##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K





|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the Fiscal Year Ended December 31, 2004                                                 
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission file number 0-26241


BackWeb Technologies Ltd.


(Exact name of registrant as specified in its charter)


|                                                                                               |  |                                            
|---------------------------------------------------------------------------------------------- |  | -------------------------------------------
|Israel                                                                                         |  | 51-2198508                                 
|(State or other jurisdiction of
    incorporation or organization)                             |  | (I.R.S. Employer
    Identification Number)
|                                                                                              
|10 Haamal Street, Park Afek, Rosh Haayin,
    Israel(Address of principal executive offices) |  | 48092(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)


þ o


o


o þ






DOCUMENTS INCORPORATED BY REFERENCE












---










BACKWEB TECHNOLOGIES LTD.


ANNUAL REPORT ON FORM 10-K


Year Ended December 31, 2004


TABLE OF CONTENTS


|              |  |                                                                                                                      |    |      |    | 
|------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|              |  |                                                                                                                      |    | Page |   
|              |  |                                                                                                                      |    |      |   
|PART I       
|Item 1        |  | Business                                                                                                             |    |      | 1  | 
|Item 2.       |  | Properties                                                                                                           |    |      | 9  | 
|Item 3.       |  | Legal Proceedings                                                                                                    |    |      | 9  | 
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders                                                              |    |      | 10 | 
|PART II      
|Item 5.       |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |    |      | 10 | 
|Item 6.       |  | Selected Financial Data                                                                                              |    |      | 11 | 
|Item 7.       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |    |      | 12 | 
|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                             |    |      | 69 | 
|Item 9A.      |  | Controls and Procedures                                                                                              |    |      | 69 | 
|Item 9B.      |  | Other Information                                                                                                    |    |      | 70 | 
|PART III     
|Item 10.      |  | Directors and Executive Officers of the
    Registrant                                                               |    |      | 70 | 
|Item 11.      |  | Executive Compensation                                                                                               |    |      | 72 | 
|Item 12.      |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |    |      | 75 | 
|Item 13.      |  | Certain Relationships and Related
    Transactions                                                                   |    |      | 77 | 
|Item 14.      |  | Principal Accountant Fees and Services                                                                               |    |      | 77 | 
|PART IV      
|Item 15.      |  | Exhibits and Financial Statement
    Schedules                                                                       |    |      | 78 | 
|Signatures    |  |                                                                                                                      | 79 |     
|EXHIBIT 10.8 
|EXHIBIT 10.18
|EXHIBIT 10.19
|EXHIBIT 10.20
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 23.2 
|EXHIBIT 23.3 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 









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Cautionary Statement Regarding Forward-Looking Statements


This Annual Report on Form 10-K contains express or
implied forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are those that predict or describe
future events or trends and that do not relate solely to
historical matters. The words believes,
expects, anticipates,
intends, forecasts,
projects, plans, estimates,
anticipates, or similar expressions may identify
forward-looking statements. Readers are cautioned not to place
undue reliance on our forward-looking statements, as they
involve many risks and uncertainties. Our actual results may
differ materially from such statements. Factors that may cause
or contribute to such differences include those discussed in
this Annual Report under the caption Risk Factors
and elsewhere in this Annual Report, as well as in our other SEC
reports and filings. Although we believe that the assumptions
underlying our forward-looking statements are reasonable, any of
the assumptions could prove inaccurate, and, therefore, we
cannot assure you that the results contemplated in such
forward-looking statements will be realized. The inclusion of
such forward-looking information should not be regarded as a
representation by us, or any other person, that the future
events, plans or expectations contemplated by us will be
achieved. Forward-looking statements reflect our current views
with respect to future events and financial performance or
operations and speak only as of the date of this report. We
undertake no obligation to issue any updates or revisions to any
forward-looking statements to reflect any change in our
expectations with regard thereto or any change in events,
conditions, or circumstances on which any such statements are
based.





PART I







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

Overview








1



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BackWeb Technology and Products








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



| |           
| | ----------
| | Technology





| |                       
| | ----------------------
| | Polite Synchronization



2



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



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





| |         
| | --------
| | Products



| |                              
| | -----------------------------
| | BackWeb Offline Access Server





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

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | correct regardless of visual presentation changes. Content
    transformation is accomplished by embedding OTML tags into the
    portal, intranet, or Web application page, which tags control
    the optimized transformation of the pages for offline viewing.
    OTML is an extension to HTML and applications other than OAS
    software, such as the browser, will ignore the HTML tags.
    Although portals, for example, include both personalized and
    non-personalized content, our OAS acquires content in the
    context of individual users and creates a single personalized
    information package for each user. Because a large portion of
    the content is shared among many users and because that content
    may be very large, it is necessary to consolidate shared
    information so that it can be retrieved and stored once for all
    targeted users. The OAS stores content, including documents and
    Web pages, in separate information packages that are sent to
    more than one user. Once content has been acquired, transformed
    and consolidated, it is packaged for offline delivery into units
    called InfoPaks. Such packaging includes the creation of
    database records for targeting, delivery tracking, user
    interaction reporting and version control of the content,
    calculating byte-level differences between versions of the
    content, which is critical when only a small portion of a
    document is modified, and optimized storage and communication
    with users plug-ins.
|
| |  | The BackWeb Polite Sync Server,which is also available
    as a separate product as described below, is a highly scalable
    content delivery engine for desktops and laptops that enables
    offline access to Web content via BackWeb plug-ins. The BackWeb
    Polite Sync Server is designed to manage the delivery of
    thousands of gigabytes of data every day to end users. The
    server consults the BackWeb OAS database to find out whether
    there is new content relevant to the corresponding user. The
    BackWeb plug-in then begins downloading InfoPaks incrementally
    via the Polite Sync Server to enable scalable content delivery.
    The Polite Sync Server includes several key features:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Interruptible content deliveryactivates only when the
    network connection is idle;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Byte-level differentiationdetermines which content has
    been modified based on the content already stored on the
    users computer and ensures the delivery of only the
    changes rather than the entire content item; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Polite Neighborcastdistributes content over a LAN using
    the distributed client-based caching system, thereby reducing
    the amount of WAN traffic.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



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



4



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Customers






Sales and Marketing




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







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





Customer Service and Support




5



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Research and Development






Competition






| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | small companies attempting to address the needs of mobile or
    disconnected Web users such as iOra;                                                                                                                           
|
| |  | large enterprise software companies attempting to address the
    needs of mobile or disconnected Web users that have announced or
    may have plans to develop mobile technology, such as IBM,
    Siebel, Microsoft, and SAP;
|
| |  | mobile middleware vendors such as Sybase iAnywhere and
    Everypath; and                                                                                                                                                       
|
| |  | synchronization software companies such as Intellisynch.                                                                                                                                                                        



6



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Intellectual Property and Proprietary Rights










7



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| |   |                                                          
| | - | ---------------------------------------------------------
| |  | 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.



Employees




8



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











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







9



---



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






PART II







|        |                                                                
|------- | ---------------------------------------------------------------
|Item 5. | Market for Our Common Stock and Related Stockholder
    Matters



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

|     |                |      |   |      |     |  |   |      | 
|---- | -------------- | ---- | - | ---- | --- |  | - | ---- | 
|     |                | High |   |      | Low | 
|     |                |      |   |      |     | 
|2004 |                |      |   |      |     |  |   |     
|     | First Quarter  |      | $ | 1.77 |     |  | $ | 0.84 | 
|     | Second Quarter |      | $ | 1.24 |     |  | $ | 0.62 | 
|     | Third Quarter  |      | $ | 0.84 |     |  | $ | 0.30 | 
|     | Fourth Quarter |      | $ | 0.88 |     |  | $ | 0.32 | 













10



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



|                                                                                                |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |         |        |        |   |         |        |        | 
|----------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------ | ----- | ----- | - | ------- | ----- | ------ | - | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                                |                                                                                                            | Years Ended December 31,              |       
|                                                                                                |                                                                                                            |                                       |       
|                                                                                                |                                                                                                            | 2004                                  |        |       | 2003  |   |         | 2002  |        |   | 2001    |        |        | 2000 |        
|                                                                                                |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |        
|                                                                                                |                                                                                                            | (In thousands, except per share data) |       
|Consolidated Statements of Operations                                                           |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |         |        |        |   |         |       
|Revenue:                                                                                        |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |         |        |        |   |         |       
|                                                                                                | License                                                                                                    |                                       | $      | 1,593 |       |   | $       | 3,232 |        |   | $       | 2,119  |        |      | $       | 13,807 |        |   | $       | 29,294 |       
|                                                                                                | Service                                                                                                    |                                       |        | 3,906 |       |   |         | 3,270 |        |   |         | 4,228  |        |      |         | 6,831  |        |   |         | 9,052  |       
|                                                                                                |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |        
|                                                                                                |                                                                                                            | Total revenue                         |        |       | 5,499 |   |         |       | 6,502  |   |         |        | 6,347  |      |         |        | 20,638 |   |         |        | 38,346 | 
|Cost of revenue:                                                                                |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |         |        |        |   |         |       
|                                                                                                |                                                                                                            | License                               |        |       | 72    |   |         |       | 128    |   |         |        | 213    |      |         |        | 443    |   |         |        | 249    | 
|                                                                                                |                                                                                                            | Service                               |        |       | 1,170 |   |         |       | 1,057  |   |         |        | 3,050  |      |         |        | 5,238  |   |         |        | 6,051  | 
|                                                                                                |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |        
|                                                                                                |                                                                                                            | Total cost of revenue                 |        |       | 1,242 |   |         |       | 1,185  |   |         |        | 3,263  |      |         |        | 5,681  |   |         |        | 6,300  | 
|                                                                                                |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |        
|Gross profit                                                                                    |                                                                                                            |                                       | 4,257  |       |       |   | 5,317   |       |        |   | 3,084   |        |        |      | 14,957  |        |        |   | 32,046  |       
|                                                                                                |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |        
|Operating expenses:                                                                             |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |         |        |        |   |         |       
|                                                                                                | Research and development                                                                                   |                                       |        | 3,298 |       |   |         | 4,487 |        |   |         | 6,059  |        |      |         | 9,230  |        |   |         | 8,672  |       
|                                                                                                | Sales and marketing                                                                                        |                                       |        | 4,071 |       |   |         | 6,272 |        |   |         | 10,298 |        |      |         | 22,882 |        |   |         | 28,479 |       
|                                                                                                | General and administrative                                                                                 |                                       |        | 1,958 |       |   |         | 3,939 |        |   |         | 4,557  |        |      |         | 10,494 |        |   |         | 7,480  |       
|                                                                                                | Restructuring charges                                                                                      |                                       |        | 469   |       |   |         | 443   |        |   |         | 4,678  |        |      |         | 2,825  |        |   |         |       |       
|                                                                                                | Write-off and amortization of intellectual property, other
    intangibles and deferred stock compensation |                                       |        |      |       |   |         |      |        |   |         | 3,546  |        |      |         | 3,806  |        |   |         | 11,377 |       
|                                                                                                |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |        
|                                                                                                |                                                                                                            | Total operating expenses              |        |       | 9,796 |   |         |       | 15,141 |   |         |        | 29,138 |      |         |        | 49,237 |   |         |        | 56,008 | 
|                                                                                                |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |        
|Loss from operations                                                                            |                                                                                                            |                                       | (5,539 | )     |       |   | (9,824  | )     |        |   | (26,054 | )      |        |      | (34,280 | )      |        |   | (23,962 | )     
|Interest and other income, net                                                                  |                                                                                                            |                                       | 396    |       |       |   | 98      |       |        |   | 1,172   |        |        |      | 2,037   |        |        |   | 4,749   |       
|Write down of equity investments                                                                |                                                                                                            |                                       |       |       |       |   | (1,000  | )     |        |   |        |        |        |      | (2,500  | )      |        |   |        |       
|                                                                                                |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |        
|Net loss                                                                                        |                                                                                                            | $                                     | (5,143 | )     |       | $ | (10,726 | )     |        | $ | (24,882 | )      |        | $    | (34,743 | )      |        | $ | (19,213 | )     
|                                                                                                |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |        
|Basic and diluted net loss per share                                                            |                                                                                                            | $                                     | (0.13  | )     |       | $ | (0.27   | )     |        | $ | (0.63   | )      |        | $    | (0.91   | )      |        | $ | (0.52   | )     
|                                                                                                |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |        
|Weighted average number of shares used in computing basic and
    diluted net loss per share(1) |                                                                                                            |                                       | 40,711 |       |       |   | 40,000  |       |        |   | 39,284  |        |        |      | 38,225  |        |        |   | 37,205  |       
|                                                                                                |                                                                                                            |                                       |        |       |       |   |         |       |        |   |         |        |        |      |        

11



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|                                                  |  |                    |        |  |      |   |        |      |  |   |        |  |  |      |        |  |  |   |        | 
|------------------------------------------------- |  | ------------------ | ------ |  | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  |  | - | ------ | 
|                                                  |  | As of December 31, |       
|                                                  |  |                    |       
|                                                  |  | 2004               |        |  | 2003 |   |        | 2002 |  |   | 2001   |  |  | 2000 |       
|                                                  |  |                    |        |  |      |   |        |      |  |   |        |  |  |      |       
|                                                  |  | (In thousands)     |       
|Consolidated Balance Sheets Data:                 |  |                    |        |  |      |   |        |      |  |   |        |  |  |      |        |  |  |   |        | 
|Cash, cash equivalents and short-term investments |  | $                  | 10,320 |  |      | $ | 14,457 |      |  | $ | 23,757 |  |  | $    | 41,824 |  |  | $ | 64,734 | 
|Working capital                                   |  |                    | 7,903  |  |      |   | 12,301 |      |  |   | 20,334 |  |  |      | 37,905 |  |  |   | 63,916 | 
|Total assets                                      |  |                    | 12,555 |  |      |   | 18,515 |      |  |   | 29,409 |  |  |      | 56,512 |  |  |   | 90,374 | 
|Total shareholders equity                        |  | $                  | 7,938  |  |      | $ | 12,961 |      |  | $ | 22,521 |  |  | $    | 46,581 |  |  | $ | 78,430 | 






|    |                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the calculation of the weighted average number of shares
    used to calculated basic and diluted net loss per share, please
    see Note 2 of the Notes to Consolidated Financial
    Statements, Net Loss Per Share.






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

The following discussion and analysis should be read in
conjunction with, and is qualified by, the Selected
Consolidated Financial Data and our consolidated financial
statements and notes thereto included elsewhere in this report,
as well as the section on Risk Factors that is set
forth below in this Item 7. 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 report.










