 1993, Mr. Shwed served as a Software Manager of
Heliogram, a software development company. Mr. Shwed serves
as an Outside Director under the Israeli Companies Law for a
term expiring on August 23, 2003.

Gwen Spertellhas
served as our Chief Operating Officer since September 2000. From
December 1997 to August 2000, Ms. Spertell held the
position of Senior Vice President at the Company and was
responsible for sales, marketing and business development. Prior
to joining BackWeb, from 1989 through 1997, Ms. Spertell
spent eight years at Oracle Corporation where she served in
various management positions and was variously responsible for
sales, consulting and alliance development, with her last
position at Oracle being Vice President of Global ISV Alliances.
Ms. Spertell holds a Bachelor of Arts in Economics from
Rutgers University.

Christopher C. Marshallhas served as our Vice President of
Finance since August 2000 and as Chief Accounting Officer since
July 2001. From January 2000, when he joined BackWeb, until
August 2000, Mr. Marshall served as Senior
DirectorFinance and Corporate Controller. Prior to joining
BackWeb, from October 1998 through 1999, Mr. Marshall
served as Vice President, Finance and acting CFO of Supercom,
Inc., where he was responsible for accounting, treasury, credit
banking and finance operations. From July 1997 through September
1998, Mr. Marshall was Vice President, Finance and
Corporate Controller at S Vision which company was eventually
sold to Compaq Corporation. From October 1995 through June 1997,
Mr. Marshall was the Divisional Controller at NEC
Technologies in the consumer division where he was responsible
for accounting, costing, finance business planning, and sale
order management and operations. Mr. Marshall holds a
Bachelors of Science in Accounting, Law and Economics from the
University College Cardiff in the United Kingdom, a Masters in
Mathematics and Business Modeling from University College London
and an MBA from the London Business School.

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

B.     Section 16(a)
Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act
of 1934, as amended (the Exchange Act), 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) and the National Association of Securities
Dealers, Inc. 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 2001, all filing requirements applicable to its
officers, directors and 10 percent shareholders were met.

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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, 2001, December 31,
2000 and December 31, 1999, the year that we became a
public company, by our Chief Executive Officer; the
Companys two other executive officers; and an additional
person who would have been considered as an executive officer
but for the fact that he left the Company prior to
December 31, 2001 (collectively, our Named Executive
Officers):

SUMMARY COMPENSATION TABLE

|                            |                         |  |      |           |  |                            |         |                     |  |            |         |                 |  |   |   |   |  |  |         |         |  |   |       |   | 
|--------------------------- | ----------------------- |  | ---- | --------- |  | -------------------------- | ------- | ------------------- |  | ---------- | ------- | --------------- |  | - | - | - |  |  | ------- | ------- |  | - | ----- | - | 
|                            |                         |  |      |           |  |                            |         |                     |  |           
|                            |                         |  |      |           |  |                            |         | Long Term          
|                            |                         |  |      |           |  | Extraordinary Compensation |         | Compensation Awards
|                            |                         |  |      |           |  |                            |         |                    
|                            |                         |  |      |           |  |                            |         | Other               |  | Securities |         |                
|                            |                         |  |      |           |  |                            |         | Extraordinary       |  | Underlying |         | All Other      
|Name and Principal Position |                         |  |      | Salary($) |  | Bonus($)                   |         | Compensation        |  | Options    |         | Compensation($)
|                            |                         |  |      |           |  |                            |         |                     |  |            |         |                
|Eli Barkat(1)               |                         |  | 2001 |           |  | $                          | 144,000 |                     |  | $          | 0       |                 |  | $ | 0 |   |  |  | 225,000 |         |  | $ | 0     |  
|                            | Chief Executive Officer |  |      | 2000      |  |                            | $       | 261,251             |  |            | $       | 0               |  |   | $ | 0 |  |  |         | 750,000 |  |   | $     | 0 | 
|                            |                         |  | 1999 |           |  | $                          | 220,008 |                     |  | $          | 130,000 |                 |  | $ | 0 |   |  |  | 350,000 |         |  | $ | 0     |  
|Hanan Miron(2)              |                         |  | 2001 |           |  | $                          | 176,250 |                     |  | $          | 13,125  |                 |  | $ | 0 |   |  |  | 83,200  |         |  | $ | 8,411 |  
|                            | Chief Financial Officer |  |      | 2000      |  |                            | $       | 213,125             |  |            | $       | 45,000          |  |   | $ | 0 |  |  |         | 148,200 |  |   | $     | 0 | 
|                            |                         |  | 1999 |           |  | $                          | 166,667 |                     |  | $          | 39,500  |                 |  | $ | 0 |   |  |  | 316,666 |         |  | $ | 0     |  
|Gwen Spertell(3)            |                         |  | 2001 |           |  | $                          | 250,000 |                     |  | $          | 0       |                 |  | $ | 0 |   |  |  | 434,000 |         |  |   |       |  
|                            | Chief Operating Officer |  |      | 2000      |  |                            | $       | 228,333             |  |            | $       | 87,000          |  |   | $ | 0 |  |  |         | 166,000 |  |   | $     | 0 | 
|                            |                         |  | 1999 |           |  | $                          | 197,917 |                     |  | $          | 78,750  |                 |  | $ | 0 |   |  |  | 0       |         |  | $ | 0     |  
|Christopher Marshall(4)     |                         |  | 2001 |           |  | $                          | 170,000 |                     |  | $          | 0       |                 |  | $ | 0 |   |  |  | 231,800 |         |  |   |       |  
|                            | Vice President, Finance |  |      | 2000      |  |                            | $       | 143,750             |  |            | $       | 13,594          |  |   | $ | 0 |  |  |         | 211,800 |  |   | $     | 0 | 
|                            |                         |  | 1999 |           |  | $                          | 0       |                     |  | $          | 0       |                 |  | $ | 0 |   |  |  | 0       |         |  | $ | 0     |  



---



|    |                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Barkats base salary for 2001 was
	$288,000. However, Mr. Barkat voluntarily relinquished the
	balance of his 2001 base salary as of July 1, 2001. The
	base salary set forth in the table above for 2001 reflects only
	base salary actually paid to Mr. Barkat by the Company.
|   
|(2) | Mr. Miron joined BackWeb in March 1999 and
	left the Company in November 2001. Mr. Mirons other
	compensation aggregating $8,411 represents accrued vacation paid
	upon his leaving the Company.                                                                                   
|   
|(3) | Ms. Spertells base salary shown for
	the fiscal year ended December 31, 2000, includes a
	pro-rated amount reflecting a salary increase that accompanied
	her promotion to Chief Operation Officer as of September 1,
	2000.                                                       
|   
|(4) | Mr. Marshall joined BackWeb in January 2000
	and was not paid any compensation by the Company for the fiscal
	year ended December 31, 1999.                                                                                                                                         

Stock Option Grants in Fiscal 2001

The following table sets forth each grant of
stock options during the fiscal year ended December 31,
2001, to each of the Named Executive Officers in the Summary
Compensation Table set forth above. No stock appreciation rights
were granted during this period.

