SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~For the Quarterly Period Ended March 31, 2005~~

For the Quarterly Period Ended June 30, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~For the Transition period from to~~

For the Transition period from to

Commission File Number 000-26241

BackWeb Technologies Ltd.

(Exact Name of Registrant as Specified in its Charter)

Israel (State or Other Jurisdiction of Incorporation or Organization)		51-2198508 (I.R.S. Employer Identification Number)
Israel		51-2198508
10 Ha’amal Street, Park Afek, Rosh Ha’ayin, Israel (Address of Principal Executive Offices)		48092 (Zip Code)
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)
10 Ha’amal Street, Park Afek, RoshHa’ayin, Israel		48092
(Address of Principal Executive		(Zip Code)
Offices)

(972) 3-6118800

(Registrant’s Telephone Number, Including Area Code)

3 Abba Hillel Street, Ramat Gan, Israel
(Former Address, if Changed Since Last Report

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or ~~(as~~a ~~defined~~non-accelerated infiler. ~~Rule~~See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). ~~Yes~~(Check ~~o No þ~~One):

~~The~~Large ~~registrant~~accelerated ~~had~~filer o Accelerated ~~40,993,109~~filer ~~Ordinary Shares outstanding as of May 9, 2005.~~o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The registrant had 41,250,497 Ordinary Shares outstanding as of August 1, 2006.

BACKWEB TECHNOLOGIES LTD.

REPORT ON FORM 10-Q FOR THE QUARTER ENDED ~~MARCH~~JUNE 3130, ~~2005~~2006

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)		3
Condensed Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004		3
Condensed Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005		3
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004 (Unaudited)		4
Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2006 and 2005 (Unaudited)		4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004 (Unaudited)		5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005 (Unaudited)		5
Notes to Condensed Consolidated Financial Statements (Unaudited)		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1112
Item 3. Quantitative and Qualitative Disclosures About Market Risk		3124
Item 4. Controls and Procedures		3224
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		3324
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		33
Item 1A. Risk Factors		25
Item 3. Defaults Upon Senior Securities		33
Item 2. Changes in Securities and Use of Proceeds		36
Item 4. Submission of Matters to a Vote of Security Holders		33
Item 3. Defaults Upon Senior Securities		36
Item 5. Other Information		33
Item 4. Submission of Matters to a Vote of Security Holders		36
Item 6. Exhibits		33
Item 5. Other Information		36
Signatures		35
Item 6. Exhibits		36
Signatures		37
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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. For example, our statements regarding the expected impact of the restructuring we implemented in the second quarter of 2006 and regarding our revenue and expense trend expectations in this Quarterly Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. 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 these 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 Item 1A. of Part II of this Quarterly Report under the caption “Risk Factors.” Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could prove inaccurate, and, therefore, our actual results may differ materially from such statements. 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 — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

BACKWEB TECHNOLOGIES LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS ~~(in thousands)~~

	March 31,			December 31,
	2005			2004
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,955		$	5,213
Short-term investments		5,138			5,107
Trade accounts receivable, net		1,087			1,677
Other accounts receivable and prepaid expenses		296			378
Total current assets		11,476			12,375
Long-term investments and long-term assets		32			26
Property and equipment, net		135			154
Total assets	$	11,643		$	12,555
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	175		$	175
Accrued liabilities		1,460			1,710
Deferred revenue		2,240			2,672
Total current liabilities		3,875			4,557
Long-term liabilities		47			60
Commitments and contingencies (Note 2)
Shareholders’ equity:
Ordinary Shares		151,670			151,644
Accumulated other comprehensive income		(14	)		(19	)
Accumulated deficit		(143,935	)		(143,687	)
Total shareholders’ equity		7,721			7,938
Total liabilities and shareholders’ equity	$	11,643		$	12,555

(in thousands)

Note: The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date


	June 30,			December 31,
	2006			2005
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,029		$	1,583
Short-term investments		4,139			6,293
Trade accounts receivable, net		1,308			1,554
Other accounts receivable and prepaid expenses		427			325

Total current assets		7,903			9,755
Long-term investments and long-term assets		44			35
Property and equipment, net		177			213

Total assets	$	8,124		$	10,003

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	154		$	247
Accrued liabilities		1,690			1,731
Deferred revenue		890			976

Total current liabilities		2,734			2,924
Long-term liabilities		—			8
Commitments and contingencies (Note 2)
Shareholders’ equity:
Ordinary Shares		152,050			151,763
Accumulated other comprehensive income		—			(2	)
Accumulated deficit		(146,660	)		(144,720	)

Total shareholders’ equity		5,390			7,041

Total liabilities and shareholders’ equity	$	8,124		$	10,003

Note: The ~~accompanying~~balance ~~notes~~sheet ~~are~~at anDecember 31, ~~integral~~2005 ~~part~~has ofbeen ~~the~~derived ~~condensed~~from ~~consolidated~~the audited financial statements at that date.

3The accompanying notes are an integral part of the condensed consolidated financial statements.

~~Table of Contents~~3

BACKWEBTable TECHNOLOGIESof LTD. Contents

~~CONDENSED~~BACKWEB ~~CONSOLIDATED~~TECHNOLOGIES ~~STATEMENTS OF OPERATIONS~~LTD. ~~(in thousands, except per share data)~~

	Three Months Ended
	March 31, 2005			March 31, 2004
	(Unaudited)
Revenue:
License	$	767		$	669
Service		890			969
Total revenue		1,657			1,638
Cost of revenue:
License		5			24
Service		159			393
Total cost of revenue		164			417
Gross profit		1493			1,221
Operating expenses:
Research and development		593			971
Sales and marketing		725			952
General and administrative		404			609
Total operating expenses		1,722			2,532
Loss from operations		(229	)		(1,311	)
Interest and other income/(expense), net		(20	)		(60	)
Net loss	$	(249	)	$	(1,371	)
Basic and diluted net loss per share	$	(0.01	)	$	(0.03	)
Weighted average number of shares used in computing basic and diluted net loss per share		40,877			40,622

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

~~The~~(in ~~accompanying~~thousands, ~~notes~~except ~~are~~per anshare ~~integral part of the condensed consolidated financial statements.~~ data)