12



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Business Overview






Recent Events






Near Term Outlook




Critical Accounting Policies




13



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##### Table of Contents







| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | revenue recognition;                                                                                                                    
|
| |  | estimating valuation allowances and accrued liabilities,
    specifically the trade receivable allowances for doubtful
    accounts; and
|
| |  | accrued restructuring charges.                                                                                                          



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















14



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##### Table of Contents









| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Estimating Valuation Allowances and Accrued Liabilities,
    Including the Allowance for Doubtful Accounts







| |                            
| | ---------------------------
| | Accrued Restructuring Costs



15



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##### Table of Contents



Results of Operations




|                                 |                                                                                                             |                          |      |    |      |  |      |      |     |  |      |     |     | 
|-------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------ | ---- | -- | ---- |  | ---- | ---- | --- |  | ---- | --- | --- | 
|                                 |                                                                                                             | Year Ended December 31,  |     
|                                 |                                                                                                             |                          |     
|                                 |                                                                                                             | 2004                     |      |    | 2003 |  |      | 2002 |    
|                                 |                                                                                                             |                          |      |    |      |  |      |      |    
|Revenue:                         |                                                                                                             |                          |      |    |      |  |      |      |     |  |      |    
|                                 | License                                                                                                     |                          |      | 29 | %    |  |      | 50   | %   |  |      | 33  | %  
|                                 | Service                                                                                                     |                          |      | 71 |      |  |      | 50   |     |  |      | 67  |    
|                                 |                                                                                                             |                          |      |    |      |  |      |      |    
|                                 |                                                                                                             | Total revenue            |      |    | 100  |  |      |      | 100 |  |      |     | 100 | 
|Cost of revenue:                 |                                                                                                             |                          |      |    |      |  |      |      |     |  |      |    
|                                 | License                                                                                                     |                          |      | 1  |      |  |      | 2    |     |  |      | 3   |    
|                                 | Service                                                                                                     |                          |      | 21 |      |  |      | 16   |     |  |      | 48  |    
|                                 |                                                                                                             |                          |      |    |      |  |      |      |    
|                                 |                                                                                                             | Total cost of revenue    |      |    | 23   |  |      |      | 18  |  |      |     | 51  | 
|                                 |                                                                                                             |                          |      |    |      |  |      |      |    
|Gross profit                     |                                                                                                             |                          | 77   |    |      |  | 82   |      |     |  | 49   |    
|                                 |                                                                                                             |                          |      |    |      |  |      |      |    
|Operating expenses:              |                                                                                                             |                          |      |    |      |  |      |      |     |  |      |    
|                                 | Research and development                                                                                    |                          |      | 60 |      |  |      | 69   |     |  |      | 95  |    
|                                 | Sales and marketing                                                                                         |                          |      | 74 |      |  |      | 96   |     |  |      | 162 |    
|                                 | General and administrative                                                                                  |                          |      | 36 |      |  |      | 61   |     |  |      | 72  |    
|                                 | Restructuring charges                                                                                       |                          |      | 8  |      |  |      | 7    |     |  |      | 74  |    
|                                 | Write-off and amortization of intellectual property, other
    intangibles, and deferred stock compensation |                          |      |   |      |  |      |     |     |  |      | 56  |    
|                                 |                                                                                                             |                          |      |    |      |  |      |      |    
|                                 |                                                                                                             | Total operating expenses |      |    | 178  |  |      |      | 233 |  |      |     | 459 | 
|Loss from operations             |                                                                                                             |                          | (101 | )  |      |  | (151 | )    |     |  | (410 | )  
|                                 |                                                                                                             |                          |      |    |      |  |      |      |    
|Interest and other income, net   |                                                                                                             |                          | 7    |    |      |  | 2    |      |     |  | 18   |    
|Write down of equity investments |                                                                                                             |                          |     |    |      |  | (15  | )    |     |  |     |    
|                                 |                                                                                                             |                          |      |    |      |  |      |      |    
|Net loss                         |                                                                                                             |                          | (94  | )% |      |  | (165 | )%   |     |  | (392 | )% 
|                                 |                                                                                                             |                          |      |    |      |  |      |      |    



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

|              |  |              |       |        |   |                                    |        |   |        |  |       |    |  |   |       |  |   |   |     |      |  |  |     |   |  |   |       | 
|------------- |  | ------------ | ----- | ------ | - | ---------------------------------- | ------ | - | ------ |  | ----- | -- |  | - | ----- |  | - | - | --- | ---- |  |  | --- | - |  | - | ----- | 
|              |  | December 31, |      
|              |  |              |      
|              |  |              |       | Change |   |                                    |        |   | Change |  |       |   
|              |  |              |       |        |   |                                    |        |   |        |  |       |   
|              |  | 2004         |       |        | $ |                                    |        | % |        |  | 2003  |    |  | $ |       |  | % |   |     | 2002 | 
|              |  |              |       |        |   |                                    |        |   |        |  |       |    |  |   |       |  |   |   |     |      | 
|              |  |              |       |        |   | (In thousands, except percentages) |        |   |       
|Total revenue |  | $            | 5,499 |        |   | $                                  | (1,003 | ) |        |  | (15.4 | )% |  | $ | 6,502 |  |   | $ | 155 |      |  |  | 2.4 | % |  | $ | 6,347 | 



16



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##### Table of Contents









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

|                                 |  |                                    |       |        |   |   |        |   |        |  |       |    |  |   |       |   |   |   |       |      |  |  |      |   |  |   |       |  
|-------------------------------- |  | ---------------------------------- | ----- | ------ | - | - | ------ | - | ------ |  | ----- | -- |  | - | ----- | - | - | - | ----- | ---- |  |  | ---- | - |  | - | ----- | -
|                                 |  | December 31,                       |      
|                                 |  |                                    |      
|                                 |  |                                    |       | Change |   |   |        |   | Change |  |       |   
|                                 |  |                                    |       |        |   |   |        |   |        |  |       |   
|                                 |  | 2004                               |       |        | $ |   |        | % |        |  | 2003  |    |  | $ |       |   | % |   |       | 2002 | 
|                                 |  |                                    |       |        |   |   |        |   |        |  |       |    |  |   |       |   |   |   |       |      | 
|                                 |  | (In thousands, except percentages) |      
|License revenue                  |  | $                                  | 1,593 |        |   | $ | (1,639 | ) |        |  | (50.7 | )% |  | $ | 3,232 |   |   | $ | 1,113 |      |  |  | 52.5 | % |  | $ | 2,119 |  
|As a percentage of total revenue |  |                                    | 29.0  | %      |   |   |       |   |        |  |      |    |  |   | 49.7  | % |   |   |      |      |  |  |     |   |  |   | 33.4  | %







17



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##### Table of Contents





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

|                                 |  |                                    |       |        |   |   |     |   |        |  |      |   |  |   |       |   |   |   |      |      |  |  |       |    |  |   |       |  
|-------------------------------- |  | ---------------------------------- | ----- | ------ | - | - | --- | - | ------ |  | ---- | - |  | - | ----- | - | - | - | ---- | ---- |  |  | ----- | -- |  | - | ----- | -
|                                 |  | December 31,                       |      
|                                 |  |                                    |      
|                                 |  |                                    |       | Change |   |   |     |   | Change |  |      |  
|                                 |  |                                    |       |        |   |   |     |   |        |  |      |  
|                                 |  | 2004                               |       |        | $ |   |     | % |        |  | 2003 |   |  | $ |       |   | % |   |      | 2002 | 
|                                 |  |                                    |       |        |   |   |     |   |        |  |      |   |  |   |       |   |   |   |      |      | 
|                                 |  | (In thousands, except percentages) |      
|Service revenue                  |  | $                                  | 3,906 |        |   | $ | 634 |   |        |  | 19.4 | % |  | $ | 3,270 |   |   | $ | (958 | )    |  |  | (22.7 | )% |  | $ | 4,228 |  
|As a percentage of total revenue |  |                                    | 71.0  | %      |   |   |    |   |        |  |     |   |  |   | 50.3  | % |   |   |     |      |  |  |      |    |  |   | 66.6  | %









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

|                                 |  |                                    |       |        |   |   |    |   |        |  |      |   |  |   |       |   |   |   |        |      |  |  |       |    |  |   |       |  
|-------------------------------- |  | ---------------------------------- | ----- | ------ | - | - | -- | - | ------ |  | ---- | - |  | - | ----- | - | - | - | ------ | ---- |  |  | ----- | -- |  | - | ----- | -
|                                 |  | December 31,                       |      
|                                 |  |                                    |      
|                                 |  |                                    |       | Change |   |   |    |   | Change |  |      |  
|                                 |  |                                    |       |        |   |   |    |   |        |  |      |  
|                                 |  | 2004                               |       |        | $ |   |    | % |        |  | 2003 |   |  | $ |       |   | % |   |        | 2002 | 
|                                 |  |                                    |       |        |   |   |    |   |        |  |      |   |  |   |       |   |   |   |        |      | 
|                                 |  | (In thousands, except percentages) |      
|Cost of revenue                  |  | $                                  | 1,242 |        |   | $ | 57 |   |        |  | 4.8  | % |  | $ | 1,185 |   |   | $ | (2,078 | )    |  |  | (63.7 | )% |  | $ | 3,263 |  
|As a percentage of total revenue |  |                                    | 22.6  | %      |   |   |   |   |        |  | 4.4  | % |  |   | 18.2  | % |   |   |       |      |  |  | (33.2 | )% |  |   | 51.4  | %



18



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##### Table of Contents





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



|                                   |  |                                    |     |        |   |   |     |   |        |  |       |    |  |   |     |   |   |   |     |      |  |  |       |    |  |   |      |  
|---------------------------------- |  | ---------------------------------- | --- | ------ | - | - | --- | - | ------ |  | ----- | -- |  | - | --- | - | - | - | --- | ---- |  |  | ----- | -- |  | - | ---- | -
|                                   |  | December 31,                       |    
|                                   |  |                                    |    
|                                   |  |                                    |     | Change |   |   |     |   | Change |  |       |   
|                                   |  |                                    |     |        |   |   |     |   |        |  |       |   
|                                   |  | 2004                               |     |        | $ |   |     | % |        |  | 2003  |    |  | $ |     |   | % |   |     | 2002 | 
|                                   |  |                                    |     |        |   |   |     |   |        |  |       |    |  |   |     |   |   |   |     |      | 
|                                   |  | (In thousands, except percentages) |    
|Cost of license revenue            |  | $                                  | 72  |        |   | $ | (56 | ) |        |  | (43.8 | )% |  | $ | 128 |   |   | $ | (85 | )    |  |  | (39.9 | )% |  | $ | 213  |  
|As a percentage of license revenue |  |                                    | 6.5 | %      |   |   |    |   |        |  | 2.5   | %  |  |   | 4.0 | % |   |   |    |      |  |  | (6.1  | )% |  |   | 10.1 | %
|As a percentage of total revenue   |  |                                    | 1.3 | %      |   |   |    |   |        |  | (0.7  | )% |  |   | 2.0 | % |   |   |    |      |  |  | (1.4  | )% |  |   | 3.4  | %







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



|                                   |  |                                    |       |        |   |   |     |   |        |  |      |    |  |   |       |   |   |   |        |      |  |  |       |    |  |   |       |  
|---------------------------------- |  | ---------------------------------- | ----- | ------ | - | - | --- | - | ------ |  | ---- | -- |  | - | ----- | - | - | - | ------ | ---- |  |  | ----- | -- |  | - | ----- | -
|                                   |  | December 31,                       |      
|                                   |  |                                    |      
|                                   |  |                                    |       | Change |   |   |     |   | Change |  |      |   
|                                   |  |                                    |       |        |   |   |     |   |        |  |      |   
|                                   |  | 2004                               |       |        | $ |   |     | % |        |  | 2003 |    |  | $ |       |   | % |   |        | 2002 | 
|                                   |  |                                    |       |        |   |   |     |   |        |  |      |    |  |   |       |   |   |   |        |      | 
|                                   |  | (In thousands, except percentages) |      
|Cost of service revenue            |  | $                                  | 1,170 |        |   | $ | 113 |   |        |  | 10.7 | %  |  | $ | 1,057 |   |   | $ | (1,993 | )    |  |  | (65.3 | )% |  | $ | 3,050 |  
|As a percentage of service revenue |  |                                    | 30    | %      |   |   |    |   |        |  | (2.3 | )% |  |   | 32.3  | % |   |   |       |      |  |  | (39.8 | )% |  |   | 72.1  | %
|As a percentage of total revenue   |  |                                    | 21.3  | %      |   |   |    |   |        |  | 5    | %  |  |   | 16.3  | % |   |   |       |      |  |  | (31.8 | )% |  |   | 48.1  | %





19



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##### Table of Contents







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



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



|                                 |  |                                    |       |        |   |   |        |   |        |  |       |    |  |   |       |   |   |   |        |      |  |  |       |    |  |   |       |  
|-------------------------------- |  | ---------------------------------- | ----- | ------ | - | - | ------ | - | ------ |  | ----- | -- |  | - | ----- | - | - | - | ------ | ---- |  |  | ----- | -- |  | - | ----- | -
|                                 |  | December 31,                       |      
|                                 |  |                                    |      
|                                 |  |                                    |       | Change |   |   |        |   | Change |  |       |   
|                                 |  |                                    |       |        |   |   |        |   |        |  |       |   
|                                 |  | 2004                               |       |        | $ |   |        | % |        |  | 2003  |    |  | $ |       |   | % |   |        | 2002 | 
|                                 |  |                                    |       |        |   |   |        |   |        |  |       |    |  |   |       |   |   |   |        |      | 
|                                 |  | (In thousands, except percentages) |      
|Research and development         |  | $                                  | 3,298 |        |   | $ | (1,189 | ) |        |  | (26.5 | )% |  | $ | 4,487 |   |   | $ | (1,572 | )    |  |  | (25.9 | )% |  | $ | 6,059 |  
|As a percentage of total revenue |  |                                    | 59.9  | %      |   |   |       |   |        |  | (9.1  | )% |  |   | 69.0  | % |   |   |       |      |  |  | (26.5 | )% |  |   | 95.5  | %









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



|                                 |  |                                    |       |        |   |   |        |   |        |  |       |    |  |   |       |   |   |   |        |      |  |  |       |    |  |   |        |  
|-------------------------------- |  | ---------------------------------- | ----- | ------ | - | - | ------ | - | ------ |  | ----- | -- |  | - | ----- | - | - | - | ------ | ---- |  |  | ----- | -- |  | - | ------ | -
|                                 |  | December 31,                       |      
|                                 |  |                                    |      
|                                 |  |                                    |       | Change |   |   |        |   | Change |  |       |   
|                                 |  |                                    |       |        |   |   |        |   |        |  |       |   
|                                 |  | 2004                               |       |        | $ |   |        | % |        |  | 2003  |    |  | $ |       |   | % |   |        | 2002 | 
|                                 |  |                                    |       |        |   |   |        |   |        |  |       |    |  |   |       |   |   |   |        |      | 
|                                 |  | (In thousands, except percentages) |      
|Sales and marketing              |  | $                                  | 4,071 |        |   | $ | (2,201 | ) |        |  | (35.1 | )% |  | $ | 6,272 |   |   | $ | (4,026 | )    |  |  | (39.1 | )% |  | $ | 10,298 |  
|As a percentage of total revenue |  |                                    | 74.0  | %      |   |   |       |   |        |  | (22.5 | )% |  |   | 96.5  | % |   |   |       |      |  |  | (65.8 | )% |  |   | 162.3  | %



20



---



##### Table of Contents









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



|                                 |  |                                    |       |        |   |   |        |   |        |  |       |    |  |   |       |   |   |   |      |      |  |  |       |    |  |   |       |  
|-------------------------------- |  | ---------------------------------- | ----- | ------ | - | - | ------ | - | ------ |  | ----- | -- |  | - | ----- | - | - | - | ---- | ---- |  |  | ----- | -- |  | - | ----- | -
|                                 |  | December 31,                       |      
|                                 |  |                                    |      
|                                 |  |                                    |       | Change |   |   |        |   | Change |  |       |   
|                                 |  |                                    |       |        |   |   |        |   |        |  |       |   
|                                 |  | 2004                               |       |        | $ |   |        | % |        |  | 2003  |    |  | $ |       |   | % |   |      | 2002 | 
|                                 |  |                                    |       |        |   |   |        |   |        |  |       |    |  |   |       |   |   |   |      |      | 
|                                 |  | (In thousands, except percentages) |      
|General and administrative       |  | $                                  | 1,958 |        |   | $ | (1,981 | ) |        |  | (50.3 | )% |  | $ | 3,939 |   |   | $ | (618 | )    |  |  | (13.6 | )% |  | $ | 4,557 |  
|As a percentage of total revenue |  |                                    | 35.6  | %      |   |   |       |   |        |  | (25.0 | )% |  |   | 60.6  | % |   |   |     |      |  |  | (11.2 | )% |  |   | 71.8  | %