The exercise price of each option was equal to
the fair market value of our Ordinary Shares as valued by the
Board on the date of grant. Generally, the fair market value of
our Ordinary Shares is deemed to be the closing sales price as
quoted on the Nasdaq National Market. During 2001, in certain
circumstances, in order to account for market conditions, the
Board determined the fair market value, and set the exercise
price for options it granted, to be equal to the average closing
price of our Ordinary Shares during the thirty days preceding
the first of the month, if the grant date was between the first
and fifteenth of the month or, if the grant date were between
the sixteenth and the end of a month, the average closing price
of our Ordinary Shares during the thirty days preceding the
sixteenth. As a result, there are circumstances in which an
option may have an exercise price below the closing sale price
of the Companys Ordinary Shares on the date of grant.

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The exercise price for an option may be paid in
cash, check, promissory note, in shares of our Ordinary Shares
valued at fair market value on the exercise date, through a
cashless exercise procedure involving a same-day sale of the
purchased Ordinary Shares, a reduction in Company liability to
the optionee or any combination of these methods of payment. We
may also finance the option exercise by lending the optionee
sufficient funds to pay the exercise price for the acquired
Ordinary Shares, together with any federal and state income tax
liability incurred by the optionee in connection with such
exercise, although we did not do such during fiscal 2001.

The following table presents the grants 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, 2001, including the
potential realizable value of the options at assumed 5% and 10%
extraordinary rates over the term of the option, compounded
annually. If the exercise price of an option were below the
market price of the Companys Ordinary Shares at the date
of grant, a 0% rate is shown. 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 be dependent on the future performance of our Ordinary
Shares.

Percentages shown under Percent of Total
Options Granted to Employees in the Fiscal Year are based
on an aggregate of 6,799,562 options granted to employees of the
Company under the Option Plans during the fiscal year ended
December 31, 2001.

OPTION GRANTS IN FISCAL 2001

|                     |  |            |         |               |  |             |     |       |  |            |      |                               |  |    |         |     |  |  |         |  |  |   |          |   |  |   |         |  |  |   |         | 
|-------------------- |  | ---------- | ------- | ------------- |  | ----------- | --- | ----- |  | ---------- | ---- | ----------------------------- |  | -- | ------- | --- |  |  | ------- |  |  | - | -------- | - |  | - | ------- |  |  | - | ------- | 
|                     |  |            |         |               |  |             |     |       |  |            |      |                              
|                     |  |            |         |               |  |             |     |       |  |            |      | Potential Realizable Value at
|                     |  | Number of  |         | Percent of    |  |             |     |       |  |            |      | Assumed Extraordinary Rate of
|                     |  | Securities |         | Total Options |  |             |     |       |  |            |      | Stock Price Appreciation for 
|                     |  | Underlying |         | Granted to    |  | Exercise or |     |       |  |            |      | Option Term                  
|                     |  | Options    |         | Employees in  |  | Base Price  |     | Grant |  | Expiration |      |                              
|Name                 |  | Granted    |         | Fiscal Year   |  | ($/Share)   |     | Date  |  | Date       |      | 0%                            |  | 5% |         | 10%
|                     |  |            |         |               |  |             |     |       |  |            |      |                               |  |    |         |    
|Eli Barkat           |  |            | 225,000 |               |  |             | 3.3 | %     |  | $          | 1.07 |                               |  |    | 8/1/01  |     |  |  | 8/1/08  |  |  | $ | 0        |   |  | $ | 98,009  |  |  | $ | 228,403 | 
|Hanan Miron          |  |            | 39,345  |               |  |             | 0.6 | %     |  | $          | 0.76 |                               |  |    | 8/15/01 |     |  |  | 2/1/07  |  |  | $ | 0        |   |  | $ | 9,139   |  |  | $ | 20,442  | 
|                     |  |            | 33,200  |               |  |             | 0.5 | %     |  | $          | 0.76 |                               |  |    | 8/15/01 |     |  |  | 7/1/07  |  |  | $ | 0        |   |  | $ | 8,379   |  |  | $ | 18,946  | 
|                     |  |            | 10,655  |               |  |             | 0.2 | %     |  | $          | 0.76 |                               |  |    | 8/15/01 |     |  |  | 2/1/07  |  |  | $ | 0        |   |  | $ | 2,475   |  |  | $ | 5,536   | 
|Gwen Spertell        |  |            | 59,000  |               |  |             | 0.9 | %     |  | $          | 7.94 |                               |  |    | 1/2/01  |     |  |  | 11/1/07 |  |  | $ | (114,460 | ) |  | $ | 25,542  |  |  | $ | 210,307 | 
|                     |  |            | 50,000  |               |  |             | 0.7 | %     |  | $          | 0.76 |                               |  |    | 8/15/01 |     |  |  | 7/1/07  |  |  | $ | 0        |   |  | $ | 12,618  |  |  | $ | 28,532  | 
|                     |  |            | 63,572  |               |  |             | 0.9 | %     |  | $          | 0.76 |                               |  |    | 8/15/01 |     |  |  | 2/1/10  |  |  | $ | 0        |   |  | $ | 24,709  |  |  | $ | 59,953  | 
|                     |  |            | 11,428  |               |  |             | 0.2 | %     |  | $          | 0.76 |                               |  |    | 8/15/01 |     |  |  | 2/1/10  |  |  | $ | 0        |   |  | $ | 4,442   |  |  | $ | 10,777  | 
|                     |  |            | 250,000 |               |  |             | 3.7 | %     |  | $          | 0.60 |                               |  |    | 10/1/01 |     |  |  | 10/1/11 |  |  | $ | 12,500   |   |  | $ | 114,695 |  |  | $ | 271,483 | 
|Christopher Marshall |  |            | 61,800  |               |  |             | 0.9 | %     |  | $          | 0.76 |                               |  |    | 8/15/01 |     |  |  | 7/1/07  |  |  | $ | 0        |   |  | $ | 15,596  |  |  | $ | 35,267  | 
|                     |  |            | 12,212  |               |  |             | 0.2 | %     |  | $          | 0.76 |                               |  |    | 8/15/01 |     |  |  | 1/10/07 |  |  | $ | 0        |   |  | $ | 2,801   |  |  | $ | 6,255   | 
|                     |  |            | 67,788  |               |  |             | 1.0 | %     |  | $          | 0.76 |                               |  |    | 8/15/01 |     |  |  | 1/10/07 |  |  | $ | 0        |   |  | $ | 15,547  |  |  | $ | 34,722  | 
|                     |  |            | 90,000  |               |  |             | 1.3 | %     |  | $          | 0.60 |                               |  |    | 10/1/01 |     |  |  | 10/1/11 |  |  | $ | 4,500    |   |  | $ | 41,290  |  |  | $ | 97,734  | 