	Three Months Ended						Six Months Ended
	June 30, 2006			June 30, 2005			June 30, 2006			June 30, 2005
	(Unaudited)						(Unaudited)
Revenue:
License	$	462		$	859		$	1,253		$	1,626
Service		680			859			1,545			1,749

Total revenue		1,142			1,718			2,798			3,375
Cost of revenue:
License		19			7			40			13
Service		182			193			422			351

Total cost of revenue		201			200			462			364

Gross profit		941			1,518			2,336			3,011
Operating expenses:
Research and development		619			547			1,201			1,140
Sales and marketing		979			805			2,054			1,530
General and administrative		479			446			1,084			850

Total operating expenses		2,077			1,798			4,339			3,520

Loss from operations		(1,136	)		(280	)		(2,003	)		(509	)

Interest and other income, net		40			47			64			27
Net loss	$	(1,096	)	$	(233	)	$	(1,939	)	$	(482	)

Basic and diluted net loss per share	$	(0.03	)	$	(0.01	)	$	(0.05	)	$	(0.01	)

Weighted average number of shares used in computing basic and diluted net loss per share		41,250			40,993			41,181			40,923

~~Table~~The accompanying notes are an integral part of ~~Contents~~the condensed consolidated financial statements.

~~BACKWEB TECHNOLOGIES LTD.~~4

CONDENSEDTable CONSOLIDATEDof STATEMENTS OF CASH FLOWS (in thousands) Contents

	Three Months Ended
	March 31, 2005			March 31, 2004
	Unaudited
Operating Activities
Net loss	$	(249	)	$	(1,371	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		(107	)		93
Changes in operating assets and liabilities:
Trade accounts receivable		590			355
Other receivables, prepaid expenses, and other long-term assets		76			72
Accounts payable and accrued liabilities		(250	)		(427	)
Deferred revenue and long-term liabilities		(446	)		(193	)
Net cash used in operating activities		(386	)		(1,085	)
Investing Activities
Proceeds from disposals / (purchases) of property and equipment		128			(16	)
Proceeds from sales of / (purchases of) short-term investments		(31	)		241
Net cash provided by investing activities		97			225
Financing Activities
Proceeds from issuance of ordinary shares, net		31			971
Net cash provided by / (used in) financing activities		31			971
(Decrease) in cash and cash equivalents		(258	)		(763	)
Cash and cash equivalents at beginning of the period		5,213			4,026
Cash and cash equivalents at end of the period	$	4,955		$	3,263

BACKWEB TECHNOLOGIES LTD.

~~The~~CONDENSED ~~accompanying~~CONSOLIDATED ~~notes~~STATEMENTS ~~are~~OF anCASH ~~integral part of the condensed consolidated financial statements.~~FLOWS

5 (in thousands)


	Six Months Ended
	June 30,			June 30,
	2006			2005
	Unaudited
Operating Activities
Net loss	$	(1,939	)	$	(482	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		75			68
Changes in operating assets and liabilities:
Trade accounts receivable		246			459
Other receivables, prepaid expenses, and other long-term assets		(111	)		194
Accounts payable and accrued liabilities		(134	)		(327	)
Deferred revenue		(94	)		(1,083	)

Net cash used in operating activities		(1,957	)		(1,171	)

Investing Activities
Disposals of property and equipment		(37	)		(121	)
Purchases / (sales) of short-term investments		2,154			(1,072	)

Net cash provided by / (used for) investing activities		2,117			(1,193	)

Financing Activities
Proceeds from issuance of ordinary shares, net		286			65

Net cash provided by financing activities		286			65

Net increase (decrease) in cash and cash equivalents		446			(2,299	)
Cash and cash equivalents at beginning of the period		1,583			5,213

Cash and cash equivalents at end of the period	$	2,029		$	2,914

~~BACKWEB~~The ~~TECHNOLOGIES~~accompanying ~~LTD~~notes are an integral part of the condensed consolidated financial statements.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~5

1.Table Organization and Summary of Significant Accounting Policies Contents

~~Organization~~BACKWEB —TECHNOLOGIES ~~BackWeb Technologies Ltd~~LTD. ~~was incorporated under the laws of Israel in August~~ 1995 and commenced operations in November 1995. BackWeb Technologies Ltd., together with its subsidiaries (collectively, “BackWeb” or the “Company”), is a provider of offline Web infrastructure and application-specific software that enable companies to extend the reach of their Web assets to the mobile community of their customers, partners, and employees. The Company’s products address the need of mobile users who are disconnected from a network to access and transact with critical enterprise Web content and applications, such as sales tools, forecast management, contact lists, service repair guides, expense report updates, pricing data, time sheets, collaboration sessions, work orders, and other essential documents and applications. BackWeb sells its products primarily to end users in a variety of industries, including high technology manufacturing, pharmaceuticals, financial services and insurance, telecommunications, entertainment and media, and government, through its direct sales force, resellers, and OEMs.

~~Basis~~NOTES ofTO ~~Presentation~~CONDENSED —CONSOLIDATED ~~The~~FINANCIAL ~~unaudited interim condensed consolidated financial statements~~STATEMENTS ~~include the accounts of BackWeb Technologies Ltd. and its wholly owned subsidiaries. They have been~~ prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and with the instructions of Form 10-Q and Article 10 of Regulation S-X. All significant intercompany balances and transactions have been eliminated on consolidation. In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) required to fairly state the Company’s financial position, results of operations and cash flows for the periods indicated. The condensed consolidated balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The interim condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. The results of the Company’s operations for the interim periods presented are not necessarily indicative of operating results for the full fiscal year ending December 31, 2005 or any future interim period.