21



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##### Table of Contents





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

|                                 |  |                                    |     |        |   |   |    |   |        |  |      |   |  |   |     |   |   |   |        |      |  |  |       |    |  |   |       |  
|-------------------------------- |  | ---------------------------------- | --- | ------ | - | - | -- | - | ------ |  | ---- | - |  | - | --- | - | - | - | ------ | ---- |  |  | ----- | -- |  | - | ----- | -
|                                 |  | December 31,                       |    
|                                 |  |                                    |    
|                                 |  |                                    |     | Change |   |   |    |   | Change |  |      |  
|                                 |  |                                    |     |        |   |   |    |   |        |  |      |  
|                                 |  | 2004                               |     |        | $ |   |    | % |        |  | 2003 |   |  | $ |     |   | % |   |        | 2002 | 
|                                 |  |                                    |     |        |   |   |    |   |        |  |      |   |  |   |     |   |   |   |        |      | 
|                                 |  | (In thousands, except percentages) |    
|Restructuring and other charges  |  | $                                  | 469 |        |   | $ | 26 |   |        |  | 5.9  | % |  | $ | 443 |   |   | $ | (4,235 | )    |  |  | (90.5 | )% |  | $ | 4,678 |  
|As a percentage of total revenue |  |                                    | 8.5 | %      |   |   |   |   |        |  | 1.7  | % |  |   | 6.8 | % |   |   |       |      |  |  | (66.9 | )% |  |   | 73.7  | %





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

|                                                               |  |                                    |     |        |   |   |   |  |        |      |   |   |   |   |     |   |  |   |        |   |  |  |        |    |  |   |       |  
|-------------------------------------------------------------- |  | ---------------------------------- | --- | ------ | - | - | - |  | ------ | ---- | - | - | - | - | --- | - |  | - | ------ | - |  |  | ------ | -- |  | - | ----- | -
|                                                               |  | December 31,                       |    
|                                                               |  |                                    |    
|                                                               |  |                                    |     | Change |   |   |   |  | Change |      |   |  
|                                                               |  |                                    |     |        |   |   |   |  |        |      |   |  
|                                                               |  | 2004                               |     |        | $ |   | % |  |        | 2003 |   |   | $ |   |     | % |  |   | 2002   |  
|                                                               |  |                                    |     |        |   |   |   |  |        |      |   |   |   |   |     |   |  |   |        |  
|                                                               |  | (In thousands, except percentages) |    
|Write-off of intellectual property and other intangible assets |  | $                                  |    |        |   | $ |  |  |        |      | 0 | % |   | $ |    |   |  | $ | (1,764 | ) |  |  | (100.0 | )% |  | $ | 1,764 |  
|As a percentage of total revenue                               |  |                                    | 0.0 | %      |   |   |  |  |        |      | 0 | % |   |   | 0.0 | % |  |   |       |   |  |  | (27.8  | )% |  |   | 27.8  | %





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

|                                                                                             |  |                                    |     |        |   |   |   |  |        |      |   |   |   |   |     |   |  |   |        |   |  |  |        |    |  |   |       |  
|-------------------------------------------------------------------------------------------- |  | ---------------------------------- | --- | ------ | - | - | - |  | ------ | ---- | - | - | - | - | --- | - |  | - | ------ | - |  |  | ------ | -- |  | - | ----- | -
|                                                                                             |  | December 31,                       |    
|                                                                                             |  |                                    |    
|                                                                                             |  |                                    |     | Change |   |   |   |  | Change |      |   |  
|                                                                                             |  |                                    |     |        |   |   |   |  |        |      |   |  
|                                                                                             |  | 2004                               |     |        | $ |   | % |  |        | 2003 |   |   | $ |   |     | % |  |   | 2002   |  
|                                                                                             |  |                                    |     |        |   |   |   |  |        |      |   |   |   |   |     |   |  |   |        |  
|                                                                                             |  | (In thousands, except percentages) |    
|Amortization of intellectual property, other intangibles and
    deferred stock compensation |  | $                                  |    |        |   | $ |  |  |        |      | 0 | % |   | $ |    |   |  | $ | (1,782 | ) |  |  | (100.0 | )% |  | $ | 1,782 |  
|As a percentage of total revenue                                                             |  |                                    | 0.0 | %      |   |   |  |  |        |      | 0 | % |   |   | 0.0 | % |  |   |       |   |  |  | (28.1  | )% |  |   | 28.1  | %



22



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##### Table of Contents







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

|                                 |  |                                    |     |        |   |   |     |   |        |  |      |   |  |   |     |   |   |   |        |      |  |  |       |    |  |   |       |  
|-------------------------------- |  | ---------------------------------- | --- | ------ | - | - | --- | - | ------ |  | ---- | - |  | - | --- | - | - | - | ------ | ---- |  |  | ----- | -- |  | - | ----- | -
|                                 |  | December 31,                       |    
|                                 |  |                                    |    
|                                 |  |                                    |     | Change |   |   |     |   | Change |  |      |  
|                                 |  |                                    |     |        |   |   |     |   |        |  |      |  
|                                 |  | 2004                               |     |        | $ |   |     | % |        |  | 2003 |   |  | $ |     |   | % |   |        | 2002 | 
|                                 |  |                                    |     |        |   |   |     |   |        |  |      |   |  |   |     |   |   |   |        |      | 
|                                 |  | (In thousands, except percentages) |    
|Interest and other income, net   |  | $                                  | 396 |        |   | $ | 298 |   |        |  | 304  | % |  | $ | 98  |   |   | $ | (1,061 | )    |  |  | (90.5 | )% |  | $ | 1,172 |  
|As a percentage of total revenue |  |                                    | 7.2 | %      |   |   |    |   |        |  | 5.5  | % |  |   | 1.7 | % |   |   |       |      |  |  | (16.8 | )% |  |   | 18.5  | %





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

|                                 |  |                                    |   |        |   |   |        |   |        |  |       |    |  |   |       |   |   |   |       |      |  |  |      |   |  |   |     |  
|-------------------------------- |  | ---------------------------------- | - | ------ | - | - | ------ | - | ------ |  | ----- | -- |  | - | ----- | - | - | - | ----- | ---- |  |  | ---- | - |  | - | --- | -
|                                 |  | December 31,                       |  
|                                 |  |                                    |  
|                                 |  |                                    |   | Change |   |   |        |   | Change |  |       |   
|                                 |  |                                    |   |        |   |   |        |   |        |  |       |   
|                                 |  | 2004                               |   |        | $ |   |        | % |        |  | 2003  |    |  | $ |       |   | % |   |       | 2002 | 
|                                 |  |                                    |   |        |   |   |        |   |        |  |       |    |  |   |       |   |   |   |       |      | 
|                                 |  | (In thousands, except percentages) |  
|Write-down of equity investments |  | $                                  |  |        |   | $ | (1,000 | ) |        |  | (100  | )% |  | $ | 1,000 |   |   | $ | 1,000 |      |  |  | 100  | % |  | $ |    |  
|As a percentage of total revenue |  |                                    |  | %      |   |   |       |   |        |  | (15.4 | )% |  |   | 15.4  | % |   |   |      |      |  |  | 15.4 | % |  |   | 0.0 | %





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



23



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##### Table of Contents





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

Off-Balance Sheet Arrangement


Liquidity and Capital Resources










24



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##### Table of Contents





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



|                            |  |       |       |                        |      |   |     |       |  |     |       |         |       |   |   |  |  |   |   | 
|--------------------------- |  | ----- | ----- | ---------------------- | ---- | - | --- | ----- |  | --- | ----- | ------- | ----- | - | - |  |  | - | - | 
|                            |  |       |       | Payments Due by Period
|                            |  |       |       |                       
|                            |  |       |       | Less                   |      |   |    
|                            |  |       |       | Than 1                 |      |   | 1-3 |       |  | 3-5 |       | After 5
|                            |  | Total |       |                        | Year |   |     | Years |  |     | Years |         | Years
|                            |  |       |       |                        |      |   |     |       |  |     |       |         |      
|Operating lease obligations |  | $     | 1,819 |                        |      | $ | 911 |       |  | $   | 908   |         |       | $ |  |  |  | $ |  | 
|                            |  |       |       |                        |      |   |     |       |  |     |       |         |       |   |  

Effective Corporate Tax Rates








Impact of Inflation and Currency Fluctuations




Recently Issued Accounting Pronouncements




25



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Application of FASB Statement
No. 109 Accounting for Income Taxes


Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision


RISK FACTORS




Risks Relating to Our Business




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





| |                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business strategy requires that we derive a
    significant amount of license revenue from our OAS product. If
    demand for OAS does not increase, our total revenue will not
    increase and our business will suffer.



26



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| |                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have recently restructured our company, which could
    make it more difficult for us to achieve our business objectives
    or could result in further restructurings if we dont meet
    the goals of the restructuring.





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





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



27



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





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





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



28



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





| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | demand for our products and services;                                                               
|
| |  | internal budget constraints and the approval processes of our
    current and prospective customers;
|
| |  | the timing and mix of revenue generated by product licenses and
    professional services;          
|
| |  | the length and unpredictability of our sales cycle;                                                 
|
| |  | loss of customers;                                                                                  
|
| |  | new product introductions or internal development efforts by
    competitors or partners;           
|
| |  | costs related to acquisitions of technology or
    businesses; and                                  
|
| |  | economic conditions generally, as well as those specific to the
    Internet and related industries.





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





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



29



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







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







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



30



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







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





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





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



31



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| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | Our business will suffer if the Internet infrastructure
    cannot support the demands placed on it.





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





| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the economic slowdown continues, or if our revenue does
    not increase in the near future, we may have to implement
    additional plans in order to reduce our operating costs.





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





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



32



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





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





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







33



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





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





| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our financial performance and workforce reductions may
    adversely affect the morale and performance of our personnel and
    our ability to hire new personnel.





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



34



---



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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.





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





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





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





35



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





| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.







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



36



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##### Table of Contents







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



Risks Relating to Our Ordinary Shares




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





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





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



37



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











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








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



38



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



|     |                                      |                                       |   |        |            |  |   |           |   |  |            |        |   |  |   |        |  
|---- | ------------------------------------ | ------------------------------------- | - | ------ | ---------- |  | - | --------- | - |  | ---------- | ------ | - |  | - | ------ | -
|     |                                      | First Qtr                             |   |        | Second Qtr |  |   | Third Qtr |   |  | Fourth Qtr |       
|     |                                      |                                       |   |        |            |  |   |           |   |  |            |       
|     |                                      | Unaudited                             |  
|     |                                      | (In thousands, except per share data) |  
|2004 |                                      |                                       |   |        |            |  |   |           |   |  |            |        |   |  |   |       
|     | Total revenue                        |                                       | $ | 1,638  |            |  | $ | 1,147     |   |  | $          | 1,181  |   |  | $ | 1,533  |  
|     | Gross profit                         |                                       |   | 1,221  |            |  |   | 910       |   |  |            | 822    |   |  |   | 1,304  |  
|     | Net loss                             |                                       |   | (1,371 | )          |  |   | (1,323    | ) |  |            | (1,537 | ) |  |   | (912   | )
|     | Basic and diluted net loss per share |                                       |   | (0.03  | )          |  |   | (0.03     | ) |  |            | (0.04  | ) |  |   | (0.02  | )
|2003 |                                      |                                       |   |        |            |  |   |           |   |  |            |        |   |  |   |       
|     | Total revenue                        |                                       | $ | 1,527  |            |  | $ | 1,465     |   |  | $          | 1,754  |   |  | $ | 1,756  |  
|     | Gross profit                         |                                       |   | 1,251  |            |  |   | 1,183     |   |  |            | 1,486  |   |  |   | 1,397  |  
|     | Net loss                             |                                       |   | (3,638 | )          |  |   | (2,608    | ) |  |            | (2,490 | ) |  |   | (1,990 | )
|     | Basic and diluted net loss per share |                                       |   | (0.09  | )          |  |   | (0.07     | ) |  |            | (0.06  | ) |  |   | (0.05  | )



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



|                                                                                                                                |  |  |    | 
|------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Report of Grant Thornton LLP, Independent
    Registered Public Accounting Firm                                                 |  |  | 40 | 
|Report of Ernst & Young LLP,
    Independent Registered Public Accounting Firm                                                  |  |  | 41 | 
|Report of Kost Forer Gabbay &
    Kasierer, a member of Ernst & Young Global, Independent
    Registered Public Accounting Firm |  |  | 42 | 
|Consolidated Balance Sheets                                                                                                     |  |  | 43 | 
|Consolidated Statements of Operations                                                                                           |  |  | 44 | 
|Consolidated Statements of
    Shareholders Equity                                                                             |  |  | 45 | 
|Consolidated Statements of Cash Flows                                                                                           |  |  | 46 | 
|Notes to the Consolidated Financial
    Statements                                                                              |  |  | 47 | 

39



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Report of Independent Registered Public Accounting Firm
















| |                       
| | ----------------------
| | /s/ GRANT THORNTON LLP





40



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REPORT OF INDEPENDENT AUDITORS














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





41



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REPORT OF INDEPENDENT AUDITORS














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





42



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BACKWEB TECHNOLOGIES LTD.





CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 |                                            |          |         |        |     |          |         |        | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------- | ------- | ------ | --- | -------- | ------- | ------ | 
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    | December 31,                                                                                                                                                                                                                    |                                           
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 |                                           
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    | 2004                                                                                                                                                                                                                            |                                            |          | 2003    |       
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 |                                            |          |         |       
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    | (In thousands, except                                                                                                                                                                                                           |                                           
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    | share and per share data)                                                                                                                                                                                                       |                                           
|ASSETS                                                                                                                                                                                                                                                                                                                                              
|Current assets:                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                    |                                                                                                                                                                                                                                 |                                            |          |         |        |     |         
|                                                                                                                                                                                                                                                                                                                                                     | Cash and cash equivalents                                                                                                                          |                                                                                                                                                                                                                                 | $                                          | 5,213    |         |        | $   | 4,026    |        
|                                                                                                                                                                                                                                                                                                                                                     | Short-term investments                                                                                                                             |                                                                                                                                                                                                                                 |                                            | 5,107    |         |        |     | 10,431   |        
|                                                                                                                                                                                                                                                                                                                                                     | Trade accounts receivable, net of allowance for doubtful
    accounts of $643,000 and $2.1 million at December 31,
    2004 and 2003, respectively |                                                                                                                                                                                                                                 |                                            | 1,677    |         |        |     | 2,403    |        
|                                                                                                                                                                                                                                                                                                                                                     | Other accounts receivables and prepaid expenses                                                                                                    |                                                                                                                                                                                                                                 |                                            | 378      |         |        |     | 782      |        
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 |                                            |          |         |       
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 | Total current assets                       |          |         | 12,375 |     |          |         | 17,642 | 
|Long-term investments and other long term assets                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 | 26                                         |          |         |        | 572 |         
|Property and equipment, net                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                    |                                                                                                                                                                                                                                 | 154                                        |          |         |        | 301 |         
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 |                                            |          |         |       
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 | Total assets                               |          | $       | 12,555 |     |          | $       | 18,515 | 
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 |                                            |          |         |       
|                                                                                                                                                                                                                                                                                                                                                    
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                                                                                                                
|Current liabilities:                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                    |                                                                                                                                                                                                                                 |                                            |          |         |        |     |         
|                                                                                                                                                                                                                                                                                                                                                     | Accounts payable                                                                                                                                   |                                                                                                                                                                                                                                 | $                                          | 175      |         |        | $   | 403      |        
|                                                                                                                                                                                                                                                                                                                                                     | Accrued liabilities                                                                                                                                |                                                                                                                                                                                                                                 |                                            | 1,625    |         |        |     | 3,813    |        
|                                                                                                                                                                                                                                                                                                                                                     | Deferred revenue                                                                                                                                   |                                                                                                                                                                                                                                 |                                            | 2,672    |         |        |     | 1,125    |        
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 |                                            |          |         |       
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 | Total current liabilities                  |          |         | 4,472  |     |          |         | 5,341  | 
|                                                                                                                                                                                                                                                                                                                                                     | Accrued severance pay, net                                                                                                                         |                                                                                                                                                                                                                                 |                                            | 85       |         |        |     | 108      |        
|                                                                                                                                                                                                                                                                                                                                                     | Long-term deferred revenue                                                                                                                         |                                                                                                                                                                                                                                 |                                            | 60       |         |        |     | 105      |        
|Commitments and contingencies                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                    |                                                                                                                                                                                                                                 |                                            |          |         |        |     |         
|Shareholders equity:                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                    |                                                                                                                                                                                                                                 |                                            |          |         |        |     |         
|Preferred Shares, nominal value NIS 0.01 per share;
    50,000,000 shares authorized and zero outstanding at
    December 31, 2004 and December 31, 2003, Series E
    Preferred Shares, nominal value NIS 0.01 per share; zero
    and one share authorized and issued and outstanding at
    December 31, 2004 and December 31, 2003, respectively |                                                                                                                                                    |                                                                                                                                                                                                                                 |                                           |          |         |        |    |         
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    | Ordinary Shares, nominal value NIS 0.03 per share;
    150,067,829 shares authorized at December 31, 2004 and
    2003; 40,560,182 and 39,772,254 shares issued and
    outstanding at December 31, 2004 and 2003, respectively |                                            |          | 151,644 |        |     |          | 151,496 |       
|                                                                                                                                                                                                                                                                                                                                                     | Accumulated other comprehensive income (loss)                                                                                                      |                                                                                                                                                                                                                                 |                                            | (19      | )       |        |     | 9        |        
|                                                                                                                                                                                                                                                                                                                                                     | Accumulated deficit                                                                                                                                |                                                                                                                                                                                                                                 |                                            | (143,687 | )       |        |     | (138,544 | )      
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 |                                            |          |         |       
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 | Total shareholders equity                 |          |         | 7,938  |     |          |         | 12,961 | 
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 |                                            |          |         |       
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 | Total liabilities and shareholders equity |          | $       | 12,555 |     |          | $       | 18,515 | 
|                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                    |                                                                                                                                                                                                                                 |                                            |          |         |       



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BACKWEB TECHNOLOGIES LTD.





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                                             |                                                                              |                                       |        |       |       |   |         |       |        |   |         |        |        | 
|-------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------- | ------ | ----- | ----- | - | ------- | ----- | ------ | - | ------- | ------ | ------ | 
|                                                                                             |                                                                              | Year Ended December 31,               |       
|                                                                                             |                                                                              |                                       |       
|                                                                                             |                                                                              | 2004                                  |        |       | 2003  |   |         | 2002  |       
|                                                                                             |                                                                              |                                       |        |       |       |   |         |       |       
|                                                                                             |                                                                              | (In thousands, except per share data) |       
|Revenue:                                                                                     |                                                                              |                                       |        |       |       |   |         |       |        |   |         |       
|                                                                                             | License                                                                      |                                       | $      | 1,593 |       |   | $       | 3,232 |        |   | $       | 2,119  |       
|                                                                                             | Service                                                                      |                                       |        | 3,906 |       |   |         | 3,270 |        |   |         | 4,228  |       
|                                                                                             |                                                                              |                                       |        |       |       |   |         |       |       
|                                                                                             |                                                                              | Total revenue                         |        |       | 5,499 |   |         |       | 6,502  |   |         |        | 6,347  | 
|Cost of revenue:                                                                             |                                                                              |                                       |        |       |       |   |         |       |        |   |         |       
|                                                                                             | License                                                                      |                                       |        | 72    |       |   |         | 128   |        |   |         | 213    |       
|                                                                                             | Service                                                                      |                                       |        | 1,170 |       |   |         | 1,057 |        |   |         | 3,050  |       
|                                                                                             |                                                                              |                                       |        |       |       |   |         |       |       
|                                                                                             |                                                                              | Total cost of revenue                 |        |       | 1,242 |   |         |       | 1,185  |   |         |        | 3,263  | 
|                                                                                             |                                                                              |                                       |        |       |       |   |         |       |       
|Gross profit                                                                                 |                                                                              |                                       | 4,257  |       |       |   | 5,317   |       |        |   | 3,084   |       
|                                                                                             |                                                                              |                                       |        |       |       |   |         |       |       
|Operating expenses:                                                                          |                                                                              |                                       |        |       |       |   |         |       |        |   |         |       
|                                                                                             | Research and development                                                     |                                       |        | 3,298 |       |   |         | 4,487 |        |   |         | 6,059  |       
|                                                                                             | Sales and marketing                                                          |                                       |        | 4,071 |       |   |         | 6,272 |        |   |         | 10,298 |       
|                                                                                             | General and administrative                                                   |                                       |        | 1,958 |       |   |         | 3,939 |        |   |         | 4,557  |       
|                                                                                             | Restructuring and other charges                                              |                                       |        | 469   |       |   |         | 443   |        |   |         | 4,678  |       
|                                                                                             | Write-off of intellectual property and other purchased
    intangible assets |                                       |        |      |       |   |         |      |        |   |         | 1,764  |       
|                                                                                             | Amortization of intellectual property and other intangible assets            |                                       |        |      |       |   |         |      |        |   |         | 1,566  |       
|                                                                                             | Amortization of deferred stock compensation                                  |                                       |        |      |       |   |         |      |        |   |         | 216    |       
|                                                                                             |                                                                              |                                       |        |       |       |   |         |       |       
|                                                                                             |                                                                              | Total operating expenses              |        |       | 9,796 |   |         |       | 15,141 |   |         |        | 29,138 | 
|                                                                                             |                                                                              |                                       |        |       |       |   |         |       |       
|Loss from operations                                                                         |                                                                              |                                       | (5,539 | )     |       |   | (9,824  | )     |        |   | (26,054 | )     
|Interest and other income, net                                                               |                                                                              |                                       | 396    |       |       |   | 98      |       |        |   | 1,172   |       
|Write down of equity investments                                                             |                                                                              |                                       |       |       |       |   | (1,000  | )     |        |   |        |       
|                                                                                             |                                                                              |                                       |        |       |       |   |         |       |       
|Net loss                                                                                     |                                                                              | $                                     | (5,143 | )     |       | $ | (10,726 | )     |        | $ | (24,882 | )     
|                                                                                             |                                                                              |                                       |        |       |       |   |         |       |       
|Basic and diluted net loss per share                                                         |                                                                              | $                                     | (0.13  | )     |       | $ | (0.27   | )     |        | $ | (0.63   | )     
|                                                                                             |                                                                              |                                       |        |       |       |   |         |       |       
|Weighted average number of shares used in computing basic and
    diluted net loss per share |                                                                              |                                       | 40,711 |       |       |   | 40,000  |       |        |   | 39,284  |       
|                                                                                             |                                                                              |                                       |        |       |       |   |         |       |       



44



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BACKWEB TECHNOLOGIES LTD.





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


|                                                                                                                             |          |                                   |    |   |                 |   |        |            |  |  |            |             |  |               |         |   |              |   |        |               |  |   |               |   |  |               |      |   |        |   |          |         |   |   |         |         |   |   |        |         |  
|---------------------------------------------------------------------------------------------------------------------------- | -------- | --------------------------------- | -- | - | --------------- | - | ------ | ---------- |  |  | ---------- | ----------- |  | ------------- | ------- | - | ------------ | - | ------ | ------------- |  | - | ------------- | - |  | ------------- | ---- | - | ------ | - | -------- | ------- | - | - | ------- | ------- | - | - | ------ | ------- | -
|                                                                                                                             |          | Shareholders Equity              |   
|                                                                                                                             |          |                                   |   
|                                                                                                                             |          | Series E                          |    |   |                 |   | Notes  |            |  |  |            | Accumulated |  |               |        
|                                                                                                                             |          | Preferred Shares                  |    |   | Ordinary Shares |   |        | Receivable |  |  | Deferred   |             |  | Other         |         |   |              |   | Total  |              
|                                                                                                                             |          |                                   |    |   |                 |   |        | from       |  |  | Stock      |             |  | Comprehensive |         |   | Accumulated  |   |        | Comprehensive |  |   | Shareholders |  
|                                                                                                                             |          | Shares                            |    |   | Amount          |   |        | Shares     |  |  | Amount     |             |  | Shareholders  |         |   | Compensation |   |        | Income/(Loss) |  |   | Deficit       |   |  | Income/(Loss) |      |   | Equity |  
|                                                                                                                             |          |                                   |    |   |                 |   |        |            |  |  |            |             |  |               |         |   |              |   |        |               |  |   |               |   |  |               |      |   |        |  
|                                                                                                                             |          | (In thousands, except share data) |   
|Balance at December 31, 2001                                                                                                 |          |                                   | 1  |   |                 |   | 3,454  |            |  |  | 38,613,328 |             |  |               | 147,114 |   |              |   | (1,235 | )             |  |   | (216          | ) |  |               | 400  |   |        |   | (102,936 | )       |   |   |        |         |   |   | 46,581 |        
|Issuance of Ordinary Shares pursuant to options exercised and
    ESPP purchases                                             |          |                                   |   |   |                 |   |       |            |  |  | 736,714    |             |  |               | 299     |   |              |   |       |               |  |   |              |   |  |               |     |   |        |   |         |         |   |   |        |         |   |   | 299    |        
|Exchange of Series E preferred shares                                                                                        |          |                                   | (1 | ) |                 |   | (3,454 | )          |  |  | 422,212    |             |  |               | 3,454   |   |              |   |       |               |  |   |              |   |  |               |     |   |        |   |         |         |   |   |        |         |   |   |       |        
|Forgiveness of shareholder loan                                                                                              |          |                                   |   |   |                 |   |       |            |  |  |           |             |  |               |        |   |              |   | 221    |               |  |   |              |   |  |               |     |   |        |   |         |         |   |   |        |         |   |   | 221    |        
|Repayment of notes receivable from shareholders                                                                              |          |                                   |   |   |                 |   |       |            |  |  |           |             |  |               |        |   |              |   | 508    |               |  |   |              |   |  |               |     |   |        |   |         |         |   |   |        |         |   |   | 508    |        
|Amortization of deferred stock compensation                                                                                  |          |                                   |   |   |                 |   |       |            |  |  |           |             |  |               |        |   |              |   |       |               |  |   | 216           |   |  |               |     |   |        |   |         |         |   |   |        |         |   |   | 216    |        
|Comprehensive loss:                                                                                                          |          |                                   |    |   |                 |   |        |            |  |  |            |             |  |               |         |   |              |   |        |               |  |   |               |   |  |               |      |   |        |   |          |         |   |   |         |         |   |   |        |        
|                                                                                                                             | Net loss |                                   |    |  |                 |   |        |           |  |  |            |            |  |               |         |  |              |   |        |              |  |   |               |  |  |               |      |  |        |   |          | (24,882 | ) |   |         | (24,882 | ) |   |        | (24,882 | )
|Unrealized loss on available for sale marketable securities                                                                  |          |                                   |   |   |                 |   |       |            |  |  |           |             |  |               |        |   |              |   |       |               |  |   |              |   |  |               | (382 | ) |        |   |         |         |   |   | (382    | )       |   |   | (382   | )      
|Unrealized loss on forward exchange contracts                                                                                |          |                                   |    |   |                 |   |        |            |  |  |            |             |  |               |         |   |              |   |        |               |  |   |               |   |  |               | (40  | ) |        |   |         |         |   |   | (40     | )       |   |   | (40    | )      
|                                                                                                                             |          |                                   |    |   |                 |   |        |            |  |  |            |             |  |               |         |   |              |   |        |               |  |   |               |   |  |               |      |   |        |  
|Total comprehensive loss                                                                                                     |          |                                   |   |   |                 |   |       |            |  |  |           |             |  |               |        |   |              |   |       |               |  |   |              |   |  |               |     |   |        |   |         |         |   |   | (25,304 | )       |   |   |       |        
|                                                                                                                             |          |                                   |    |   |                 |   |        |            |  |  |            |             |  |               |         |   |              |   |        |               |  |   |               |   |  |               |      |   |        |  
|Balance at December 31, 2002                                                                                                 |          |                                   |   |   |                 |   |       |            |  |  | 39,772,254 |             |  |               | 150,867 |   |              |   | (506   | )             |  |   |              |   |  |               | (22  | ) |        |   | (127,818 | )       |   |   |        |         |   |   | 22,521 |        
|Issuance of Ordinary Shares pursuant to options exercised, ESPP
    purchases and exchange of Series E preferred shares, net |          |                                   |   |   |                 |   |       |            |  |  | 787,928    |             |  |               | 629     |   |              |   |       |               |  |   |              |   |  |               |     |   |        |   |         |         |   |   |        |         |   |   | 629    |        
|Repayment of notes receivable from shareholders                                                                              |          |                                   |   |   |                 |   |       |            |  |  |           |             |  |               |        |   |              |   | 506    |               |  |   |              |   |  |               |     |   |        |   |         |         |   |   |        |         |   |   | 506    |        
|Comprehensive loss:                                                                                                          |          |                                   |    |   |                 |   |        |            |  |  |            |             |  |               |         |   |              |   |        |               |  |   |               |   |  |               |      |   |        |   |          |         |   |   |         |         |   |   |        |        
|                                                                                                                             | Net loss |                                   |    |  |                 |   |        |           |  |  |            |            |  |               |         |  |              |   |        |              |  |   |               |  |  |               |      |  |        |   |          | (10,726 | ) |   |         | (10,726 | ) |   |        | (10,726 | )
|Unrealized income on available for sale marketable securities                                                                |          |                                   |   |   |                 |   |       |            |  |  |           |             |  |               |        |   |              |   |       |               |  |   |              |   |  |               | 31   |   |        |   |         |         |   |   | 31      |         |   |   | 31     |        
|                                                                                                                             |          |                                   |    |   |                 |   |        |            |  |  |            |             |  |               |         |   |              |   |        |               |  |   |               |   |  |               |      |   |        |  
|Total comprehensive loss                                                                                                     |          |                                   |   |   |                 |   |       |            |  |  |           |             |  |               |        |   |              |   |       |               |  |   |              |   |  |               |     |   |        |   |         |         |   | $ | (10,695 | )       |   |   |       |        
|                                                                                                                             |          |                                   |    |   |                 |   |        |            |  |  |            |             |  |               |         |   |              |   |        |               |  |   |               |   |  |               |      |   |        |  
|Balance at December 31, 2003                                                                                                 |          |                                   |   |   |                 | $ |       |            |  |  | 40,560,182 |             |  | $             | 151,496 |   |              | $ |       |               |  | $ |              |   |  | $             | 9    |   |        | $ | (138,544 | )       |   |   |        |         |   | $ | 12,961 |        
|                                                                                                                             |          |                                   |    |   |                 |   |        |            |  |  |            |             |  |               |         |   |              |   |        |               |  |   |               |   |  |               |      |   |        |  
|Issuance of Ordinary Shares pursuant to options exercised, ESPP
    purchases and exchange of Series E preferred shares, net |          |                                   |   |   |                 |   |       |            |  |  | 271,934    |             |  |               | 148     |   |              |   |       |               |  |   |              |   |  |               |     |   |        |   |         |         |   |   |        |         |   |   | 148    |        
|Comprehensive loss:                                                                                                          |          |                                   |    |   |                 |   |        |            |  |  |            |             |  |               |         |   |              |   |        |               |  |   |               |   |  |               |      |   |        |   |          |         |   |   |         |         |   |   |        |        
|Net loss                                                                                                                     |          |                                   |   |   |                 |   |       |            |  |  |           |             |  |               |        |   |              |   |       |               |  |   |              |   |  |               |     |   |        |   | (5,143   | )       |   |   |        |         |   |   | (5,143 | )      
|Unrealized income on available for sale marketable securities                                                                |          |                                   |   |   |                 |   |       |            |  |  |           |             |  |               |        |   |              |   |       |               |  |   |              |   |  |               | (28  | ) |        |   |         |         |   |   | (28     | )       |   |   | (28    | )      
|Total comprehensive loss                                                                                                     |          |                                   |   |   |                 |   |       |            |  |  |           |             |  |               |        |   |              |   |       |               |  |   |              |   |  |               |     |   |        |   |         |         |   | $ | (10,723 | )       |   |   | 7,939  |        
|                                                                                                                             |          |                                   |    |   |                 |   |        |            |  |  |            |             |  |               |         |   |              |   |        |               |  |   |               |   |  |               |      |   |        |  
|Balance at December 31, 2004                                                                                                 |          |                                   |   |   |                 | $ |       |            |  |  | 40,832,116 |             |  | $             | 151,644 |   |              | $ |       |               |  | $ |              |   |  | $             | (19  | ) |        | $ | (143,687 | )       |   |   |        |         |   | $ | 7,938  |        
|                                                                                                                             |          |                                   |    |   |                 |   |        |            |  |  |            |             |  |               |         |   |              |   |        |               |  |   |               |   |  |               |      |   |        |  