In February 2001, the Company implemented a
voluntary stock option exchange program for its employees. The
program was implemented to ameliorate, in part, the impact of
current financial market conditions on our employees who are
critical to the Companys continued success and creating
long-term value for all shareholders. Under the program, each
employee was offered the opportunity to cancel all, or part of,
outstanding stock options previously granted 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
to be granted at least six months and one day in the future. The
exercise price of these new options was to be equal to the fair
market value of the Companys Ordinary Shares as of the
date of the grant. The vesting schedule of the new options was
to be unchanged from that of the cancelled options. Members of
the Board and Eli Barkat, our CEO, did not participate in this
program. Messrs. Miron and Marshall did, as well as
Ms. Spertell.

In August 2001, the Company fulfilled its offer
by granting new options to employees who had participated in the
exchange program at an exercise price of $0.76. Each of the
grants set forth in the table above with a grant date of
August 15, 2001, represents the grant of new options under
this program. For a

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further discussion of this program, please see
Note 11 of the Notes to the Consolidated Financial
Statements set forth earlier in this Report.


In October 2001, the Company instituted a
company-wide incentive program to give each of the
Companys employees, who are critical to the Companys
continued success and creating long-term value for all
shareholders, an incentive to drive the Companys success
and accelerate profitability and other strategic corporate
goals. With respect to management level employees, the Company
sought to provide an extra incentive by granting those employees
options with the potential for accelerated vesting, if the
Company were to meet certain goals defined by the Companys
Board of Directors. Thus, 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 designated vesting
commencement date (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 16.66%
vesting the first four years and 33.33% vesting in year five.
Notwithstanding this vesting schedule, if, for the fourth
quarter of calendar year 2002, the Companys earnings per
share on an operational basis (prior to taking into
consideration any special charges) are $0.00 or greater, then
50% of the aggregate amount of the option vests and becomes
exercisable upon the first anniversary of the vesting
commencement date. In addition, if the Company achieves a 20% or
more growth in revenues in each of the next two calendar years
and the Companys earnings per share on an operational
basis (prior to taking into consideration any special charges)
are greater than $0.00, then, 30% and 20%, respectively, of the
remaining options would vest and become exercisable upon the
second and third anniversary of the vesting commencement date.
In the table above, the options granted to Ms. Spertell and
Mr. Marshall with a grant date of October 1, 2001, are
part of this program and vest according to the schedule for
employees at the level of vice president and above. In February
2002, pursuant to shareholder approval at an Extraordinary
General Meeting, Mr. Barkat also was granted options to
acquire 725,000 Ordinary Shares as part of this program.
Mr. Barkats options vest according to the schedule
for employees at the level of vice president and above and have
an exercise price of $1.32 per Ordinary Share.

The options granted under the Option Plans
generally have a term of seven years from the date of grant.
Because the vesting schedule of the options granted on
August 15, 2001 was unchanged from that of the canceled
options and included vesting that had already occurred as of the
date of the new grant, as well as that during the period between
cancellation and re-grant, the expiration date for such options
is generally less than seven (7) years. Options with a
grant date of October 1, 2001, in the table above, are
subject to the special vesting schedule described above and have
a term of ten (10) years.



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

The following table sets forth options exercised
by each of the Named Executive Officers in the Summary
Compensation Table, set forth above, during the fiscal year
ended December 31, 2001, and the number and value of
securities underlying unexercised options held by these Named
Executive Officers, as of December 31, 2001.

Amounts shown under the column Value
Realized are equal to the fair market value of the
Ordinary Shares acquired on the option exercise date, less the
exercise price paid for such Ordinary Shares.

Amounts shown under the column Value of
Unexercised In-the-Money Options at Fiscal Year End are
based on the fair market value, i.e., the closing sale price, of
our Ordinary Shares at December 31, 2001 (which was $1.35
per Ordinary Share), less the exercise price payable for such
Ordinary Shares.

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AGGREGATE OPTION EXERCISES IN FISCAL
2001

|                        |  |             |   |          |  |                            |   |                      |  |             |         |               |  |  |         |  |  |   |        |  |  |   |         | 
|----------------------- |  | ----------- | - | -------- |  | -------------------------- | - | -------------------- |  | ----------- | ------- | ------------- |  |  | ------- |  |  | - | ------ |  |  | - | ------- | 
|                        |  |             |   |          |  |                            |   |                     
|                        |  |             |   |          |  | Number of Securities       |   | Value of Unexercised
|                        |  |             |   |          |  | Underlying Unexercised     |   | In-the-Money Options
|                        |  | Shares      |   |          |  | Options at Fiscal Year End |   | at Fiscal Year End  
|                        |  | Acquired    |   | Value    |  |                            |   |                     
|Name                    |  | on Exercise |   | Realized |  | Exercisable                |   | Unexercisable        |  | Exercisable |         | Unexercisable
|                        |  |             |   |          |  |                            |   |                      |  |             |         |              
|Eli Barkat              |  |             | 0 |          |  | $                          | 0 |                      |  |             | 250,000 |               |  |  | 725,000 |  |  | $ | 0      |  |  | $ | 63,000  | 
|Hanan Miron             |  |             | 0 |          |  | $                          | 0 |                      |  |             | 143,429 |               |  |  | 0       |  |  | $ | 17,389 |  |  | $ | 0       | 
|Gwen Spertell           |  |             | 0 |          |  | $                          | 0 |                      |  |             | 194,399 |               |  |  | 403,059 |  |  | $ | 30,729 |  |  | $ | 230,521 | 
|Christopher C. Marshall |  |             | 0 |          |  | $                          | 0 |                      |  |             | 78,345  |               |  |  | 223,455 |  |  | $ | 24,713 |  |  | $ | 126,449 | 

Employment Agreements

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

In the event of a change-in-control of the
Company or a change in responsibilities following a
change-in-control of the Company, the vesting schedule for
options granted to the Named Executive Officers would be
accelerated, and the options would vest in full at the time of
the closing of any such transaction.