~~Revenue~~1. ~~Recognition~~Organization ~~— To date, the Company has derived its revenue from license fees for its products, maintenance, training,~~ and ~~rendering~~Summary of ~~consulting~~Significant ~~services.~~Accounting ~~The Company sells its~~Policies ~~products primarily through its direct sales force, resellers, and OEMs.~~

~~The~~Organization ~~Company~~— ~~recognizes~~BackWeb ~~software~~Technologies ~~license~~Ltd. ~~revenue~~was inincorporated ~~accordance~~under ~~with~~the ~~Statement~~laws of ~~Position~~Israel ~~97-2,~~in August ~~“Software~~1995 ~~Revenue~~and ~~Recognition~~commenced operations in November 1995. BackWeb Technologies Ltd.,” astogether ~~amended~~with its subsidiaries (collectively, “~~SOP~~BackWeb” ~~97-2~~or the “Company”), ~~and~~is ~~SOP~~a 98provider of offline Web infrastructure and application-9,specific ~~“Modification~~software that enables companies to extend the reach of their ~~SOP~~Web ~~97-2~~assets to the mobile community of their customers, partners, and employees. The Company’s ~~Software~~products ~~Revenue~~address ~~Recognition~~the ~~with~~need ~~Respect~~of tomobile ~~Certain~~users ~~Transactions”~~who ~~(“SOP~~are ~~98-9”).~~disconnected ~~SOP~~from ~~98-9~~a ~~requires~~network to access and ~~that~~transact ~~revenue~~with becritical ~~recognized~~enterprise ~~under~~Web ~~the~~content, ~~“Residual~~such ~~Method”~~as ~~when~~sales ~~vendor~~tools, ~~specific~~forecast ~~objective~~management, ~~evidence~~contact ~~(“VSOE”)~~lists, ofservice ~~fair~~repair ~~value~~guides, ~~exists~~expense ~~for~~report ~~all~~updates, ~~undelivered~~pricing ~~elements~~data, time sheets, collaboration sessions, work orders, and noother ~~VSOE~~essential ~~exists~~documents ~~for~~and ~~the~~applications. ~~delivered~~The Company’s products are ~~elements.~~designed ~~Under~~to reduce network costs and improve the ~~Residual~~productivity ~~Method,~~of ~~any~~increasingly ~~discounts~~mobile inworkforces. BackWeb ~~the~~sells ~~arrangement~~its ~~are~~products ~~allocated~~primarily to end users in a variety of industries, including the ~~delivered~~telecommunications, ~~elements~~financial and computer industries, through its direct sales force, resellers, OEMs and sales/marketing partners.

~~Revenue~~Basis ~~from~~of ~~software~~Presentation ~~license~~— ~~agreements~~The isunaudited ~~recognized~~interim ~~when~~condensed ~~all~~consolidated offinancial statements include the ~~following~~accounts ~~criteria~~of ~~are met~~BackWeb asTechnologies ~~set~~Ltd. ~~forth~~and its wholly owned subsidiaries. They have been prepared in ~~SOP~~accordance ~~97-2:~~with ~~(1) persuasive~~U.S. ~~evidence~~generally ofaccepted anaccounting ~~arrangement~~principles ~~exists;~~for ~~(2) delivery~~interim ~~has~~financial ~~occurred;~~reporting ~~(3) the~~and ~~fee~~with isthe ~~fixed~~instructions orof ~~determinable;~~Form 10-Q and ~~(4)~~Article ~~collectibility~~10 isof ~~probable~~Regulation S-X. ~~The~~All ~~Company~~significant ~~does~~intercompany ~~not~~balances ~~generally~~and ~~grant~~transactions ahave ~~right~~been eliminated upon consolidation. In the opinion of management, ~~return~~the tointerim ~~its~~condensed ~~customers.~~consolidated ~~When~~financial astatements ~~right~~reflect all adjustments (consisting of ~~return~~normal ~~exists,~~recurring adjustments) required to fairly state the Company’s ~~defers~~financial position, ~~revenue~~results ~~until~~of operations and cash flows for the ~~right~~periods ofindicated. ~~return~~The ~~expires,~~condensed consolidated balance sheet at ~~which~~December 31, ~~time~~2005 ~~revenue~~has isbeen ~~recognized~~derived from the audited consolidated ~~provided~~financial statements at that date but does not include all ~~other~~of ~~revenue~~the ~~recognition~~information ~~criteria~~and ~~have~~footnotes required ~~been~~by ~~met~~U.S. Ifgenerally accepted accounting principles for complete financial statements. The interim condensed consolidated financial statements should be read in conjunction with the ~~fee~~notes isto the ~~not~~consolidated ~~fixed~~financial orstatements included in the Company’s Annual Report on Form 10-K for the ~~determinable~~fiscal year ended December 31, ~~revenue~~2005. isThe ~~recognized~~results asof ~~payments~~the ~~become~~Company’s ~~due~~operations ~~from~~for the ~~customer~~interim periods ~~provided~~presented ~~that~~are ~~all~~not necessarily indicative of operating results for the full fiscal year ~~other~~ending ~~revenue~~December 31, ~~recognition~~2006 ~~criteria~~or ~~have~~any ~~been~~future ~~met~~interim period.

AsNet ~~noted~~Loss ~~above,~~Per ~~when~~Share ~~contracts~~—Basic ~~contain~~net ~~multiple~~loss ~~elements~~per ~~wherein~~share ~~VSOE~~is ofcomputed ~~fair~~based ~~value~~on ~~exists~~the ~~for~~weighted average number ~~all~~of ~~undelivered~~Ordinary ~~elements,~~Shares ~~the~~outstanding ~~Company~~during ~~accounts~~each ~~for~~period. ~~the~~Diluted ~~delivered~~net ~~elements~~loss inper ~~accordance~~share ~~with~~is ~~the~~computed based on ~~Residual~~the ~~Method~~weighted ~~prescribed~~average bynumber ~~SOP~~of ~~98-9.~~Ordinary ~~Maintenance~~Shares ~~revenue~~outstanding ~~included~~during inthe ~~these~~period ~~arrangements~~plus ispotentially ~~deferred~~dilutive ~~and~~Ordinary ~~recognized~~Shares onconsidered aoutstanding ~~straight-line~~during ~~basis~~the ~~over~~period ~~the~~in ~~term~~accordance with Statement of Financial ~~the~~Accounting ~~maintenance~~Standard ~~agreement~~(SFAS) No. 128, “Earnings per Share.” The ~~VSOE~~ total number of ~~fair~~Ordinary Shares ~~value~~subject ofto ~~the~~outstanding ~~undelivered~~options ~~elements~~excluded ~~(maintenance,~~from ~~training,~~the ~~and~~diluted ~~consulting~~net ~~services)~~loss isper share calculation ~~determined~~because ~~based~~they onwould ~~the~~be ~~price~~considered ~~charged~~anti-dilutive ~~for~~was ~~the~~6,067,211 ~~undelivered~~and ~~element~~6,196,416 ~~when~~at ~~sold~~June 30, ~~separately~~2006 and 2005, respectively.