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BACKWEB TECHNOLOGIES LTD.





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                               |                                                                   |                                                                             |                                           |      |        |        |         |       |        |         |         |       |        |         |  
|---------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------- | ---- | ------ | ------ | ------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | -
|                                                                                               |                                                                   | Year Ended December 31,                                                     |                                          
|                                                                                               |                                                                   |                                                                             |                                          
|                                                                                               |                                                                   | 2004                                                                        |                                           |      | 2003   |        |         | 2002  |       
|                                                                                               |                                                                   |                                                                             |                                           |      |        |        |         |       |       
|                                                                                               |                                                                   | (In thousands)                                                              |                                          
|Operating activities                                                                           |                                                                   |                                                                             |                                           |      |        |        |         |       |        |         |         |      
|Net loss                                                                                       |                                                                   | $                                                                           | (5,143                                    | )    |        | $      | (10,726 | )     |        | $       | (24,882 | )    
|Adjustments to reconcile net loss to net cash used in operating
    activities:                |                                                                   |                                                                             |                                           |      |        |        |         |       |        |         |         |      
|Write-off of intellectual property and other intangibles                                       |                                                                   |                                                                             |                                          |      |        |        |        |       |        |         | 1,764   |      
|                                                                                               | Amortization of intellectual property and other intangible assets |                                                                             |                                           |     |        |        |         |      |        |         |         | 1,566 |       
|                                                                                               | Amortization of deferred stock compensation                       |                                                                             |                                           |     |        |        |         |      |        |         |         | 273   |       
|                                                                                               | Provision for bad and doubtful debts                              |                                                                             |                                           |     |        |        |         | 104   |        |         |         | 205   |       
|                                                                                               | Depreciation                                                      |                                                                             |                                           | 252  |        |        |         | 878   |        |         |         | 2,262 |       
|                                                                                               | (Gain)/loss on disposal of property and equipment                 |                                                                             |                                           | (260 | )      |        |         |      |        |         |         | 71    |       
|                                                                                               | Forgiveness of shareholder loan                                   |                                                                             |                                           |     |        |        |         |      |        |         |         | 221   |       
|                                                                                               | Write down of an equity investment                                |                                                                             |                                           |     |        |        |         | 1,000 |        |         |         |      |       
|                                                                                               | Changes in operating assets and liabilities:                      |                                                                             |                                           |      |        |        |         |       |        |         |         |       |       
|                                                                                               |                                                                   | Trade accounts receivable                                                   |                                           |      | 726    |        |         |       | (848   | )       |         |       | 1,665  |        
|                                                                                               |                                                                   | Other accounts receivables, prepaid expenses and other long-term
    assets |                                           |      | 950    |        |         |       | 556    |         |         |       | 1,523  |        
|                                                                                               |                                                                   | Accounts payable and accrued liabilities                                    |                                           |      | (2,439 | )      |         |       | (1,130 | )       |         |       | (1,978 | )      
|                                                                                               |                                                                   | Deferred revenue                                                            |                                           |      | 1,501  |        |         |       | (204   | )       |         |       | (1,065 | )      
|                                                                                               |                                                                   |                                                                             |                                           |      |        |        |         |       |       
|                                                                                               |                                                                   |                                                                             | Net cash used in operating activities     |      |        | (4,413 | )       |       |        | (10,370 | )       |       |        | (18,375 | )
|                                                                                               |                                                                   |                                                                             |                                           |      |        |        |         |       |       
|Investing activities                                                                           |                                                                   |                                                                             |                                           |      |        |        |         |       |        |         |         |      
|Disposals/ (purchases) of property and equipment                                               |                                                                   |                                                                             | (105                                      | )    |        |        | (96     | )     |        |         | (60     | )    
|Proceeds from disposals of property and equipment                                              |                                                                   |                                                                             | 260                                       |      |        |        |        |       |        |         |        |      
|Purchases of short-term investments                                                            |                                                                   |                                                                             |                                          |      |        |        |        |       |        |         | (6,656  | )    
|Proceeds from sales of short-term investments                                                  |                                                                   |                                                                             | 5,324                                     |      |        |        | 8,575   |       |        |         | 11,857  |      
|                                                                                               |                                                                   |                                                                             | Net cash provided by investing activities |      |        | 5,479  |         |       |        | 8,479   |         |       |        | 5,141   |  
|                                                                                               |                                                                   |                                                                             |                                           |      |        |        |         |       |       
|Financing activities                                                                           |                                                                   |                                                                             |                                           |      |        |        |         |       |        |         |         |      
|Proceeds from repayment of shareholders notes receivable                                      |                                                                   |                                                                             |                                          |      |        |        | 506     |       |        |         | 508     |      
|Proceeds from issuance of Ordinary Shares pursuant to options
    exercised and ESPP purchases |                                                                   |                                                                             | 121                                       |      |        |        | 629     |       |        |         | 299     |      
|                                                                                               |                                                                   |                                                                             |                                           |      |        |        |         |       |       
|                                                                                               |                                                                   |                                                                             | Net cash provided by financing activities |      |        | 121    |         |       |        | 1,135   |         |       |        | 807     |  
|                                                                                               |                                                                   |                                                                             |                                           |      |        |        |         |       |       
|Net increase or (decrease) in cash and cash equivalents                                        |                                                                   |                                                                             | 1,187                                     |      |        |        | (756    | )     |        |         | 12,427  |      
|Cash and cash equivalents at beginning of the year                                             |                                                                   |                                                                             | 4,026                                     |      |        |        | 4,782   |       |        |         | 17,209  |      
|                                                                                               |                                                                   |                                                                             |                                           |      |        |        |         |       |       
|Cash and cash equivalents at end of the year                                                   |                                                                   | $                                                                           | 5,213                                     |      |        | $      | 4,026   |       |        | $       | 4,782   |      
|                                                                                               |                                                                   |                                                                             |                                           |      |        |        |         |       |       
|Supplemental disclosure of non-cash investing and financing
    transactions                   |                                                                   |                                                                             |                                           |      |        |        |         |       |        |         |         |      
|Exchange of Series E Preferred Stock to Ordinary Shares                                        |                                                                   | $                                                                           |                                          |      |        | $      |        |       |        | $       | 3,454   |      
|                                                                                               |                                                                   |                                                                             |                                           |      |        |        |         |       |       
|Forfeiture of restricted shares                                                                |                                                                   | $                                                                           |                                          |      |        | $      |        |       |        | $       |        |      
|                                                                                               |                                                                   |                                                                             |                                           |      |        |        |         |       |       
|Interest paid                                                                                  |                                                                   | $                                                                           |                                          |      |        | $      |        |       |        | $       |        |      
|                                                                                               |                                                                   |                                                                             |                                           |      |        |        |         |       |       
|Taxes paid                                                                                     |                                                                   | $                                                                           | 59                                        |      |        | $      | 78      |       |        | $       | 59      |      
|                                                                                               |                                                                   |                                                                             |                                           |      |        |        |         |       |       



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BACKWEB TECHNOLOGIES LTD.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                                       
|-- | --------------------------------------
|1. | Organization and Basis of Presentation













|   |                                           
|-- | ------------------------------------------
|2. | Summary of Significant Accounting Policies





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



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




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







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





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





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







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





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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




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





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



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







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







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



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)
















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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)








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





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





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





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





51



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






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







| |                   
| | ------------------
| | Net Loss Per Share





|                                                              |                                                    |                         |        |        |      |   |         |        |   |   |         |        |  
|------------------------------------------------------------- | -------------------------------------------------- | ----------------------- | ------ | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                                                              |                                                    | Year Ended December 31, |       
|                                                              |                                                    |                         |       
|                                                              |                                                    | 2004                    |        |        | 2003 |   |         | 2002   |  
|                                                              |                                                    |                         |        |        |      |   |         |        |  
|Net loss                                                      |                                                    | $                       | (5,143 | )      |      | $ | (10,726 | )      |   | $ | (24,882 | )     
|Basic and diluted:                                            |                                                    |                         |        |        |      |   |         |        |   |   |         |       
|                                                              | Weighted-average shares                            |                         |        | 41,144 |      |   |         | 40,299 |   |   |         | 39,339 |  
|                                                              | Less weighted-average shares subject to repurchase |                         |        | (433   | )    |   |         | (299   | ) |   |         | (55    | )
|                                                              |                                                    |                         |        |        |      |   |         |        |  
|Shares used in computing basic and diluted net loss per share |                                                    |                         | 40,711 |        |      |   | 40,000  |        |   |   | 39,284  |       
|                                                              |                                                    |                         |        |        |      |   |         |        |  
|Basic and diluted net loss per share                          |                                                    | $                       | (0.13  | )      |      | $ | (0.27   | )      |   | $ | (0.63   | )     
|                                                              |                                                    |                         |        |        |      |   |         |        |  



52



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






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







|                          |  |              |     |   |      |  |     |      |  |  |     |  
|------------------------- |  | ------------ | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                          |  | Year Ended   |    
|                          |  | December 31, |    
|                          |  |              |    
|Stock Options             |  | 2004         |     |   | 2003 |  |     | 2002 | 
|                          |  |              |     |   |      |  |     |      | 
|Risk-free interest rates  |  |              | 3.6 | % |      |  | 3.3 | %    |  |  | 3.8 | %
|Expected lives (in years) |  |              | 5   |   |      |  | 5   |      |  |  | 5   |  
|Dividend yield            |  |              | 0   | % |      |  | 0   | %    |  |  | 0   | %
|Expected volatility       |  |              | 124 | % |      |  | 123 | %    |  |  | 121 | %

|                          |  |              |     |   |      |  |     |      |  |  |     |  
|------------------------- |  | ------------ | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                          |  | Year Ended   |    
|                          |  | December 31, |    
|                          |  |              |    
|Stock Purchase Shares     |  | 2004         |     |   | 2003 |  |     | 2002 | 
|                          |  |              |     |   |      |  |     |      | 
|Risk-free interest rates  |  |              | 3.6 | % |      |  | 3.3 | %    |  |  | 3.8 | %
|Expected lives (in years) |  |              | 0.5 |   |      |  | 0.5 |      |  |  | 0.5 |  
|Dividend yield            |  |              | 0   | % |      |  | 0   | %    |  |  | 0   | %
|Expected volatility       |  |              | 124 | % |      |  | 123 | %    |  |  | 121 | %



|                                                                                   |  |                                       |        |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                   |  | December 31,                          |       
|                                                                                   |  |                                       |       
|                                                                                   |  | 2004                                  |        |   | 2003 |   |         | 2002 | 
|                                                                                   |  |                                       |        |   |      |   |         |      | 
|                                                                                   |  | (In thousands, except per share data) |       
|Net loss as reported                                                               |  | $                                     | (5,143 | ) |      | $ | (10,726 | )    |  | $ | (24,882 | )
|Add  stock based expense reported in net loss                                     |  |                                       |       |   |      |   |        |      |  |   | 216     |  
|Less  stock based compensation expense determined
    under the fair value method |  |                                       | (907   | ) |      |   | (2,155  | )    |  |   | (3,685  | )
|                                                                                   |  |                                       |        |   |      |   |         |      | 
|Pro forma net loss                                                                 |  | $                                     | (6,050 | ) |      | $ | (12,881 | )    |  | $ | (28,351 | )
|                                                                                   |  |                                       |        |   |      |   |         |      | 
|Pro forma basic and diluted net loss per share                                     |  | $                                     | (0.15  | ) |      | $ | (0.32   | )    |  | $ | (0.72   | )
|                                                                                   |  |                                       |        |   |      |   |         |      | 
|Basic and diluted net loss per share                                               |  | $                                     | (0.13  | ) |      | $ | (0.27   | )    |  | $ | (0.63   | )
|                                                                                   |  |                                       |        |   |      |   |         |      | 

53



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






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









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











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





|                  |                                                          |              |   |     |      |   |     |    | 
|----------------- | -------------------------------------------------------- | ------------ | - | --- | ---- | - | --- | -- | 
|                  |                                                          | December 31, |  
|                  |                                                          |              |  
|                  |                                                          | 2004         |   |     | 2003 |  
|                  |                                                          |              |   |     |      |  
|Beginning balance |                                                          | $            | 9 |     |      | $ | (22 | ) 
|                  | Unrealized loss on forward exchange contracts            |              |   |    |      |   |     |   | 
|                  | Unrealized gain/(loss) on available-for-sale investments |              |   | (28 | )    |   |     | 31 | 
|                  |                                                          |              |   |     |      |  
|                  | Total accumulated other comprehensive income (loss)      |              | $ | (19 | )    |   | $   | 9  | 
|                  |                                                          |              |   |     |      |  