Compensation of Directors

Members of the Board of Directors of the Company
do not receive cash compensation from BackWeb for the services
they provide as directors, although they are reimbursed for
certain expenses in connection with attendance at Board and
Board Committee meetings. Directors who are not employees of
BackWeb generally receive grants of options to purchase
BackWebs Ordinary Shares when they first join the Board
and at each Annual Shareholder Meeting during their term of
service, subject to ratification and approval by the
Companys shareholders. The grant date of any such options
is the date of the Annual Shareholder Meeting approving such
grant, and the exercise price is the Fair Market Value of the
Companys Ordinary Shares, as that term is defined in the
Option Plans, which is generally the closing sale price of the
Companys Ordinary Shares on the Nasdaq National Market the
day before the Annual Shareholder Meeting approving such grant.
In February 2002, pursuant to shareholder approval at an
Extraordinary General Meeting, each of the Companys
non-employee directors was also granted options to acquire
50,000 Ordinary Shares as part of the Company-wide incentive
program described above, instituted by the Company in October
2001. These options vest according to the schedule for Company
employees at the level of vice president and above and have an
exercise price of $1.32 per Ordinary Share.

Compensation Committee Interlocks and Insider
Participation

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

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Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The following table shows the amount of our
Ordinary Shares beneficially owned, as of March 1, 2002, 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 current directors, and (iv) our
Named Executive Officers and current directors as a group.
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and includes voting or
investment power with respect to the securities.

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 1, 2002, but excludes Ordinary Shares
underlying options or warrants held by any other person.
Percentage of beneficial ownership is based on 38,872,292
Ordinary Shares outstanding as of March 1, 2002.

|                                                                           |                                                       |                    |           |                    |  |  |      |   | 
|-------------------------------------------------------------------------- | ----------------------------------------------------- | ------------------ | --------- | ------------------ |  |  | ---- | - | 
|                                                                           |                                                       | 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 |                    |  |  | 8.6  | %
|                                                                           | 8 Hamarpe Street
	Har Hotzvim
	Jerusalem 91450 Israel |                    |           |                    |  |  |      |   | 
|Yuval 63 Holdings (1995) Ltd.(2)                                           |                                                       |                    | 3,352,342 |                    |  |  | 8.6  | %
|                                                                           | 8 Hamarpe Street
	Har Hotzvim
	Jerusalem 91450 Israel |                    |           |                    |  |  |      |   | 
|NirBarkat Holdings Ltd.(3)                                                 |                                                       |                    | 3,352,342 |                    |  |  | 8.6  | %
|                                                                           | 8 Hamarpe Street
	Har Hotzvim
	Jerusalem 91450 Israel |                    |           |                    |  |  |      |   | 
|The Goldman Sachs Group, Inc.(4)                                           |                                                       |                    | 3,272,676 |                    |  |  | 8.4  | %
|                                                                           | 85 Broad Street
	New York, New York 10004             |                    |           |                    |  |  |      |   | 
|United States Trust Company of New York(5)                                 |                                                       |                    | 3,272,677 |                    |  |  | 8.4  | %
|                                                                           | West 47th Street, 25th Floor                          |                    |           |                    |  |  |      |   | 
|                                                                           | New York, New York 10036                              |                    |           |                    |  |  |      |   | 
|Executive Officers and Directors                                           |                                                       |                    |           |                    |  |  |      |  
|Eli Barkat(6)                                                              |                                                       |                    | 4,213,973 |                    |  |  | 10.8 | %
|Hanan Miron(7)                                                             |                                                       |                    | 81,254    |                    |  |  | *    |  
|Gwen Spertell(8)                                                           |                                                       |                    | 549,703   |                    |  |  | 1.4  | %
|Christopher C. Marshall(9)                                                 |                                                       |                    | 109,328   |                    |  |  | *    |  
|Charles Federman(10)                                                       |                                                       |                    | 778,680   |                    |  |  | 2.0  | %
|Joseph Gleberman(11)                                                       |                                                       |                    | 3,283,092 |                    |  |  | 8.4  | %
|William L. Larson(12)                                                      |                                                       |                    | 17,361    |                    |  |  | *    |  
|Isabel Maxwell                                                             |                                                       |                    | 0         |                    |  |  | *    |  
|Gil Shwed(13)                                                              |                                                       |                    | 49,999    |                    |  |  | *    |  
|Named Executive Officers and current directors as
	a group (9 persons)(14) |                                                       |                    | 9,083,390 |                    |  |  | 23.4 | %

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---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(1) | Eli Barkat, the Companys Chairman and Chief
	Executive Officer, substantially controls the voting power of
	EliBarkat Holdings Ltd. The shares listed in the table above for
	EliBarkat Holdings Ltd. do not include 548,131 Ordinary Shares
	owned directly by Eli Barkat nor do they include 1,000 Ordinary
	Shares owned directly by Mr. Barkats wife, with
	respect to which he disclaims beneficial ownership or control.
|   
|(2) | Yuval Rakavy, a former BackWeb director, owns
	substantially all of the equity and voting power of Yuval Rakavy
	Ltd., the parent company of Yuval 63 Holdings (1995) Ltd.
	The shares listed in the table above for Yuval 63 Holdings
	(1995) Ltd. do not include 198,136 Ordinary Shares owned
	directly by Mr. Rakavy.                                                                                                       
|   
|(3) | Nir Barkat, a former BackWeb director, owns
	substantially all of the equity and voting power of Nir Barkat
	Ltd., the parent company of NirBarkat Holdings Ltd. Nir Barkat
	is the brother of Eli Barkat, our Chief Executive Officer. The
	shares listed in the table above for NirBarkat Holdings Ltd. do
	not include 198,133 Ordinary Shares owned directly by Nir Barkat.                                                 
|   
|(4) | The shares listed in the table above represent
	3,272,676 Ordinary Shares owned by investment partnerships, of
	which affiliates of The Goldman Sachs Group, Inc. are the
	general partner, managing general partner or investment manager,
	including:                                                                                                                                                                         