The ~~Company~~following ~~licenses~~table ~~its~~presents ~~products on a perpetual and on a term basis. The Company recognizes license revenue arising from~~ the ~~sale~~calculation of ~~perpetual~~basic ~~licenses~~ and ~~multi-year~~diluted ~~term~~net ~~licenses~~loss ~~upon delivery.~~per ~~For~~share ~~term licenses with a contract period of less than two years~~(in thousands, ~~revenue~~except ~~arising~~per ~~from~~share ~~the~~data): ~~sale of such licenses is recognized ratably on a monthly basis.~~


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2006			2005			2006			2005
	Unaudited						Unaudited
Net loss	$	(1,096	)	$	(233	)	$	(1,939	)	$	(482	)

Basic and diluted:
Weighted-average shares		41,250			40,993			41,181			40,923
Less weighted-average shares subject to forfeiture		—			—			—			—

Weighted average number of shares used in computing basic and diluted net loss per share		41,250			40,993			41,181			40,923

Basic and diluted net loss per share	$	(0.03	)	$	(0.01	)	$	(0.05	)	$	(0.01	)

~~Table of Contents~~6

TheTable Company derives revenue primarily from software license fees paid by corporate customers and resellers, and from royalty fees from OEMs earned upon delivery of products. Revenue derived from resellers is not recognized until the software is sold through to the end user. Royalty revenue is recognized when reported to the Company by the OEM after delivery of the applicable products. In addition, the Company has granted the right to use the Company’s products to OEMs and distributors, from which royalty revenue can arise. Contents

~~Service~~Comprehensive ~~revenue~~Loss is— primarily comprised of revenue from standard maintenance agreements, consulting and training fees. Customers licensing products generally purchase the standard annual maintenance agreement for the products. The ~~Company~~following ~~recognizes~~table ~~revenue~~presents ~~from maintenance over~~ the ~~contractual~~ ~~period~~components of ~~the~~comprehensive ~~maintenance~~loss ~~agreement,~~(in ~~which is generally one year. Maintenance is~~thousands): available at multiple levels of support and is priced as a percentage of the license revenue. For those agreements where the maintenance and license is quoted as one fee, the Company values the maintenance as an undelivered element at standard rates and defers this over the contractual maintenance period for revenue recognition purposes. The customer may choose to buy a maintenance contract at its option. Consulting services are billed at an agreed upon rate, plus out-of-pocket expenses, and training services are billed on a per session basis. The Company recognizes service revenue from consulting and training when provided to the customer.

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


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2006			2005			2006			2005
	Unaudited						Unaudited
Net loss	$	(1,096	)	$	(233	)	$	(1,939	)	$	(482	)
Change in net unrealized loss on investments		—			6			1			(8	)
Total comprehensive loss	$	(1,096	)	$	(227	)	$	(1,938	)	$	(490	)

~~Net~~ Stock-Based ~~Loss~~Compensation ~~Per~~— ~~Share~~In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard 123R, which revised FAS 123 — ~~Basic~~“Accounting ~~net~~for ~~loss~~stock ~~per~~based compensation,” (SFAS 123R). SFAS 123R requires all share-based ispayments ~~calculated~~to ~~using~~employees, ~~the~~or ~~weighted~~to ~~average~~non-employee ~~number~~directors as compensation for service on the Board of ~~Ordinary~~Directors, ~~Shares~~to ~~outstanding~~be ~~during~~recognized ~~each~~as ~~period~~compensation expense in the consolidated financial statements based on the fair values of such payments. ~~Diluted~~The ~~net~~Company ~~loss~~maintains ~~per~~shareholder ~~share~~approved stock-based iscompensation ~~computed~~plans, pursuant to which it grants stock-based oncompensation to its ~~the~~employees, ~~weighted~~and ~~average~~to ~~number~~non-employee directors for Board service. These grants are primarily in the form of ~~Ordinary~~options ~~Shares~~that ~~outstanding~~allow ~~during~~a grantee to purchase a fixed number of shares of the ~~period~~Company’s ~~plus~~common ~~potentially~~stock ~~dilutive~~at ~~Ordinary~~a ~~Shares~~fixed ~~considered~~exercise ~~outstanding~~price ~~during~~equal to the ~~period~~market inprice ~~accordance~~of ~~with~~the ~~SFAS~~shares ~~No. 128, “Earnings~~at ~~per~~the ~~Share~~date of the grant.” The options ~~total~~may ~~number~~vest ofon ~~Ordinary~~a ~~Shares~~single ~~subject~~date toor ~~outstanding~~in ~~options~~tranches ~~excluded~~over a period of time, but normally they do not ~~from~~vest unless the ~~diluted~~grantee ~~net~~is ~~loss~~still ~~per~~employed ~~share~~by, ~~calculation~~or ~~because~~is ~~they~~a ~~would~~director beof, ~~considered~~the ~~anti-dilutive~~Company ~~was~~on the vesting date. ~~6,712,016~~The ~~and~~compensation ~~6,877,508~~expense atfor ~~March 31,~~these ~~2005~~grants ~~and~~will ~~2004~~be recognized over the requisite service period, which ~~respectively~~is typically the period over which the stock-based compensation awards vest.

The ~~following~~Company ~~table~~made ~~presents~~no ~~the~~modifications ~~calculation~~to ofoutstanding options with respect to vesting periods or exercise prices prior to adopting SFAS 123R. In March 2005, the ~~basic~~Securities and ~~diluted~~Exchange ~~net~~Commission (SEC) issued ~~loss~~Staff ~~per~~Accounting ~~share~~Bulletin No. 107 (~~in thousands~~SAB 107), ~~except~~which ~~per~~provides ~~share~~guidance ~~data):~~on the implementation of SFAS 123R. The Company applied the principles of SAB 107 in conjunction with its adoption of SFAS 123R.