54



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




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





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



|                        |        |              |       |            |        |   |           |            |   |   |       |            |  |       |           |        |            |   |   |   |  |   |       |        | 
|----------------------- | ------ | ------------ | ----- | ---------- | ------ | - | --------- | ---------- | - | - | ----- | ---------- |  | ----- | --------- | ------ | ---------- | - | - | - |  | - | ----- | ------ | 
|                        |        | December 31, |      
|                        |        |              |      
|                        |        | 2004         |       |            | 2003   |  
|                        |        |              |       |            |        |  
|                        |        |              |       | Unrealized |        |   | Estimated |            |   |   |       | Unrealized |  |       | Estimated |       
|                        |        | Cost         |       |            | Losses |   |           | Fair Value |   |   | Cost  |            |  | Gains |           |        | Fair Value |  
|                        |        |              |       |            |        |   |           |            |   |   |       |            |  |       |           |        |            |  
|Commercial paper        |        | $            |      |            |        | $ |          |            |   | $ |      |            |  | $     | 9,001     |        |            | $ |  |   |  | $ | 9,001 |       
|Certificates of deposit |        |              | 2,738 |            |        |   | (76       | )          |   |   | 2,662 |            |  |       | 1,421     |        |            |   | 9 |   |  |   | 1,430 |       
|Money market            |        |              | 2,445 |            |        |   |          |            |   |   | 2,445 |            |  |       |          |        |            |   |  |   |  |   |      |       
|                        | Totals |              | $     | 5,183      |        |   | $         | (76        | ) |   | $     | 5,107      |  |       | $         | 10,422 |            |   | $ | 9 |  |   | $     | 10,431 | 
|                        |        |              |       |            |        |   |           |            |   |   |       |            |  |       |           |        |            |  





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



|                                  |  |              |        |   |      |   |        |  
|--------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                  |  | December 31, |       
|                                  |  |              |       
|                                  |  | 2004         |        |   | 2003 |  
|                                  |  |              |        |   |      |  
|Computer and peripheral equipment |  | $            | 3,835  |   |      | $ | 3,871  |  
|Office, furniture and equipment   |  |              | 2,487  |   |      |   | 2,613  |  
|Leasehold improvements            |  |              | 1,135  |   |      |   | 1,128  |  
|                                  |  |              |        |   |      |  
|                                  |  |              | 7,457  |   |      |   | 7,612  |  
|Less: accumulated depreciation    |  |              | (7,303 | ) |      |   | (7,311 | )
|                                  |  |              |        |   |      |  
|Property and equipment, net       |  | $            | 154    |   |      | $ | 301    |  
|                                  |  |              |        |   |      |  





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



55



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)










|   |                      
|-- | ---------------------
|6. | Long-Term Investments









56



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)








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



|                                                   |  |              |       |  |      |   |       | 
|-------------------------------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                                                   |  | December 31, |      
|                                                   |  |              |      
|                                                   |  | 2004         |       |  | 2003 |  
|                                                   |  |              |       |  |      |  
|Accrued employees compensation and related expense |  | $            | 765   |  |      | $ | 1,780 | 
|Sales and marketing events                         |  |              | 17    |  |      |   | 12    | 
|Restructuring accrual                              |  |              | 119   |  |      |   | 534   | 
|Other                                              |  |              | 724   |  |      |   | 1,487 | 
|                                                   |  |              |       |  |      |  
|                                                   |  | $            | 1,625 |  |      | $ | 3,813 | 
|                                                   |  |              |       |  |      |  



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



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







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



57



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)








|                                        |  |              |        |   |            |   |        |       |  |   |        |  
|--------------------------------------- |  | ------------ | ------ | - | ---------- | - | ------ | ----- |  | - | ------ | -
|                                        |  | Involuntary  |        |   | Facilities |   |        |      
|                                        |  | Terminations |        |   | and Other  |   |        | Total | 
|                                        |  |              |        |   |            |   |        |       | 
|Total charge  2002 restructuring       |  |              | 1,600  |   |            |   | 3,100  |       |  |   | 4,700  |  
|                                        |  |              |        |   |            |   |        |       | 
|Cash payments  2002 restructuring      |  |              | (1,300 | ) |            |   | (2,000 | )     |  |   | (3,300 | )
|                                        |  |              |        |   |            |   |        |       | 
|Balance at December 31, 2002            |  |              | 300    |   |            |   | (1,100 | )     |  |   | (1,400 | )
|Change in estimate  2002 restructuring |  |              |       |   |            |   | 400    |       |  |   | 400    |  
|Cash payments  2002 restructuring      |  |              | (300   | ) |            |   | (1,000 | )     |  |   | (1,300 | )
|                                        |  |              |        |   |            |   |        |       | 
|Balance at December 31, 2003            |  |              |       |   |            |   | 500    |       |  |   | 500    |  
|Change in estimate  2002 restructuring |  |              |       |   |            |   | (300   | )     |  |   | (300   | )
|Cash payments  2002 restructuring      |  |              |       |   |            |   | (200   | )     |  |   | (200   | )
|                                        |  |              |        |   |            |   |        |       | 
|Total charge  2004 restructuring       |  |              | 500    |   |            |   |       |       |  |   | 500    |  
|Cash payments  2004 restructuring      |  |              | (400   | ) |            |   |       |       |  |   | (400   | )
|Balance at December 31, 2004            |  | $            | 100    |   |            | $ |       |       |  | $ | 100    |  
|                                        |  |              |        |   |            |   |        |       | 



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



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



|     |  |   |           | 
|---- |  | - | --------- | 
|2005 |  | $ | 911,000   | 
|2006 |  |   | 844,000   | 
|2007 |  |   | 65,000    | 
|2008 |  |   |          | 
|     |  | $ | 1,820,000 | 
|     |  |   |          



58



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




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











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





| |               
| | --------------
| | Line of Credit



59



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




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



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



|                                                             |  |              |            |  |      |  |            | 
|------------------------------------------------------------ |  | ------------ | ---------- |  | ---- |  | ---------- | 
|                                                             |  | December 31, |           
|                                                             |  |              |           
|                                                             |  | 2004         |            |  | 2003 | 
|                                                             |  |              |            |  |      | 
|Exercise of outstanding options                              |  |              | 7,986,485  |  |      |  | 6,791,080  | 
|Ordinary Shares available for grant under stock option plans |  |              | 9,444,026  |  |      |  | 6,717,446  | 
|                                                             |  |              |            |  |      | 
|                                                             |  |              | 17,430,511 |  |      |  | 13,508,526 | 
|                                                             |  |              |            |  |      | 





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







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







60



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)












61



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






|                             |                    |               |           |            |             |  |            |                |           |           |                |              |  |                |      |      |  |   |      |  | 
|---------------------------- | ------------------ | ------------- | --------- | ---------- | ----------- |  | ---------- | -------------- | --------- | --------- | -------------- | ------------ |  | -------------- | ---- | ---- |  | - | ---- |  | 
|                             |                    |               |           |            |             |  |            |                |           | Weighted- |               
|                             |                    | Shares        |           |            |             |  |            |                | Weighted- |           |                | Average Fair | 
|                             |                    | Available for |           |            | Options     |  |            | Exercise Price |           |           | Average        |              |  | Value of       |     
|                             |                    | Grant         |           |            | Outstanding |  |            | per Share      |           |           | Exercise Price |              |  | Option Granted |     
|                             |                    |               |           |            |             |  |            |                |           |           |                |              |  |                |     
|Balance at December 31, 2001 |                    |               | 4,789,065 |            |             |  | 10,011,082 |                |           | $         | 0.01-$5.00     |              |  | $              | 3.66 |      |  | $ | 0.85 | 
|                             | Options authorized |               |           | 1,960,000  |             |  |            |               |           |           |                |             |  |                |      |     |  |   |      |  | 
|                             | Options granted    |               |           | (2,444,904 | )           |  |            | 2,444,904      |           |           | $              | 0.24-$1.32   |  |                | $    | 0.93 |  |   |      |  | 
|                             | Options exercised  |               |           |           |             |  |            | (276,279       | )         |           | $              | 0.01-$0.76   |  |                | $    | 0.25 |  |   |      |  | 
|                             | Options canceled   |               |           | 3,406,933  |             |  |            | (3,406,933     | )         |           | $              | 0.01-$35.00  |  |                | $    | 2.68 |  |   |      |  | 
|                             |                    |               |           |            |             |  |            |                |           |           |                |              |  |                |     
|Balance at December 31, 2002 |                    |               | 7,711,094 |            |             |  | 8,772,774  |                |           | $         | 0.12-$19.00    |              |  | $              | 3.38 |      |  | $ | 0.71 | 
|                             |                    |               |           |            |             |  |            |                |           |           |                |              |  |                |     
|                             | Options granted    |               |           | (1,271,388 | )           |  |            | 1,271,388      |           |           | $              | 0.23-$1.15   |  |                | $    | 0.90 |  |   |      |  | 
|                             | Options exercised  |               |           |           |             |  |            | (591,235       | )         |           | $              | 0.12-$0.77   |  |                | $    | 0.70 |  |   |      |  | 
|                             | Options canceled   |               |           | 2,661,847  |             |  |            | (2,661,847     | )         |           | $              | 0.24-$17.00  |  |                | $    | 2.26 |  |   |      |  | 
|                             |                    |               |           |            |             |  |            |                |           |           |                |              |  |                |     
|Balance at December 31, 2003 |                    |               | 9,101,553 |            |             |  | 6,791,080  |                |           | $         | 0.12-$19.00    |              |  | $              | 3.62 |      |  | $ | 0.78 | 
|                             |                    |               |           |            |             |  |            |                |           |           |                |              |  |                |     
|                             | Options authorized |               |           | 1,960,000  |             |  |            |               |           |           |                |             |  |                |      |     |  |   |      |  | 
|                             | Options granted    |               |           | (3,352,500 | )           |  |            | 3,352,500      |           |           | $              | 0.37-$1.61   |  |                | $    | 0.47 |  |   |      |  | 
|                             | Options exercised  |               |           |           |             |  |            | (117,687       | )         |           | $              | 0.23-$1.05   |  |                | $    | 0.70 |  |   |      |  | 
|                             | Options canceled   |               |           | 1,927,314  |             |  |            | (1,927,314     | )         |           | $              | 0.23-$17.25  |  |                | $    | 1.90 |  |   |      |  | 
|                             |                    |               |           |            |             |  |            |                |           |           |                |              |  |                |     
|Balance at December 31, 2004 |                    |               | 9,636,367 |            |             |  | 8,098,579  |                |           | $         | 0.24-$19.00    |              |  | $              | 2.77 |      |  | $ | 0.38 | 
|                             |                    |               |           |            |             |  |            |                |           |           |                |              |  |                |     

62



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                |  |                     |           |  |                     |  |      |                |  |   |                |  |  |                |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- |  | ------------------- |  | ---- | -------------- |  | - | -------------- |  |  | -------------- | --------- |  |  | - | ----- | 
|                |  | Options Outstanding |           |  | Options Exercisable | 
|                |  |                     |           |  |                     | 
|                |  | Number              |           |  | Weighted Average    |  |      | Weighted       |  |   | Number         |  |  | Weighted       |          
|Range of        |  | Outstanding as      |           |  | Remaining           |  |      | Average        |  |   | Exercisable as |  |  | Average        |          
|Exercise Prices |  | of 12/31/04         |           |  | Contractual Years   |  |      | Exercise Price |  |   | of 12/31/04    |  |  | Exercise Price |          
|                |  |                     |           |  |                     |  |      |                |  |   |                |  |  |                |          
|$ 0.24 - $ 0.37 |  |                     | 137,551   |  |                     |  | 5.05 |                |  | $ | 0.26           |  |  |                | 115,051   |  |  | $ | 0.24  | 
|$ 0.38 - $ 0.39 |  |                     | 2,716,500 |  |                     |  | 6.84 |                |  | $ | 0.39           |  |  |                | 0         |  |  | $ | 0.00  | 
|$ 0.40 - $ 0.60 |  |                     | 1,079,623 |  |                     |  | 6.48 |                |  | $ | 0.57           |  |  |                | 332,579   |  |  | $ | 0.60  | 
|$ 0.61 - $ 0.77 |  |                     | 932,002   |  |                     |  | 3.82 |                |  | $ | 0.74           |  |  |                | 689,647   |  |  | $ | 0.75  | 
|$ 0.81 - $ 1.15 |  |                     | 647,504   |  |                     |  | 5.00 |                |  | $ | 1.11           |  |  |                | 397,971   |  |  | $ | 1.10  | 
|$ 1.16 - $ 1.32 |  |                     | 855,834   |  |                     |  | 6.86 |                |  | $ | 1.32           |  |  |                | 237,084   |  |  | $ | 1.30  | 
|$ 1.33 - $ 5.25 |  |                     | 502,840   |  |                     |  | 2.63 |                |  | $ | 1.95           |  |  |                | 481,664   |  |  | $ | 1.97  | 
|$ 5.26 - $12.56 |  |                     | 441,675   |  |                     |  | 2.73 |                |  | $ | 8.23           |  |  |                | 441,675   |  |  | $ | 8.23  | 
|$12.57 - $19.00 |  |                     | 785,050   |  |                     |  | 2.64 |                |  | $ | 17.26          |  |  |                | 785,050   |  |  | $ | 17.26 | 
|                |  |                     |           |  |                     |  |      |                |  |   |                |  |  |                |          
|$ 0.24 - $19.00 |  |                     | 8,098,579 |  |                     |  | 5.38 |                |  | $ | 2.77           |  |  |                | 3,480,721 |  |  | $ | 5.64  | 







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





| |                   
| | ------------------
| | Stock Option Loans



63



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##### Table of Contents



BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






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





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





|    |             
|--- | ------------
|13. | Income Taxes

Application of FASB Statement
No. 109 Accounting for Income Taxes


Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision




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



| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | Measurement of Taxable Income Under the Income Tax
    (Inflationary Adjustments) Law, 1985:



64



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






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





| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Tax Benefits Under the Law for the Encouragement of Capital
    Investments, 1959:













65



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




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







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



|                  |  |                         |       |  |      |   |        |      |  |   |        | 
|----------------- |  | ----------------------- | ----- |  | ---- | - | ------ | ---- |  | - | ------ | 
|                  |  | Year Ended December 31, |      
|                  |  |                         |      
|                  |  | 2004                    |       |  | 2003 |   |        | 2002 | 
|                  |  |                         |       |  |      |   |        |      | 
|Domestic (Israel) |  | $                       | 4,937 |  |      | $ | 9,144  |      |  | $ | 8,715  | 
|Foreign           |  |                         | 206   |  |      |   | 1,582  |      |  |   | 16,167 | 
|                  |  |                         |       |  |      |   |        |      | 
|                  |  | $                       | 5,143 |  |      | $ | 10,726 |      |  | $ | 24,882 | 
|                  |  |                         |       |  |      |   |        |      | 





| |               
| | --------------
| | Deferred Taxes



|                                               |  |              |        |   |      |   |        |  
|---------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                               |  | December 31, |       
|                                               |  |              |       
|                                               |  | 2004         |        |   | 2003 |  
|                                               |  |              |        |   |      |  
|U.S. net operating loss carryforwards          |  | $            | 2,689  |   |      | $ | 1,864  |  
|Reserves not currently deductible              |  |              | 1,471  |   |      |   | 2,659  |  
|Other, net                                     |  |              | 390    |   |      |   | 3,831  |  
|                                               |  |              |        |   |      |  
|Net deferred assets before valuation allowance |  |              | 4,550  |   |      |   | 8,354  |  
|Valuation allowance                            |  |              | (4,550 | ) |      |   | (8,354 | )
|                                               |  |              |        |   |      |  
|Net deferred tax assets                        |  | $            |       |   |      | $ |       |  
|                                               |  |              |        |   |      |  





|    |                                          
|--- | -----------------------------------------
|14. | Geographic Information and Major Customer