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



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



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | The shares listed in the table above for United
	States Trust Company of New York represent the Ordinary Shares
	beneficially owned by the investment partnerships affiliated
	with The Goldman Sachs Group, Inc., referenced in footnote
	(4) above, which entered into a Voting Trust Agreement,
	dated as of July 1, 1999 (the Voting Trust
	Agreement), with United States Trust Company of New York,
	as voting trustee (the Voting Trustee). Pursuant to
	the Voting Trust Agreement, the investment partnerships agreed
	to deposit into the voting trust created under such agreement
	(the Voting Trust) and transfer to the Voting
	Trustee all Ordinary Shares of BackWeb beneficially owned by the
	investment partnerships. Under the Voting Trust Agreement, the
	Voting Trustee, among other things, will vote such Ordinary
	Shares with the majority of votes cast or, in certain
	circumstances, in proportion to the votes cast for all other
	Ordinary Shares outstanding or abstain from voting. Under the
	Voting Trust Agreement, (i) each investment partnership has
	the power to dispose or to direct the disposition of the
	Ordinary Shares deposited by such investment partnership into
	the Voting Trust, and (ii) each investment partnership has
	the right to receive all dividends paid on the Ordinary Shares
	deposited by such investment partnership into the Voting Trust,
	including securities that are not entitled to vote.
|   
|(6) | The shares listed in the table above for Eli
	Barkat include 3,352,342 Ordinary Shares held by EliBarkat
	Holdings Ltd., an entity substantially controlled by Eli Barkat,
	1,000 Ordinary Shares owned directly by                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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|    |                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Mr. Barkats wife, with respect to
	which he disclaims beneficial ownership or control, and options
	to purchase 312,500 Ordinary Shares that are exercisable within
	sixty days of March 1, 2002.
|   
|(7) | The shares listed in the table for Mr. Miron
	are Ordinary Shares owned directly by Mr. Miron.                                                                                                    
|   
|(8) | The shares listed in the table above for Gwen
	Spertell include options to purchase 234,630 Ordinary Shares
	that are exercisable within sixty days of March 1, 2002.                             
|   
|(9) | The shares listed in the table above for
	Christopher C. Marshall include options to purchase 109,328
	Ordinary Shares that are exercisable within sixty days of
	March 1, 2002.                  



|     |                                                                                                                                                                                                                                                                                                                                                                                                                   
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | The shares listed in the table above for Charles
	Federman include 539,691 shares held by Bare LLC, an entity
	substantially controlled by Mr. Federman and options to
	purchase 10,416 Ordinary Shares that are exercisable within
	sixty days of March 1, 2002.                                                                                                                                                 
|    
|(11) | The shares listed in the table above for Joseph
	Gleberman include 3,272,676 shares held by entities affiliated
	with The Goldman Sachs Group, Inc. and options to purchase
	10,416 Ordinary Shares that are exercisable by
	Mr. Gleberman within sixty days of March 1, 2002.
	Mr. Gleberman is a Managing Partner of Goldman, Sachs &
	Co., which is a wholly owned subsidiary of The Goldman Sachs
	Group, Inc.
|    
|(12) | The shares listed in the table above for
	William L. Larson include options to purchase 17,361
	Ordinary Shares that are exercisable within sixty days of
	March 1, 2002.                                                                                                                                                                                                                                         
|    
|(13) | The shares listed in the table above for Gil
	Shwed include options to purchase 49,999 Ordinary Shares that
	are exercisable within sixty days of March 1, 2002.                                                                                                                                                                                                                                                  
|    
|(14) | The shares listed in the table above for our
	Named Executive Officers and directors as a group include
	650,000 Ordinary Shares held by two of our Named Executive
	Officers subject to the right of repurchase in favor of the
	Company and 744,650 Ordinary Shares held by our Named Executive
	Officers and directors subject to options which are exercisable
	within 60 days of March 1, 2002.              




Item 13.     Certain
Relationships and Related Transactions

Stock Option
Loans

In March 1999, prior to its initial public
offering, the Company made loans to certain executive officers
to allow such executive officers to exercise options to purchase
Ordinary Shares of the Company. Each loan is evidenced by a full
recourse promissory note with an interest rate of 5.25%
compounded annually. Each note is secured by the Ordinary Shares
acquired by the executive officers as a result of the option
exercise. Generally, each note is to be repaid in equal
installments over a four-year period that coincides with the
vesting schedule for the underlying options. Each payment is to
consist of one-quarter of the outstanding principal, plus all
accrued unpaid interest as at the date of payment. Payments are
due on each anniversary date of vesting schedule of the
underlying options. The Companys current executive
officers to whom the loans were made are Eli Barkat and Gwen
Spertell. In November 2001, the Compensation Committee of the
Companys Board of Directors approved extending
Ms. Spertells last two remaining payments for one
year with interest continuing to accrue over the extension
period. During the year ended December 31, 2001 the largest
amount of Mr. Barkats and Ms. Spertells
indebtedness was $2,026,500 and $221,569, respectively.

Transactions
with 3Path, Inc.

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 a
Stock Purchase Agreement for Series B Convertible Preferred
Stock dated February 2, 2000, between and among 3Path, Inc.
(3Path) and other investors, including the Company.
BackWebs Audit Committee, Board of Directors and
shareholders approved the Companys investment in 3Path.
Among the other investors in 3Path are some of our major
shareholders, including EliBarkat Holdings Ltd., NirBarkat
Holdings Ltd., Yuval 63 Holdings (1995) Ltd., Bare, LLC, a
company controlled by Charles Federman (who

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is a BackWeb director), and affiliates of The
Goldman Sachs Group, Inc. (affiliates of which are principal
shareholders of BackWeb). BRM Technologies Ltd.
(BRM), of which Mr. Federman is Managing
Director, is also an investor in 3Path. As a group, such
shareholders have a controlling interest in 3Path. In addition,
Mr. Federman serves as chairman of the Board of Directors
of 3Path, and Joseph Gleberman, another of our directors, serves
as a member of the 3Path Board. Gwen Spertell, our Chief
Operating Officer, also served as a member of the 3Path Board
until November 2001. In the ordinary course of business, the
Company has granted 3Path various non-exclusive licenses to use
the Companys programs for 3Paths business. These
transactions were granted on customary commercial terms. In the
third quarter of fiscal 2001, in connection with a review of its
long-term investments, the Company recorded a non-cash charge of
$2.5 million to write down its investment in 3Path. See
discussion in Note 7 of the Notes to the Consolidated
Financial Statements elsewhere in this Report. In December 2001,
3Paths Board and its shareholders declared a 10 for 1
reverse stock split in connection with certain financing
provided to it by BRM and Bare, LLC, the result of which, among
other things, diluted significantly the Companys
investment in 3Path.


Shareholders
Loans

In 1995, BackWeb signed an agreement (the
Founding Agreement) with its early investors (the
Early Investors), according to which the Early
Investors provided BackWeb with loan financing in the amount of
$500,000 (the Loan). The Loan was denominated in NIS
and linked to the Israel consumer price index. The Loan was
payable at a rate of 2.5% of cumulative consolidated revenues in
excess of $5,000,000. In addition, effective September 30,
1996, $748,000 of accounts payable to the Early Investors was
converted into a shareholders loan on the same terms as
the Loan. In January 2001, the Loan was fully repaid.

Other

Please refer to Note 8 of the Notes to the
Consolidated Financial Statements elsewhere in this Report.