	Three Months Ended
	March 31,			March 31,
	2005			2004
	Unaudited
Net loss	$	(249	)	$	(1,371	)
Basic and diluted:
Weighted-average shares		40,877			40,622
Less weighted-average shares subject to forfeiture		—			—
Weighted average number of shares used in computing basic and diluted net loss per share		40,877			40,622
Basic and diluted net loss per share	$	(0.01	)	$	(0.03	)

The Company adopted SFAS 123R effective January 1, 2006, using the modified-prospective transition method. Under this transition method, compensation expense will be recognized based on the grant date fair value estimated in accordance with the provisions of SFAS 123R for all new grants effective January 1, 2006, and for options granted prior to but not vested as of December 31, 2005. Prior periods were not restated to reflect the impact of adopting the new standard and therefore do not include compensation expense related to stock option grants for those periods. In accordance with SFAS 123R, the Company recognized stock option related compensation expense of approximately $110,000 for the three-month period ended June 30, 2006 and a total of approximately $217,000 for the six-month period ended June 30, 2006. All options granted in the periods were stock options and the related compensation expense will be recognized on a straight-line basis over the vesting period of each grant, net of estimated forfeitures. The Company’s estimated forfeiture rates are based on its historical experience. The estimated fair value of the options granted through the first half of 2006 and prior years was calculated using a Black Scholes Merton option pricing model (Black Scholes model). The following summarizes the assumptions used in the Black Scholes model as applied in the three and six-month periods ended June 30, 2006:

Comprehensive Loss — The following table presents the components of comprehensive loss (in thousands):


	Three Months Ended
	June 30,
Stock Options	2006
Risk-free interest rates (1)		5.1	%
Expected lives (in years) (2)		6.25
Dividend yield (3)		0	%
Expected volatility (4)		113	%

	Three Months Ended
	Six Months Ended
	March 31,			March 31,
	June 30,
	2005			2004
Stock Options	2006
	Unaudited
Risk-free interest rates (1)		4.7% - 5.1	%
Net loss	$	(249	)	$	(1,371	)
Expected lives (in years) (2)		6.25
Change in net unrealized gain (loss) on investments		(14	)		(26	)
Dividend yield (3)		0	%
Total comprehensive loss	$	(263	)	$	(1,397	)
Expected volatility (4)		83% - 113	%

~~Stock Compensation — BackWeb has elected to follow Accounting Principles Board Opinion No. 25,~~7 “Accounting for Stock Issued to Employees” (“APB 25”), and FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation” (“FIN 44”), in accounting for its employee stock options. Under APB 25, when the exercise price of the Company’s stock options is less than the market price of the underlying Ordinary Shares on the date of grant, compensation expense is recognized.

ProTable formaof information regarding the Company’s net loss and net loss per share is required by SFAS 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS 123. Contents


	Three Months Ended
	June 30,
Stock Purchase Plan Shares	2006
Risk-free interest rates (1)		4.8	%
Expected lives (in years) (2)		.5
Dividend yield (3)		0	%
Expected volatility (4)		113	%


	Six Months Ended
	June 30,
Stock Purchase Plan Shares	2006
Risk-free interest rates (1)		4.8 – 5.2	%
Expected lives (in years) (2)		.5
Dividend yield (3)		0	%
Expected volatility (4)		82% - 113	%

The Company calculated the fair market value of each option grant on the date of grant using the Black-Scholes option-pricing model as prescribed by SFAS 123 and the following assumptions:


(1)		The risk-free interest rate is based on U.S. Treasury debt securities with maturities close to the expected term of the option.

(2)		The expected term represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior

(3)		No cash dividends have been declared on the Company’s common stock since the Company’s inception, and the Company currently does not anticipate paying cash dividends over the expected term of the option.

(4)		Expected volatility is based on relevant historical volatility of the Company’s stock factoring in daily share price observations.

	Three Months Ended
	March 31,			March 31,
Stock Options	2005			2004
Risk-free interest rates		4.2	%		2.8	%
Expected lives (in years)		5			5
Dividend yield		0	%		0	%
Expected volatility		76	%		70	%

At June 30, 2006, approximately $300,000 of unrecognized compensation expense related to stock options is expected to be recognized over a weighted average period of approximately 4.7 years. The resulting effect on net loss and net loss per share attributable to common shareholders is not likely to be representative of the effects in future periods, due to additional grants and subsequent periods of vesting.

	Three Months Ended
	March 31,			March 31,
Stock Purchase Shares	2005			2004
Risk-free interest rates		4.2	%		2.8	%
Expected lives (in years)		.5			.5
Dividend yield		0	%		0	%
Expected volatility		76	%		70	%

Prior to January 1, 2006, the Company accounted for its stock-based compensation plans under Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees.” In accordance with APB 25, the Company recognized no compensation expense for qualified stock option grants. For options issued with an exercise price less than the fair market value of the shares at the date of grant, the Company recognized the difference between the exercise price and fair market value as compensation expense in accordance with APB 25. Prior to January 1, 2006, the Company provided pro forma disclosure amounts in accordance with SFAS No. 123 “Accounting for Stock-Based Compensation,” (SFAS 123) as amended by SFAS No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure” (SFAS 148). As compensation expense was disclosed but not recognized in periods prior to January 1, 2006, no cumulative adjustment for forfeitures was recorded in any subsequent period. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation in the prior three and six-month periods ended June 30, 2005:

Pro forma information under SFAS 123 is as follows (in thousands, except per share data):


	Three
	Months ended
	June 30,
	2005
Net loss as reported	$	(233	)
Stock based compensation expense determined under the fair value method		(115	)

Pro forma net loss	$	(348	)

Net loss per share:
Basic and diluted — as reported	$	(0.01	)

Basic and diluted — pro forma	$	(0.01	)