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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                                              |               |                         |       |       |      |   |       |       |  |   |       |       | 
|--------------------------------------------- | ------------- | ----------------------- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                              |               | Year Ended December 31, |      
|                                              |               |                         |      
|                                              |               | 2004                    |       |       | 2003 |   |       | 2002  | 
|                                              |               |                         |       |       |      |   |       |       | 
|Revenue from sales to unaffiliated customers: |               |                         |       |       |      |   |       |       |  |   |       |      
|                                              | North America |                         | $     | 4,537 |      |   | $     | 4,757 |  |   | $     | 3,705 | 
|                                              | Israel        |                         |       | 92    |      |   |       | 795   |  |   |       | 1,731 | 
|                                              | Europe        |                         |       | 870   |      |   |       | 950   |  |   |       | 911   | 
|                                              |               |                         |       |       |      |   |       |       | 
|                                              |               | $                       | 5,499 |       |      | $ | 6,502 |       |  | $ | 6,347 |      
|                                              |               |                         |       |       |      |   |       |       | 

|                   |               |              |     |     |      |   |     |      |  |   |       |       | 
|------------------ | ------------- | ------------ | --- | --- | ---- | - | --- | ---- |  | - | ----- | ----- | 
|                   |               | December 31, |    
|                   |               |              |    
|                   |               | 2004         |     |     | 2003 |   |     | 2002 | 
|                   |               |              |     |     |      |   |     |      | 
|Long-lived assets: |               |              |     |     |      |   |     |      |  |   |       |      
|                   | North America |              | $   | 123 |      |   | $   | 193  |  |   | $     | 704   | 
|                   | Israel        |              |     | 56  |      |   |     | 102  |  |   |       | 1,351 | 
|                   | Other         |              |     | 2   |      |   |     | 6    |  |   |       | 28    | 
|                   |               |              |     |     |      |   |     |      | 
|                   |               | $            | 181 |     |      | $ | 301 |      |  | $ | 2,083 |      
|                   |               |              |     |     |      |   |     |      | 





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

Guarantors Accounting for Guarantees.






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BACKWEB TECHNOLOGIES LTD.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






Other Liabilities and Other Claims. Accounting
for Asset Retirement Obligations,


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












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

Evaluation of disclosure controls and procedures.




Changes in internal control over financial reporting.


69



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|         |                  
|-------- | -----------------
|Item 9B. | Other Information

Litigation against Chris Marshall, a former employee.





PART III







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

Directors and Executive Officers




|               |  |     |    |  |          |                        
|-------------- |  | --- | -- |  | -------- | -----------------------
|Name           |  | Age |    |  | Position
|               |  |     |    |  |         
|Eli Barkat     |  |     | 41 |  |          | Chairman of the Board  
|Uday Bellary   |  |     | 50 |  |          | Director               
|Amir Makleff   |  |     | 57 |  |          | Director               
|Isabel Maxwell |  |     | 54 |  |          | Director               
|William Heye   |  |     | 44 |  |          | Chief Executive Officer
|Ken Holmes     |  |     | 39 |  |          | Vice President, Finance

Eli Barkat


Uday Bellary


Amir Makleff


70



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Isabel Maxwell


William Heye


Ken Holmes




Audit Committee Financial Expert




Section 16(a) Beneficial Ownership Reporting
Compliance






71



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Code of Ethics









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



Summary Compensation Table


|                            |                                             |  |      |                     |  |              |              |         |            |        |        |        |             |  |         |        |  |  |         |         | 
|--------------------------- | ------------------------------------------- |  | ---- | ------------------- |  | ------------ | ------------ | ------- | ---------- | ------ | ------ | ------ | ----------- |  | ------- | ------ |  |  | ------- | ------- | 
|                            |                                             |  |      |                     |  | Long Term    |             
|                            |                                             |  |      | Annual Compensation |  |              | Compensation |        
|                            |                                             |  |      |                     |  |              | Awards       |        
|                            |                                             |  |      |                     |  | Other Annual |              |         | Securities |       
|                            |                                             |  |      |                     |  | Compensation |              |         | Underlying |       
|Name and Principal Position |                                             |  |      | Salary ($)          |  |              | Bonus ($)    |         |            | ($)(6) |        |        | Options (#) | 
|                            |                                             |  |      |                     |  |              |              |         |            |        |        |        |             | 
|Eli Barkat(1)               |                                             |  | 2004 |                     |  |              | 97,542       |         |            |        |       |        |             |  |        |        |  |  | 15,000  |        
|                            | Chairman and former Chief Executive Officer |  |      | 2003                |  |              |              | 207,360 |            |        |        | 85,000 |             |  |         |       |  |  |         |        | 
|                            |                                             |  |      | 2002                |  |              |              | 281,264 |            |        |        |       |             |  |         |       |  |  |         | 725,000 | 
|William Heye(2)             |                                             |  | 2004 |                     |  |              | 180,000      |         |            |        | 44,126 |        |             |  | 11,763  |        |  |  | 700,000 |        
|                            | Chief Executive Officer                     |  |      | 2003                |  |              |              | 180,000 |            |        |        | 13,771 |             |  |         | 50,977 |  |  |         | 60,000  | 
|                            |                                             |  |      | 2002                |  |              |              | 167,250 |            |        |        | 25,001 |             |  |         | 1,752  |  |  |         | 37,500  | 
|Erez Lorber(3)              |                                             |  | 2004 |                     |  |              | 177,808      |         |            |        | 12,000 |        |             |  | 193,842 |        |  |  |        |        
|                            | Former Chief Executive Officer              |  |      | 2003                |  |              |              | 193,500 |            |        |        | 25,755 |             |  |         | 69,600 |  |  |         | 400,000 | 
|                            |                                             |  |      | 2002                |  |              |              | 199,771 |            |        |        | 29,812 |             |  |         | 19,377 |  |  |         | 37,500  | 
|Ken Holmes(4)               |                                             |  | 2004 |                     |  |              | 155,000      |         |            |        | 25,480 |        |             |  |        |        |  |  | 193,000 |        
|                            | Vice President, Finance                     |  |      | 2003                |  |              |              | 99,260  |            |        |        | 9,141  |             |  |         |       |  |  |         | 66,000  | 
|                            |                                             |  |      | 2002                |  |              |              |        |            |        |        |       |             |  |         |       |  |  |         |        | 
|Michael A. Morgan(5)        |                                             |  | 2004 |                     |  |              | 158,333      |         |            |        | 34,228 |        |             |  | 74,314  |        |  |  |        |        
|                            | Former Chief Financial Officer              |  |      | 2003                |  |              |              | 190,000 |            |        |        | 41,120 |             |  |         | 0      |  |  |         | 40,000  | 
|                            |                                             |  |      | 2002                |  |              |              | 69,910  |            |        |        | 12,380 |             |  |         | 0      |  |  |         | 250,000 | 






|    |                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Barkat resigned as Chief Executive Officer on
    January 1, 2004. Mr. Barkat received a salary through
    June 30, 2004, and thereafter was compensated in similarly
    to other directors with no salary paid to him by us after that
    date.
|   
|(2) | Mr. Heye succeeded Mr. Lorber as Chief Executive
    Officer in October 2004.                                                                                                                                                                          
|   
|(3) | Mr. Lorber succeeded Mr. Barkat as Chief Executive
    Officer in January 2004. Mr. Lorber resigned from BackWeb
    effective October 8, 2004.                                                                                                        
|   
|(4) | Mr. Holmes joined BackWeb in May 2003.                                                                                                                                                                                                                 
|   
|(5) | Mr. Morgan resigned as Chief Financial Officer on
    October 8, 2004. Mr. Morgan joined BackWeb in August
    2002.                                                                                                                                   
|   
|(6) | The Other Annual Compensation includes commission
    payments, severance payments, and vacation payout amounts.                                                                                                                                     

Stock Option Grants in Fiscal 2003




72



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Option Grants in Fiscal 2004


|                  |  |             |         |  |               |  |      |             |  |   |            |                      |            |                        |             |  |    |  |         |     |  |   |         |  |  |   |         | 
|----------------- |  | ----------- | ------- |  | ------------- |  | ---- | ----------- |  | - | ---------- | -------------------- | ---------- | ---------------------- | ----------- |  | -- |  | ------- | --- |  | - | ------- |  |  | - | ------- | 
|                  |  |             |         |  |               |  |      |             |  |   |            | Potential Realizable |           
|                  |  |             |         |  |               |  |      |             |  |   |            | Value at Assumed     |           
|                  |  | Number of   |         |  | Percent of    |  |      |             |  |   |            |                      |            | Annual Rates of Stock  |            
|                  |  | Securities  |         |  | Total Options |  |      |             |  |   |            |                      |            | Price Appreciation for |            
|                  |  | Underlying  |         |  | Granted to    |  |      | Exercise or |  |   |            |                      |            |                        | Option Term | 
|                  |  | Options     |         |  | Employees in  |  |      | Base Price  |  |   |            |                      | Expiration |                        |             |  |   
|Name              |  | Granted (#) |         |  | Fiscal Year   |  |      | ($/Share)   |  |   | Grant Date |                      |            | Date                   |             |  | 5% |  |         | 10% | 
|                  |  |             |         |  |               |  |      |             |  |   |            |                      |            |                        |             |  |    |  |         |     | 
|Eli Barkat        |  |             | 15,000  |  |               |  | 0.4  | %           |  | $ | 0.40       |                      |            |                        | 8/10/04     |  |    |  | 8/10/11 |     |  | $ | 2,443   |  |  | $ | 5,692   | 
|William Heye      |  |             | 700,000 |  |               |  | 20.9 | %           |  | $ | 0.39       |                      |            |                        | 11/4/04     |  |    |  | 11/4/11 |     |  |   | 111,138 |  |  |   | 259,000 | 
|Erez Lorber       |  |             |        |  |               |  |     |             |  |   |           |                      |            |                        |            |  |    |  |        |     |  |   |        |  |  |   |        | 
|Ken Holmes        |  |             | 193,000 |  |               |  | 5.8  | %           |  | $ | 0.39       |                      |            |                        | 11/4/04     |  |    |  | 11/4/11 |     |  |   | 30,642  |  |  |   | 71,410  | 
|Michael A. Morgan |  |             |        |  |               |  |     |             |  |   |           |                      |            |                        |            |  |    |  |        |     |  |   |        |  |  |   |        | 

1 48


1 36


1 24


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




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Aggregate Option Exercises in Fiscal 2004


|                  |  |                            |           |  |                      |  |         |             |  |   |               |  |  |   |         | 
|----------------- |  | -------------------------- | --------- |  | -------------------- |  | ------- | ----------- |  | - | ------------- |  |  | - | ------- | 
|                  |  | Number of Securities       |           |  | Value of Unexercised | 
|                  |  | Underlying Unexercised     |           |  | In-the-Money Options | 
|                  |  | Options at Fiscal Year End |           |  | at Fiscal Year End   | 
|                  |  |                            |           |  |                      | 
|Name              |  | Exercisable                |           |  | Unexercisable        |  |         | Exercisable |  |   | Unexercisable | 
|                  |  |                            |           |  |                      |  |         |             |  |   |               | 
|Eli Barkat        |  |                            | 1,114,062 |  |                      |  | 600,938 |             |  | $ | 0             |  |  | $ | 10,500  | 
|William Heye      |  |                            | 298,000   |  |                      |  | 867,500 |             |  | $ | 26,250        |  |  | $ | 568,750 | 
|Erez Lorber       |  |                            | 281,874   |  |                      |  | 565,626 |             |  | $ | 84,687        |  |  | $ | 167,688 | 
|Ken Holmes        |  |                            | 25,250    |  |                      |  | 233,750 |             |  | $ | 16,625        |  |  | $ | 160,475 | 
|Michael A. Morgan |  |                            | 83,333    |  |                      |  | 206,667 |             |  | $ | 88,333        |  |  | $ | 182,667 | 

Employment Agreements and Change of Control Arrangements






Compensation of Directors






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





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Compensation Committee Interlocks and Insider
Participation









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





|                                       |                                                             |                    |  |           |                    |  |  |      |  
|-------------------------------------- | ----------------------------------------------------------- | ------------------ |  | --------- | ------------------ |  |  | ---- | -
|                                       |                                                             | Number of          |  |           | Percentage of      | 
|                                       |                                                             | Ordinary Shares    |  |           | Ordinary Shares    | 
|Beneficial Owner                       |                                                             | Beneficially Owned |  |           | Beneficially Owned | 
|                                       |                                                             |                    |  |           |                    | 
|5% or More Shareholders                |                                                             |                    |  |           |                    |  |  |     
|                                       | EliBarkat Holdings Ltd.(1)                                  |                    |  | 3,352,342 |                    |  |  | 8.2  | %
|                                       | 8 Hamarpe Street                                            |                    |  |           |                    |  |  |      |  
|                                       | Har Hotzvim                                                 |                    |  |           |                    |  |  |      |  
|                                       | Jerusalem 91450 Israel                                      |                    |  |           |                    |  |  |      |  
|                                       | Yuval 63 Holdings (1995) Ltd.(2)                            |                    |  | 3,352,342 |                    |  |  | 8.2  | %
|                                       | 8 Hamarpe Street                                            |                    |  |           |                    |  |  |      |  
|                                       | Har Hotzvim                                                 |                    |  |           |                    |  |  |      |  
|                                       | Jerusalem 91450 Israel                                      |                    |  |           |                    |  |  |      |  
|                                       | NirBarkat Holdings Ltd.(3)                                  |                    |  | 3,352,342 |                    |  |  | 8.2  | %
|                                       | 8 Hamarpe Street                                            |                    |  |           |                    |  |  |      |  
|                                       | Har Hotzvim                                                 |                    |  |           |                    |  |  |      |  
|                                       | Jerusalem 91450 Israel                                      |                    |  |           |                    |  |  |      |  
|Named Executive Officers and Directors |                                                             |                    |  |           |                    |  |  |     
|                                       | Eli Barkat(4)                                               |                    |  | 4,586,154 |                    |  |  | 11.2 | %
|                                       | William Heye(5)                                             |                    |  | 331,542   |                    |  |  |      |  
|                                       | Ken Holmes(6)                                               |                    |  | 31,000    |                    |  |  |      |  
|                                       | Isabel Maxwell(7)                                           |                    |  | 25,312    |                    |  |  | *    |  
|                                       | Uday Bellary(8)                                             |                    |  |           |                    |  |  |      |  
|                                       | Amir Makleff(9)                                             |                    |  |           |                    |  |  |      |  
|                                       | Michael A. Morgan(10)                                       |                    |  |           |                    |  |  |      |  
|                                       | Executive officers and directors as a group (6 persons)(11) |                    |  | 1,613,999 |                    |  |  | 3.9  | %