73



---



##### Table of Contents






PART IV






Item 14.     Exhibits,
Financial Statement Schedules, and Reports on
Form 8-K


(a) 1.     Financial
Statements

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



| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | Page Report of a member of Ernst and Young
	International, Kost, Forer & Gabbay, Independent Auditors

Consolidated Financial Statements:

Balance Sheets as of December 31, 2001 and
2000

Statements of Operations for the three years
ended December 31, 2001, 2000 and 1999

Statements of Shareholders Equity for the three
years ended December 31, 2001, 2000 and 1999

Statements of Cash Flows for the three years
ended December 31, 2001, 2000 and 1999

Notes to Consolidated Financial Statements

2.     Financial
Statement Schedules

|            |  |                                                                    
|----------- |  | -------------------------------------------------------------------
|Schedule II |  | Schedule of Valuation and Qualifying Accounts at
	December 31, 2001

SCHEDULE II

BACKWEB TECHNOLOGIES, LTD.

SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
AT DECEMBER 31, 2001


|                              |  |                                  |  |                        |       |               |  |            |       |            |  |   |        |   |  |   |       | 
|----------------------------- |  | -------------------------------- |  | ---------------------- | ----- | ------------- |  | ---------- | ----- | ---------- |  | - | ------ | - |  | - | ----- | 
|                              |  |                                  |  |                        |       |               |  |           
|                              |  |                                  |  | (Dollars in Thousands) |       | Write-off of  |  |           
|                              |  |                                  |  | Balance at             |       | Provision for |  | Previously |       | Balance at
|                              |  |                                  |  | Beginning of           |       | Doubtful      |  | Provided   |       | End of    
|                              |  |                                  |  | Period                 |       | Accounts      |  | Accounts   |       | Period    
|                              |  |                                  |  |                        |       |               |  |            |       |           
|Year Ended
	December 31, 2001 |  | Allowance for
	Doubtful Accounts |  | $                      | 1,038 |               |  | $          | 2,948 |            |  | $ | (1,029 | ) |  | $ | 2,957 | 
|Year Ended
	December 31, 2000 |  | Allowance for
	Doubtful Accounts |  | $                      | 919   |               |  | $          | 731   |            |  | $ | (612   | ) |  | $ | 1,038 | 
|Year Ended
	December 31, 1999 |  | Allowance for
	Doubtful Accounts |  | $                      | 561   |               |  | $          | 533   |            |  | $ | (175   | ) |  | $ | 919   | 

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

3.     Exhibits

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

74



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                          
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 2  | .1          |  | Software and Asset Purchase Agreement Among the
	Registrant, Mobix Communications Ltd and Esther Hemli, dated as
	of June 4, 2000.(1)                                                    
|        | 3  | .1          |  | Articles of Association of Registrant.(2)                                                                                                                                                
|        | 3  | .2          |  | Memorandum of Association of Registrant (English
	translation).(2)                                                                                                                       
|        | 4  | .1          |  | Specimen of Ordinary Share Certificate.(2)                                                                                                                                               
|        | 4  | .2          |  | Fourth Amended and Restated Rights Agreement.(2)                                                                                                                                         
|        | 4  | .3          |  | Form of Liquidity Proposal between BackWeb
	Technologies, Ltd. and the Exchangeable Shareholders.(2)                                                                                     
|        | 10 | .1*         |  | 1996 Israel Stock Option Plan (English
	translation).(2)                                                                                                                                 
|        | 10 | .2*         |  | 1996 U.S. Stock Option Plan.(2)                                                                                                                                                          
|        | 10 | .3*         |  | 1998 U.S. Stock Option Plan (Amended and Restated
	as of January 1, 2002).                                                                                                               
|        | 10 | .4*         |  | 1999 Employee Stock Purchase Plan.(2)                                                                                                                                                    
|        | 10 | .5          |  | Lease Agreement for 3 Abba Hillel Street, Ramat
	Gan, Israel (English translation).(2)                                                                                                   
|        | 10 | .6          |  | Lease Agreement for 34 Tuval Street, Ramat Gan,
	Israel (English translation).(2)                                                                                                        
|        | 10 | .7          |  | Master Lease Agreement for 2077 Gateway Place,
	Suite 500, San Jose, California.(2)                                                                                                      
|        | 10 | .8          |  | 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.(2)            
|        | 10 | .9          |  | Loan and Security Agreement, and schedule
	thereto, between BackWeb Technologies Ltd. and Transamerica
	Business Credit Corporation, dated as of December 24,
	1998.(2)                  
|        | 10 | .10         |  | Voting and Exchange Trust Agreement between
	BackWeb Technologies Ltd., BackWeb Canada Inc. and the Trust
	company of Bank of Montreal, dated as of August 8, 1997.(2)                   
|        | 10 | .11         |  | Fourth Amended and Restated Rights Agreement,
	dated as of March 24, 1999.(2)                                                                                                            
|        | 10 | .12         |  | 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.(2)                            
|        | 10 | .13        |  | Software License and Distribution Agreement for
	Embedded Products, by and between BackWeb Technologies Ltd. and
	SAP AG, dated March 17, 1999.(2)                                       
|        | 10 | .14        |  | Software Development and OEM License Agreement by
	and between BackWeb Technologies Ltd. and Baan Development B.V.,
	dated as of December 30, 1998.(2)                                   
|        | 10 | .15         |  | Amendment One, dated June 9, 2000, to
	Software License and Distribution Agreement for Embedded
	Products, by and between BackWeb Technologies Ltd. and SAP AG,
	dated March 17, 1999.(4)
|        | 10 | .16         |  | Securities Purchase Agreement, dated as of
	January 17, 2000 by and between BackWeb Technologies Ltd.
	and RealNetworks, Inc.(5)                                                         
|        | 10 | .17         |  | BackWeb Technologies Ltd. warrant issued
	January 26, 2000 to RealNetworks, Inc.(6)                                                                                                      
|        | 10 | .18         |  | 1(ST) Amendment to Lease  Expansion, made
	May 12, 2000, between Speiker Properties, L.P. and BackWeb
	Technologies, Inc.(7)                                                            
|        | 10 | .19         |  | 2(ND) Amendment to Lease  Expansion, made
	November 7, 2000, between Speiker Properties, L.P. and
	BackWeb Technologies, Inc.(7)                                                        
|        | 10 | .20         |  | Form of Promissory Note and Security Agreement
	for executive officer loans for early exercise of options
	granted prior to initial public offering.(7)                                  
|        | 10 | .21         |  | Sublease Agreement, as of September 27,
	1996, between SSA Canada Corporation, Lanacom Inc. and
	Confederation Life Insurance Company.(7)                                                
|        | 10 | .22         |  | Amendment to Sublease Agreement, as of
	June 1, 2000, between Zurich Canadian Holdings Limited,
	BackWeb Canada, Inc., and BackWeb Technologies Ltd.(7)                                  
|        | 10 | .23         |  | Convertible Loan Agreement, entered into as of
	August 1, 2001, by and between Emony Ltd. and BackWeb
	Technologies Ltd., among others.(8)                                               