	Three Months Ended
	March 31,			March 31,
	2005			2004
	Unaudited
Net loss as reported	$	(249	)	$	(1,371	)
Stock based compensation expense determined under the fair value method		(156	)		(377	)
Pro forma net loss	$	(405	)	$	(1,748	)
Net loss per share:
Basic and diluted — as reported	$	(0.01	)	$	(0.03	)
Basic and diluted — pro forma	$	(0.01	)	$	(0.04	)

RecentTable Accounting Pronouncements. In March 2004, the FASB issued EITF Issue No. 03-1 (“EITF 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 includes new guidance for evaluating and recording impairment losses on debt and equity instruments, as well as new disclosure requirements for investments that are deemed to be temporarily impaired. The Company does not expect the adoption of EITF 03-1 will have a material impact on its financial position, results of operations, or cash flows. Contents

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and superseding APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires us to expense grants made under our stock option program. That cost will be recognized over the vesting period of the plans. SFAS No. 123R is effective for periods beginning after December 31, 2005. Upon adoption of SFAS No. 123R, amounts previously disclosed under SFAS No. 123 will be recorded in our statements of operations. We are evaluating the alternatives allowed under the standard.


	Six Months ended
	June 30,
	2005
Net loss as reported	$	(482	)
Stock based compensation expense determined under the fair value method		(271	)

Pro forma net loss	$	(753	)

Net loss per share:
Basic and diluted — as reported	$	(0.01	)

Basic and diluted — pro forma	$	(0.02	)

InThe ~~December 2004,~~Company ~~the~~accounts ~~FASB~~for ~~issued~~stock ~~Staff~~options ~~Position~~granted ~~SFAS~~to ~~No. 109~~non-1,employees ~~“Application~~in ofaccordance ~~FASB Statement~~with ~~No. 109,~~SFAS ~~Accounting~~123 and ~~for~~Emerging ~~Income~~Issues ~~Taxes”~~Task ~~(FSP~~Force ~~No.~~(EITF) ~~109~~96-1)18 to— ~~the~~“Accounting ~~Tax~~For ~~Deduction~~Equity onInstruments ~~Qualified Production~~That ~~Activities~~Are ~~Provided~~Issued byTo Other ~~the~~Than ~~American~~Employees ~~Jobs~~For ~~Creation~~Acquiring, ~~Act~~Or ofIn ~~2004~~Conjunction ~~which~~With ~~was~~Selling, ~~signed~~Goods ~~into~~Or ~~law~~Services,” and, byaccordingly, ~~the~~recognizes ~~President~~as ofexpense the ~~United~~estimated ~~States~~fair onvalue ~~October 22,~~of ~~2004.~~such ~~Companies~~options ~~that~~as ~~qualify~~calculated ~~for~~using the ~~recent~~ ~~tax~~Black ~~law’s~~Scholes ~~deduction~~model. ~~for~~The ~~domestic~~fair ~~production~~value ~~activities~~is ~~must~~remeasured ~~account~~during ~~for~~the itservice asperiod ~~a special deduction under SFAS No. 109~~ and ~~reduce~~is ~~their~~amortized ~~tax~~over the ~~expense~~vesting inperiod ~~the~~of ~~period~~each option or ~~periods~~ the ~~amounts~~recipient’s ~~are deductible~~contractual arrangement, ~~according~~if ~~to FSP No~~shorter. ~~109-1.~~ ~~FSP~~ No~~. 109~~ isstock options ~~effective~~were ~~for~~issued ~~the~~to ~~Company~~non-employees inother ~~fiscal~~than ~~2006. The~~options ~~FASB’s~~granted ~~guidance~~to isnon-employee ~~not~~members ~~expected~~of tothe Board ~~have~~of aDirectors ~~material~~for ~~impact~~service onas ~~the~~Board ~~Company’s financial results~~members.

InRecent ~~December 2004, the FASB also issued Staff Position SFAS No. 109-2, “~~Accounting ~~and Disclosure Guidance for the Foreign Earnings Repatriation Provision” (FSP No~~Pronouncements. ~~109-2) within the~~ American Jobs Creation Act of 2004. The Act provides for a one-time deduction of 85 percent of certain foreign earnings that are repatriated in either an enterprise’s last tax year that began before the date

8 In December 2004, the FASB issued Staff Position SFAS No. 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes” (FSP No. 109-1) to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 which was signed into law by the President of the United States on October 22, 2004. Companies that qualify for the tax law’s deduction for domestic production activities must account for it as a special deduction under SFAS No. 109 and reduce their tax expense in the period or periods the amounts are deductible, according to FSP No. 109-1. FSP No. 109 is effective for the Company in fiscal 2006. The FASB’s guidance is not expected to have a material impact on the Company’s financial results.

~~Table~~ In December 2004, the FASB also issued Staff Position SFAS No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision” (FSP No. 109-2) within the American Jobs Creation Act of ~~Contents~~2004. The Act provides for a one-time deduction of 85 percent of certain foreign earnings that are repatriated in either an enterprise’s last tax year that began before the date of enactment, or the first tax year that begins during the one-year period beginning on the date of enactment. FSP No. 109-2 allows companies additional time to evaluate whether foreign earnings will be repatriated under the repatriation provisions of the new tax law and requires specified disclosures for companies needing the additional time to complete the evaluation. The Company is currently evaluating the repatriation provisions of the Act and will complete its evaluation once guidance has been issued by the Treasury Department on the repatriation provision.