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



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Eli Barkat substantially controls the voting power of EliBarkat
    Holdings Ltd. The shares listed in the table above for EliBarkat
    Holdings Ltd. do not include (i) 198,131 Ordinary Shares
    owned directly by Mr. Barkat, (ii) 1,000 Ordinary
    Shares owned directly by Mr. Barkats wife, with
    respect to which he disclaims beneficial ownership,
    (iii) and 163,285 Ordinary Shares held by BRM Technologies
    Ltd. in which EliBarkat Holdings Ltd. is a shareholder, with
    respect to which shares Mr. Barkat and EliBarkat Holdings
    Ltd. disclaim control and beneficial ownership.
|   
|(2) | Yuval Rakavy, a former BackWeb director, owns substantially all
    of the equity and voting power of Yuval Rakavy Ltd., the parent
    company of Yuval 63 Holdings (1995) Ltd. The shares listed
    in the table above for Yuval 63 Holdings (1995) Ltd. do not
    include 163,285 Ordinary Shares held by BRM Technologies Ltd. in
    which Yuval 63 Holdings (1995) Ltd. is a shareholder, with
    respect to which shares Mr. Rakay and Yuval 63 Holdings
    (1995) Ltd. disclaim control and beneficial ownership.                                                                                         
|   
|(3) | Nir Barkat, a former BackWeb director, owns substantially all of
    the equity and voting power of Nir Barkat Ltd., the parent
    company of NirBarkat Holdings Ltd. Nir Barkat is the brother of
    Eli Barkat, our Chairman and former Chief Executive Officer. The
    shares listed in the table above for Nir Barkat Ltd. do not
    include 163,285 Ordinary Shares held by BRM Technologies Ltd. in
    which Nir Barkat Ltd. is a shareholder, with respect to which
    shares Mr. Barkat and Nir Barkat Ltd. disclaim control and
    beneficial ownership.                                              
|   
|(4) | The shares listed in the table above for Eli Barkat include
    3,352,342 Ordinary Shares held by EliBarkat Holdings Ltd., an
    entity substantially controlled by Eli Barkat, 1,000 Ordinary
    Shares owned directly by Mr. Barkats wife, with
    respect to which he disclaims beneficial ownership or control,
    and options to purchase 1,232,812 Ordinary Shares that are
    exercisable within sixty days of March 4, 2005.                                                                                                                                                                            
|   
|(5) | The shares listed in the table above for Mr. Heye include
    options to purchase 324,875 Ordinary Shares that are
    exercisable within sixty days of March 4, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(6) | The shares listed in the table above for Mr. Holmes include
    options to purchase 31,500 Ordinary Shares that are
    exercisable within sixty days of March 4, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(7) | The shares listed in the table above for Ms. Maxwell
    include options to purchase 25,312 Ordinary Shares that are
    exercisable within sixty days of March 4, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(8) | The shares listed in the table above for our executive officers
    and directors as a group include 1,613,999 Ordinary Shares
    subject to options which are exercisable within 60 days of
    March 4, 2005.                                                                                                                                                                                                                                                                                                                                                                                                      

Equity Compensation Plan Information






|                                                           |  |                      |           |  |                      |                      |              |                       |  |  |           | 
|---------------------------------------------------------- |  | -------------------- | --------- |  | -------------------- | -------------------- | ------------ | --------------------- |  |  | --------- | 
|                                                           |  |                      |           |  |                      | Number of Securities |             
|                                                           |  |                      |           |  |                      | Remaining Available  |             
|                                                           |  |                      |           |  |                      | for Future Issuance  |             
|                                                           |  | Number of Securities |           |  |                      |                      | under Equity |                      
|                                                           |  | to be Issued upon    |           |  | Weighted-Average     |                      |              | Compensation Plans    | 
|                                                           |  | Exercise of          |           |  | Exercise Price of    |                      |              | (Excluding Securities | 
|                                                           |  | Outstanding Options, |           |  | Outstanding Options, |                      |              | Reflected in the      | 
|Plan Category                                              |  | Warrants and Rights  |           |  | Warrants and Rights  |                      |              | First Column)         | 
|                                                           |  |                      |           |  |                      |                      |              |                       | 
|Equity compensation plans approved by security holders(1)  |  |                      | 8.084,829 |  |                      | $                    | 2.77         |                       |  |  | 7,257,677 | 
|Equity compensation plans not approved by security holders |  |                      | -0-       |  |                      |                      | -0-          |                       |  |  | -0-       | 
|                                                           |  |                      |           |  |                      |                      |              |                       | 
|Total                                                      |  |                      | 8,084,829 |  |                      | $                    | 2.77         |                       |  |  | 7,257,677 | 






|    |                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes our 1996 Israel Stock Option Plan and 1998 United
    States Stock Option Plan, which provide for an annual increase
    in the number of Ordinary Shares available for issuance
    thereunder, on July 1 of each

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | fiscal year, equal to the lesser of (a) 1,960,000 Ordinary
    Shares or (b) 5% of the Ordinary Shares outstanding on that
    date, with 30% of the Ordinary Shares being allocated to the
    1996 Israel Stock Option Plan and 70% of such Shares being
    allocated to the 1998 United States Stock Option Plan. Also
    includes 1,820,608 Ordinary Shares reserved for issuance under
    our 1999 Employee Stock Purchase Plan, which provides for an
    annual increase in the number of shares available for issuance
    thereunder, on July 1 of each fiscal year, equal to the
    lesser of (a) 833,333 Ordinary Shares or (b) 2% of the
    Ordinary Shares outstanding on that date.






|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








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

Principal Accountant Fees and Services




|                   |  |      |         |  |      |   |         | 
|------------------ |  | ---- | ------- |  | ---- | - | ------- | 
|                   |  | 2004 |         |  | 2003 |  
|                   |  |      |         |  |      |  
|Audit Fees         |  | $    | 235,000 |  |      | $ | 240,000 | 
|Audit-Related Fees |  |      |        |  |      |   | 24,000  | 
|Tax Fees           |  |      | 4,000   |  |      |   | 166,000 | 
|All Other Fees     |  |      | 7,000   |  |      |   | 198,000 | 
|                   |  |      |         |  |      |  
|Total              |  | $    | 246,000 |  |      | $ | 628,000 | 
|                   |  |      |         |  |      |  

Audit Fees.


Audit-Related Fees.


Tax Fees.


All Other Fees.




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PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules





| |                         
| | ------------------------
| | 1. Financial Statements.





| |                                  
| | ---------------------------------
| | 2. Financial Statement Schedules.



SCHEDULE II


BACKWEB TECHNOLOGIES, LTD.


SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS


At December 31, 2004


|                                                             |  |            |       |                |               |              |     |            |  |   |            |   |  |   |       | 
|------------------------------------------------------------ |  | ---------- | ----- | -------------- | ------------- | ------------ | --- | ---------- |  | - | ---------- | - |  | - | ----- | 
|                                                             |  |            |       |                |               | Write-off of |     |            | 
|                                                             |  | Balance at |       |                | Provision For |              |     | Previously |  |   | Balance at |  
|                                                             |  | Beginning  |       |                | Doubtful      |              |     | Provided   |  |   | End of     |  
|                                                             |  | of Period  |       |                | Accounts      |              |     | Accounts   |  |   | Period     |  
|                                                             |  |            |       |                |               |              |     |            |  |   |            |  
|                                                             |  |            |       | (In thousands) |               |              |    
|Year Ended December 31, 2004 Allowance for Doubtful Accounts |  | $          | 2,150 |                |               | $            | 0   |            |  | $ | (1,507     | ) |  | $ | 643   | 
|Year Ended December 31, 2003 Allowance for Doubtful Accounts |  | $          | 2,046 |                |               | $            | 104 |            |  | $ | 0          |   |  | $ | 2,150 | 
|Year Ended December 31, 2002 Allowance for Doubtful Accounts |  | $          | 2,957 |                |               | $            | 205 |            |  | $ | (1,116     | ) |  | $ | 2,046 | 





| |             
| | ------------
| | 3. Exhibits.



78



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##### Table of Contents






SIGNATURES






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



| |     |                 
| | --- | ----------------
| | By: | /s/ WILLIAM HEYE

| |                        
| | -----------------------
| |                        
| | William Heye,          
| | Chief Executive Officer





|                                     |  |                                                                          |  |                |  | 
|------------------------------------ |  | ------------------------------------------------------------------------ |  | -------------- |  | 
|Signature                            |  | Title                                                                    |  | Date          
|                                     |  |                                                                          |  |               
|                                    
|/s/ WILLIAM HEYEWilliam
    Heye     |  | Chief Executive Officer
    (Principal Executive Officer)                |  | March 31, 2005
|                                    
|/s/ KEN HOLMESKen
    Holmes         |  | Vice President, Finance
    (Principal Financial and Accounting Officer) |  | March 31, 2005
|                                    
|/s/ ELI BARKATEli
    Barkat         |  | Chairman of the Board of Directors                                       |  | March 31, 2005
|                                    
|/s/ UDAY BELLARYUday
    Bellary     |  | Director                                                                 |  | March 31, 2005
|                                    
|/s/ AMIR MAKLEFFAmir
    Makleff     |  | Director                                                                 |  | March 31, 2005
|                                    
|/s/ ISABEL MAXWELLIsabel
    Maxwell |  | Director                                                                 |  | March 31, 2005

79



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##### Table of Contents






EXHIBIT INDEX


|        |    |             |  |                                                                                                                                                                                                                                         
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 3  | .1          |  | Articles of Association of BackWeb Technologies Ltd., as
    amended(1)                                                                                                                                                                 
|       
|        | 3  | .2          |  | Memorandum of Association of Registrant (English translation)(2)                                                                                                                                                                        
|       
|        | 4  | .1          |  | Specimen of Ordinary Share Certificate.(2)                                                                                                                                                                                              
|       
|        | 10 | .1*         |  | 1996 Israel Stock Option Plan (English translation)(2)                                                                                                                                                                                  
|       
|        | 10 | .2*         |  | Appendix A to Israeli Stock Option Plan, effective
    January 1, 2003(3)                                                                                                                                                               
|       
|        | 10 | .3*         |  | Form of Option Agreement for Israeli Stock Option Plan(3)                                                                                                                                                                               
|       
|        | 10 | .4*         |  | 1996 U.S. Stock Option Plan(4)                                                                                                                                                                                                          
|       
|        | 10 | .5*         |  | 1998 U.S. Stock Option Plan (Amended and Restated as of
    January 1, 2002)(5)                                                                                                                                                         
|       
|        | 10 | .6*         |  | Form of Option Agreement for 1998 U.S. Stock Option Plan(3)                                                                                                                                                                             
|       
|        | 10 | .7*         |  | 1999 Employee Stock Purchase Plan(6)                                                                                                                                                                                                    
|       
|        | 10 | .8          |  | Lease Agreement for 10 Haamal Street, Park Afek, Rosh
    Haayin, Israel (English translation).                                                                                                                                       
|       
|        | 10 | .9          |  | Master Lease Agreement between BackWeb Technologies Inc.
    handspike Properties, L.P. for the premises located at 2077
    Gateway Place, Suite 500, San Jose, California.(7)                                                         
|       
|        | 10 | .10         |  | 1st Amendment to Lease  Expansion, made
    May 12, 2000, between Speiker Properties, L.P. and BackWeb
    Technologies, Inc.(8)                                                                                                       
|       
|        | 10 | .11         |  | 2nd Amendment to Lease  Expansion, made
    November 7, 2000, between Speiker Properties, L.P. and
    BackWeb Technologies, Inc.(9)                                                                                                   
|       
|        | 10 | .12         |  | 3rd Amendment to Lease, made between CA-Gateway Office
    Limited Partnership, as successor by conversion to EOP-Gateway
    Office, L.L.C., as successor in interest to Speiker Properties,
    L.P., and BackWeb Technologies Inc.(3)
|       
|        | 10 | .13         |  | Promissory Note by BackWeb Technologies Inc., as Maker, to
    CA-Gateway Office Limited Partnership, as Payee, date
    October 27, 2003(3)                                                                                            
|       
|        | 10 | .14         |  | Guaranty of Lease by BackWeb Technologies Ltd.(3)                                                                                                                                                                                       
|       
|        | 10 | .15         |  | Guaranty of Note by BackWeb Technologies Ltd.(3)                                                                                                                                                                                        
|       
|        | 10 | .16         |  | Warrant to Purchase 200,000 Ordinary Shares, issued by
    BackWeb Technologies Ltd. to CA-Gateway Office Limited
    Partnership(3)                                                                                                    
|       
|        | 10 | .17         |  | Form of Agreement by and among Interad (1995) Ltd. and
    NirBarkat Holdings Ltd., Eli Barkat Holdings Ltd., Yuval
    63Holdings (1995) Ltd., and Lior Hass and Iftah Sneh.(10)                                                       
|       
|        | 10 | .18*        |  | Offer letter with William Heye                                                                                                                                                                                                          
|       
|        | 10 | .19*        |  | Offer letter with Ken Holmes                                                                                                                                                                                                            
|       
|        | 10 | .20*        |  | Director Cash Compensation Arrangement                                                                                                                                                                                                  
|       
|        | 21 | .1          |  | Subsidiaries of the Registrant.                                                                                                                                                                                                         
|       
|        | 23 | .1          |  | Consent of Grant Thornton LLP, Independent Registered Public
    Accounting Firm                                                                                                                                                        
|       
|        | 23 | .2          |  | Consent of Ernst & Young LLP, Independent Registered
    Public Accounting Firm                                                                                                                                                         
|       
|        | 23 | .3          |  | Consent of Kost, Forer, Gabbay & Kasierer, a member of
    Ernst & Young Global: Independent Registered Public
    Accounting Firm                                                                                                      
|       
|        | 31 | .1          |  | Certification of Principal Executive Officer, pursuant to
    Rule 13a-14(a) Under the Securities Exchange Act of 1934                                                                                                                  
|       
|        | 31 | .2          |  | Certification of Principal Financial Officer, pursuant to
    Rule 13a-14(a) Under the Securities Exchange Act of 1934                                                                                                                  
|       
|        | 32 | .1          |  | Certifications of Chief Executive Officer and Chief Financial
    Officer, pursuant to 18 U.S.C Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                  






| |     |                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated herein by reference to the corresponding Exhibit
    from the Companys Quarterly Report on Form 10-Q for
    the quarterly period ended September 30, 2002, filed
    November 14, 2002.

80



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##### Table of Contents





| |     |                                                                                                                                                                                
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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 the corresponding Exhibit
    from the Companys Annual Report on Form 10-K for the
    year ended December 31, 2003, filed March 30, 2004.
|
| | (4) | Incorporated herein by reference to Exhibit 10.2 from the
    Companys Registration Statement on Form F-1 (File
    No. 333-10358).                                           
|
| | (5) | Incorporated herein by reference to the corresponding Exhibit
    from the Companys Annual Report on Form 10-K for the
    year ended December 31, 2001, filed April 2, 2002. 
|
| | (6) | Incorporated herein by reference to Exhibit 10.4 from the
    Companys Registration Statement on Form F-1 (File
    No. 333-10358).                                           
|
| | (7) | Incorporated herein by reference to Exhibit 10.7 from the
    Companys Registration Statement on Form F-1 (File
    No. 333-10358).                                           
|
| | (8) | Incorporated herein by reference to Exhibit 10.18 from the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 2000, filed April 1, 2001.             
|
| | (9) | Incorporated herein by reference to Exhibit 10.19 from the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 2000, filed April 1, 2001.             



|     |                                                                                                                                     
|---- | ------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated herein by reference to Exhibit 10.8 from the
    Companys Registration Statement on Form F-1 (File
    No. 333-10358).



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

81