75



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                       
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .24         |  | Series B1 Warrant, issued by Emony Ltd. to
	BackWeb Technologies Ltd., dated August 6, 2001.(8)                                                                                                       
|        | 10 | .25         |  | Promissory Note, issued by Emony Ltd. to BackWeb
	Technologies Ltd., in amount of $500,000, dated August 6,
	2001.(8)                                                                                 
|        | 10 | .26         |  | OEM Agreement between Emony Ltd. and BackWeb
	Technologies Ltd., effective date August 29, 2001.(8)                                                                                                   
|        | 10 | .27         |  | Amendment No. 1 to OEM Agreement between
	Red-Bend Ltd. (formerly Emony Ltd.) and BackWeb Technologies
	Ltd., effective date September 28, 2001.(8)                                                   
|        | 10 | .28         |  | Master Software License and Services Agreement
	between Emony Ltd. as Licensor and BackWeb Technologies Ltd. as
	Licensee, effective date August 29, 2001, and Order Form in
	connection therewith.(8)
|        | 10 | .29**       |  | Alliance Agreement between Pricewaterhouse
	Coopers LLP and BackWeb Technologies, Inc., effective as of
	July 19, 2001.(8)                                                                            
|        | 10 | .30**       |  | BackWeb Value Added Reseller Agreement, effective
	date July 19, 2001, between Technology Integration LLC and
	BackWeb Technologies, Inc.(8)                                                          
|        | 10 | .31**       |  | Cooperative Marketing Agreement between BackWeb
	Technologies Inc. and Oblix, Inc., effective December 19,
	2001.                                                                                     
|        | 10 | .32**       |  | Technology & Content Partner Agreement,
	between SAP Portals, Inc. and BackWeb Technologies, effective
	December 21, 2001.                                                                            
|        | 10 | .33**       |  | Software Remarketing Agreement, between BackWeb
	Technologies, Inc. and International Business Machines
	Corporation, dated December 27, 2001.                                                        
|        | 10 | .34**       |  | Plumtree Technology Partner Program Master
	Agreement, between Plumtree Software, Inc. and BackWeb
	Technologies, effective date December 19, 2001.                                                   
|        | 21 | .1          |  | Subsidiaries of the Registrant.(2)                                                                                                                                                                    
|        | 23 | .1          |  | Consent of Independent Auditors.                                                                                                                                                                      



---



|    |                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 Registration
	Statement on Form F-1 (File No. 333-10358).                                                  
|   
|(3) | Incorporated herein by reference to
	Exhibit 10.16 from the Companys Quarterly Report on
	Form 10-Q for the quarterly period ended September 30,
	2000, filed November 14, 2000.            
|   
|(4) | Incorporated herein by reference to
	Exhibit 10.15 from the Companys Quarterly Report on
	Form 10-Q for the quarterly period ended June 30,
	2000, filed August 14, 2000.                   
|   
|(5) | Incorporated herein by reference to
	Exhibit 10.1 from the Companys Current Report on
	Form 8-K, filed February 11, 2000.                                                                   
|   
|(6) | Incorporated herein by reference to
	Exhibit 10.2 from the Companys Current Report on
	Form 8-K, filed February 11, 2000.                                                                   
|   
|(7) | 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, 2001.                    
|   
|(8) | 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, 2001, filed November 14, 2001.
|   
|*   | Indicates management contract or compensatory
	plan or arrangement required to be filed as an exhibit to this
	Annual Report on Form 10-K.                                                   
|   
|**  | Confidential treatment requested. The
	confidential portions of these documents have been omitted and
	filed separately with the Securities and Exchange Commission.                         

76



---



##### Table of Contents





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

(b) Reports on Form 8-K

No reports on Form 8-K were filed by the
Company during the quarter ended December 31, 2001.

77



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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, as amended, the
Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.



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



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

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



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

|                                                   |  |                                                                                        |  |               |  | 
|-------------------------------------------------- |  | -------------------------------------------------------------------------------------- |  | ------------- |  | 
|                                                   |  |                                                                                        |  |              
|Signature                                          |  | Title                                                                                  |  | Date         
|                                                   |  |                                                                                        |  |              
|                                                  
|/s/ ELI BARKATEli Barkat                           |  | Chief Executive Officer and Director (Principal
	Executive Officer)                    |  | April 1, 2002
|                                                  
|/s/ CHRISTOPHER C. MARSHALLChristopher C. Marshall |  | Chief Accounting Officer and
	Vice President of Finance
	(Principal Financial Officer) |  | April 1, 2002
|                                                  
|/s/ CHARLES FEDERMANCharles Federman               |  | Director                                                                               |  | April 1, 2002
|                                                  
|/s/ WILLIAM LARSONWilliam Larson                   |  | Director                                                                               |  | April 1, 2002
|                                                  
|/s/ JOSEPH GLEBERMANJoseph Gleberman               |  | Director                                                                               |  | April 1, 2002
|                                                  
|/s/ GIL SHWEDGil Shwed                             |  | Director                                                                               |  | April 1, 2002
|                                                  
|/s/ ISABEL MAXWELLIsabel Maxwell                   |  | Director                                                                               |  | April 1, 2002