of In ~~enactment~~July 2006, or the ~~first~~FASB ~~tax~~issued ~~year~~Interpretation ~~that~~No. 48, ~~begins~~“Accounting ~~during~~for ~~the~~Uncertainty ~~one-year~~in ~~period~~Income Taxes ~~beginning~~— onan ~~the date~~interpretation of ~~enactment.~~FASB ~~FSP~~Statement No. 109-2” ~~allows~~(“FIN ~~companies~~48”). ~~additional~~Under ~~time~~FIN 48, companies are required to ~~evaluate~~apply ~~whether~~the ~~foreign earnings~~“more ~~will~~likely bethan ~~repatriated~~not” ~~under~~threshold to the ~~repatriation~~recognition ~~provisions~~and derecognition of tax positions. FIN 48 also provides guidance on the ~~new~~measurement of tax ~~law~~positions, ~~and~~balance ~~requires~~sheet ~~specified~~classification, ~~disclosures~~interest ~~for~~and ~~companies~~penalties, ~~needing~~accounting ~~the~~in ~~additional~~interim ~~time~~periods, todisclosure ~~complete~~and ~~the~~transition. FIN ~~evaluation~~48 will be effective beginning January 1, 2007. The Company is currently evaluating the provisions ~~repatriation~~in ~~provisions~~FIN of48; however, at the ~~Act~~present ~~and~~time ~~will~~the ~~complete~~Company ~~its evaluation~~does ~~once~~not ~~guidance~~anticipate ~~has~~the ~~been~~adoption ~~issued~~of FIN by48 ~~the~~will ~~Treasury~~have ~~Department~~a material impact on ~~the~~its ~~repatriation~~consolidated ~~provision~~financial position, ~~which~~ isresults ~~expected~~of ~~later~~operations and incash ~~2005~~flows.

Note 2. Contingencies

Litigation

On November 13, 2001, BackWeb, six of our officers and directors, and various underwriters for our initial public offering were named as defendants in a consolidated action captioned In re BackWeb Technologies Ltd. Initial Public Offering Securities Litigation, Case No. 01-CV-10000, a purported securities class action lawsuit filed in the United States District Court, Southern District of New York. Similar cases have been filed alleging violations of the federal securities laws in the initial public offerings of more than 300 other companies, and these cases have been coordinated for pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92. A consolidated amended complaint filed in the ~~BackWeb~~ case asserts that the prospectus from ~~our~~BackWeb’s June 8, 1999 initial public offering failed to disclose certain alleged improper actions by the underwriters for the offering, including the receipt of excessive brokerage commissions and agreements with customers regarding aftermarket purchases of shares of our stock. The complaint alleges violations of Sections 11 and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated under the Securities Exchange Act of 1934. On or about July 15, 2002, an omnibus motion to dismiss was filed in the coordinated litigation on behalf of defendants, including BackWeb, on common pleadings issues. In October 2002, the Court dismissed all six individual defendants from the litigation without prejudice, pursuant to a stipulation. On February 19, 2003, the Court denied the motion to dismiss with respect to the claims against BackWeb. No trial date has yet been set.

~~A proposal has been made for the settlement and for the release of claims against the issuer~~9 defendants, including BackWeb, has been submitted to the Court. We have agreed to the proposal. The settlement is subject to a number of conditions, including approval by the proposed settling parties and the court.

IfTable the settlement does not occur, and litigation against us continues, we believe we have meritorious defenses and intend to defend the case vigorously. However, the results of any litigation are inherently uncertain and can require significant management attention, and we could be forced to incur substantial expenditures, even if we ultimately prevail. In the event there were an adverse outcome, our business could be harmed. Thus, we cannot assure you that this lawsuit will not materially and adversely affect our business, results of operations, or the price of our Ordinary Shares. Contents

~~From~~A ~~time~~proposal tohas ~~time,~~been wemade ~~are~~for ~~involved~~the insettlement ~~litigation~~and ~~incidental~~release toof ~~the~~claims ~~conduct~~against ofthe ~~our~~issuer defendants, ~~business~~including BackWeb. ~~Apart~~ ~~from~~BackWeb ~~the~~has ~~litigation~~agreed ~~described~~to ~~above,~~the weproposal. ~~are~~The ~~not~~settlement ~~party~~is subject to ~~any~~a ~~lawsuit~~number orof ~~proceeding that~~conditions, inincluding ~~our~~approval ~~opinion~~of the proposed settling parties and the court. In September 2004, isan ~~likely~~agreement of settlement was submitted to ~~seriously~~the ~~harm~~court ~~our~~for ~~business~~preliminary approval.

~~Significant~~ If ~~Risks~~the settlement does not occur, and litigation against BackWeb continues, BackWeb believes it has meritorious defenses and intends to defend the case vigorously. However, the results of any litigation are inherently uncertain and can require significant management attention, and BackWeb could be forced to incur substantial expenditures, even if it ultimately prevails. In the event there were an adverse outcome, BackWeb’s business could be harmed. Thus, BackWeb cannot assure you that this lawsuit will not materially and adversely affect its business, results of operations or the price of its Ordinary Shares.

~~Due~~Additionally, toBackWeb ~~uncertainties~~was injointly ~~the~~named ~~technology market~~ in ~~particular~~a ~~and~~judgment ~~the~~during ~~economy~~September 2005 infor ~~general~~approximately $500,000 ~~the Company~~related ~~has~~to ~~limited~~a ~~visibility~~claim toagainst ~~forecast~~its ~~future~~dormant ~~revenues~~French subsidiary. ~~While~~The ~~the~~judgment ~~Company~~is ~~believes~~related ~~there~~to is a ~~market~~dispute ~~for~~between ~~its~~a ~~products,~~former ~~this~~French ~~lack~~distributor of ~~revenue~~BackWeb ~~visibility~~and ~~exposes~~one of the ~~Company~~distributor’s toend ~~risk~~user customers. ~~should~~While BackWeb believes it ~~not~~has additional defenses against the claim and will ultimately not be ~~able~~responsible tofor ~~adjust~~payments ~~its~~under ~~expenditures~~the tojudgment, ~~mitigate~~BackWeb ~~unfavorable~~accrued ~~trends~~approximately $250,000, or approximately one-half of the total judgment against the distributor and BackWeb, in ~~its~~the ~~revenue~~third quarter of 2005.