78



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##### Table of Contents



EXHIBIT INDEX

|        |    |             |  |                                                                                                                                                                                          
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 2  | .1          |  | Software and Asset Purchase Agreement Among the
	Registrant, Mobix Communications Ltd and Esther Hemli, dated as
	of June 4, 2000.(1)                                                    
|        | 3  | .1          |  | Articles of Association of Registrant.(2)                                                                                                                                                
|        | 3  | .2          |  | Memorandum of Association of Registrant (English
	translation).(2)                                                                                                                       
|        | 4  | .1          |  | Specimen of Ordinary Share Certificate.(2)                                                                                                                                               
|        | 4  | .2          |  | Fourth Amended and Restated Rights Agreement.(2)                                                                                                                                         
|        | 4  | .3          |  | Form of Liquidity Proposal between BackWeb
	Technologies, Ltd. and the Exchangeable Shareholders.(2)                                                                                     
|        | 10 | .1*         |  | 1996 Israel Stock Option Plan (English
	translation).(2)                                                                                                                                 
|        | 10 | .2*         |  | 1996 U.S. Stock Option Plan.(2)                                                                                                                                                          
|        | 10 | .3*         |  | 1998 U.S. Stock Option Plan (Amended and Restated
	as of January 1, 2002).                                                                                                               
|        | 10 | .4*         |  | 1999 Employee Stock Purchase Plan.(2)                                                                                                                                                    
|        | 10 | .5          |  | Lease Agreement for 3 Abba Hillel Street, Ramat
	Gan, Israel (English translation).(2)                                                                                                   
|        | 10 | .6          |  | Lease Agreement for 34 Tuval Street, Ramat Gan,
	Israel (English translation).(2)                                                                                                        
|        | 10 | .7          |  | Master Lease Agreement for 2077 Gateway Place,
	Suite 500, San Jose, California.(2)                                                                                                      
|        | 10 | .8          |  | 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.(2)            
|        | 10 | .9          |  | Loan and Security Agreement, and schedule
	thereto, between BackWeb Technologies Ltd. and Transamerica
	Business Credit Corporation, dated as of December 24,
	1998.(2)                  
|        | 10 | .10         |  | Voting and Exchange Trust Agreement between
	BackWeb Technologies Ltd., BackWeb Canada Inc. and the Trust
	company of Bank of Montreal, dated as of August 8, 1997.(2)                   
|        | 10 | .11         |  | Fourth Amended and Restated Rights Agreement,
	dated as of March 24, 1999.(2)                                                                                                            
|        | 10 | .12         |  | 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.(2)                            
|        | 10 | .13        |  | Software License and Distribution Agreement for
	Embedded Products, by and between BackWeb Technologies Ltd. and
	SAP AG, dated March 17, 1999.(2)                                       
|        | 10 | .14        |  | Software Development and OEM License Agreement by
	and between BackWeb Technologies Ltd. and Baan Development B.V.,
	dated as of December 30, 1998.(2)                                   
|        | 10 | .15         |  | Amendment One, dated June 9, 2000, to
	Software License and Distribution Agreement for Embedded
	Products, by and between BackWeb Technologies Ltd. and SAP AG,
	dated March 17, 1999.(4)
|        | 10 | .16         |  | Securities Purchase Agreement, dated as of
	January 17, 2000 by and between BackWeb Technologies Ltd.
	and RealNetworks, Inc.(5)                                                         
|        | 10 | .17         |  | BackWeb Technologies Ltd. warrant issued
	January 26, 2000 to RealNetworks, Inc.(6)                                                                                                      
|        | 10 | .18         |  | 1(ST) Amendment to Lease  Expansion, made
	May 12, 2000, between Speiker Properties, L.P. and BackWeb
	Technologies, Inc.(7)                                                            
|        | 10 | .19         |  | 2(ND) Amendment to Lease  Expansion, made
	November 7, 2000, between Speiker Properties, L.P. and
	BackWeb Technologies, Inc.(7)                                                        
|        | 10 | .20         |  | Form of Promissory Note and Security Agreement
	for executive officer loans for early exercise of options
	granted prior to initial public offering.(7)                                  
|        | 10 | .21         |  | Sublease Agreement, as of September 27,
	1996, between SSA Canada Corporation, Lanacom Inc. and
	Confederation Life Insurance Company.(7)                                                
|        | 10 | .22         |  | Amendment to Sublease Agreement, as of
	June 1, 2000, between Zurich Canadian Holdings Limited,
	BackWeb Canada, Inc., and BackWeb Technologies Ltd.(7)                                  
|        | 10 | .23         |  | Convertible Loan Agreement, entered into as of
	August 1, 2001, by and between Emony Ltd. and BackWeb
	Technologies Ltd., among others.(8)                                               



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                       
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .24         |  | Series B1 Warrant, issued by Emony Ltd. to
	BackWeb Technologies Ltd., dated August 6, 2001.(8)                                                                                                       
|        | 10 | .25         |  | Promissory Note, issued by Emony Ltd. to BackWeb
	Technologies Ltd., in amount of $500,000, dated August 6,
	2001.(8)                                                                                 
|        | 10 | .26         |  | OEM Agreement between Emony Ltd. and BackWeb
	Technologies Ltd., effective date August 29, 2001.(8)                                                                                                   
|        | 10 | .27         |  | Amendment No. 1 to OEM Agreement between
	Red-Bend Ltd. (formerly Emony Ltd.) and BackWeb Technologies
	Ltd., effective date September 28, 2001.(8)                                                   
|        | 10 | .28         |  | Master Software License and Services Agreement
	between Emony Ltd. as Licensor and BackWeb Technologies Ltd. as
	Licensee, effective date August 29, 2001, and Order Form in
	connection therewith.(8)
|        | 10 | .29**       |  | Alliance Agreement between Pricewaterhouse
	Coopers LLP and BackWeb Technologies, Inc., effective as of
	July 19, 2001.(8)                                                                            
|        | 10 | .30**       |  | BackWeb Value Added Reseller Agreement, effective
	date July 19, 2001, between Technology Integration LLC and
	BackWeb Technologies, Inc.(8)                                                          
|        | 10 | .31**       |  | Cooperative Marketing Agreement between BackWeb
	Technologies Inc. and Oblix, Inc., effective December 19,
	2001.                                                                                     
|        | 10 | .32**       |  | Technology & Content Partner Agreement,
	between SAP Portals, Inc. and BackWeb Technologies, effective
	December 21, 2001.                                                                            
|        | 10 | .33**       |  | Software Remarketing Agreement, between BackWeb
	Technologies, Inc. and International Business Machines
	Corporation, dated December 27, 2001.                                                        
|        | 10 | .34**       |  | Plumtree Technology Partner Program Master
	Agreement, between Plumtree Software, Inc. and BackWeb
	Technologies, effective date December 19, 2001.                                                   
|        | 21 | .1          |  | Subsidiaries of the Registrant.(2)                                                                                                                                                                    
|        | 23 | .1          |  | Consent of Independent Auditors.                                                                                                                                                                      



---



|    |                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 Registration
	Statement on Form F-1 (File No. 333-10358).                                                  
|   
|(3) | Incorporated herein by reference to
	Exhibit 10.16 from the Companys Quarterly Report on
	Form 10-Q for the quarterly period ended September 30,
	2000, filed November 14, 2000.            
|   
|(4) | Incorporated herein by reference to
	Exhibit 10.15 from the Companys Quarterly Report on
	Form 10-Q for the quarterly period ended June 30,
	2000, filed August 14, 2000.                   
|   
|(5) | Incorporated herein by reference to
	Exhibit 10.1 from the Companys Current Report on
	Form 8-K, filed February 11, 2000.                                                                   
|   
|(6) | Incorporated herein by reference to
	Exhibit 10. 2 from the Companys Current Report on
	Form 8-K, filed February 11, 2000.                                                                  
|   
|(7) | 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, 2001.                    
|   
|(8) | 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, 2001, filed November 14, 2001.
|   
|*   | Indicates management contract or compensatory
	plan or arrangement required to be filed as an exhibit to this
	Annual Report on Form 10-K.                                                   
|   
|**  | Confidential treatment requested. The
	confidential portions of these documents have been omitted and
	filed separately with the Securities and Exchange Commission.                         



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