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

AsSignificant ~~of March 31, 2005, the Company had a $1.5 million line of credit with a lender. The amount~~Risks of borrowings available under the line of credit is based on a formula using accounts receivable. The line of credit has a stated maturity date of May 21, 2005 and provides for an automatic renewal unless cancelled by either party. The Company expects that the line will be renewed. The line of credit provides that the lender may demand payment in full of the entire outstanding balance of the loan at any time. The line of credit is secured by substantially all of the Company’s assets. The line requires that the Company meet certain financial covenants, provides payment penalties for noncompliance and prepayment, limits the amount of other debt the Company can incur, and limits the amount of spending on fixed assets. During the third quarter of 2004, the Company moved the $500,000 deposit related to its lease space in San Jose, California to a restriction under its line of credit. As a result, at March 31, 2005, the Company had unused borrowing capacity of $785,000 under this line of credit.

9 Due to uncertainties in the technology market in particular and the economy in general, the Company has limited visibility to forecast future revenues. While the Company believes there is a market for its products, this lack of revenue visibility exposes the Company to risk should it not be able to adjust its expenditures to mitigate unfavorable trends in its revenue.

~~Table~~Letter of ~~Contents~~Credit

~~Note~~ In 3February 2001, the Company signed a thirty-day revolving letter of credit of $300,000 in favor of Equity Office LLC (formerly Speiker Properties LLC). ~~Restructuring~~In ~~Liabilities~~conjunction with its lease renegotiation in San Jose, CA, the Company extended this letter of credit to a total of $500,000 in favor of Equity Office LLC in October 2003. The letter of credit extends to the end of the lease in January 2007.

OnLine September 30, 2002, the Company announced a restructuring plan, which was implemented in the three months ended December 31, 2002. The restructuring plan included a reduction in workforce, vacating certain facilities, canceling of ~~office service leases and impairment of fixed assets as a~~Credit result of employee terminations and office consolidation. In accordance with EITF 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs in a Restructuring),” and Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges” (“SAB No. 100”), the Company recorded a charge in 2002 of $4.7 million, which consisted of $1.6 million of severance and benefit costs, which included forgiveness of a $221,000 shareholder note receivable to one employee, $2.7 million of facility costs, $200,000 related to the write-down of fixed assets and $200,000 related to other related restructuring costs. The $1.6 million charge was related to severance and benefits to terminate 61 employees, representing approximately 44% of the Company’s global workforce employed as of September 30, 2002. The $2.7 million charge represented early termination penalties, office restoration costs and an accrual of certain lease commitments. In November 2003, the Company accrued an additional charge of approximately $443,000 due to a change in estimate on its facilities costs, of which approximately $289,000 related to the impairment of lease space in its Canadian subsidiary, $120,000 related to an exchange of warrants to the landlord as part of the final settlement of lease space at its headquarters in San Jose, California and approximately $34,000 of other office lease impairment charges.

~~During~~As ~~the second quarter~~ of ~~2004~~June 30, 2006, the Company ~~settled~~had a ~~lease~~$500,000 ~~agreement~~line ~~related~~of tocredit ~~its Canadian~~with ~~subsidiary~~a ~~for approximately $187,000~~lender. ~~This~~The ~~settlement~~amount ~~was~~of borrowings ~~more~~available ~~favorable~~under ~~than~~the ~~had~~line ~~been originally~~of ~~accrued~~credit ~~for,~~is ~~resulting~~based inon a ~~decrease~~formula inusing ~~restructuring~~accounts ~~expense~~receivable. The line of ~~approximately~~credit ~~$184,000. During~~has ~~the~~a ~~third~~stated ~~quarter~~maturity date of ~~2004~~January 31, ~~the~~2007 ~~Company~~and ~~determined~~provides that ~~there~~the ~~would~~lender bemay demand nopayment ~~future~~in ~~cash requirements~~full ~~under~~of the ~~restructuring~~entire ~~accrual,~~outstanding ~~and~~balance ~~reversed~~of the ~~accrual~~loan inat ~~full~~any time. ~~During~~The ~~the~~line ~~fourth~~of ~~quarter~~credit ofis ~~2004,~~secured by substantially all of the Company’s ~~recorded~~assets. aThe ~~charge~~line ofrequires ~~approximately~~that ~~$500~~the Company meet certain financial covenants,~~000~~ ~~related~~provides topayment ~~the~~penalties ~~termination of~~for 19noncompliance ~~employees~~and ~~throughout~~prepayment, limits the ~~Company,~~amount ~~including~~of other debt the Company’s ~~Chief~~can ~~Executive~~incur, ~~Officer~~ and ~~Chief Financial~~limits ~~Officer.~~the ~~All~~amount ~~amounts~~of ~~related~~spending toon ~~this~~fixed assets. ~~action~~During ~~were~~the ~~expensed~~third inquarter of 2004, ~~and~~the atCompany ~~March 31,~~moved ~~2005~~the $500, ~~there~~000 ~~was~~deposit anrelated ~~accrual~~to ofits lease ~~approximately~~space ~~$20~~in San Jose,~~000~~ ~~related~~California tounder ~~severance~~the ~~and~~line ~~other~~of ~~payments~~credit. ~~yet~~At toJune 30, be2006, the Company had no ~~distributed~~unused borrowing capacity.

~~The~~Note ~~following~~3. ~~table~~Restructuring ~~summarizes the costs and activities related to the 2002 and 2004~~Liabilities ~~restructurings (in thousands):~~

	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
Total charge – 2004 restructuring		20			—			20
Cash payments – 2004 restructuring		(100	)		—			(100	)
Balance at March 31, 2005	$	20		$	—		$	20

During the fourth quarter of 2004, the Company recorded a charge of approximately $500,000 related to the termination of 19 employees throughout the Company, including the Company’s Chief Executive Officer and Chief Financial Officer. All amounts related to this action were expensed in 2004, and at June 30, 2005, there was an accrual of approximately $20,000 related to severance and other payments yet to be distributed. At June 30, 2006, there was no balance remaining related to restructuring charges and all amounts had either been disbursed or reversed.

~~Note 4. Segments and Geographic Information~~10

BackWebTable operates in one industry segment, the development, marketing and sales of network application software. Operations in Israel are primarily related to research and development. Operations in North America and Europe include sales and marketing and administration. The following is a summary of operations within geographic areas based on the location of the legal entity making that sale (in thousands): Contents

10 The following table summarizes the costs and activities related to the 2004 restructuring (in thousands):


	Involuntary			Involuntary
	Terminations			Terminations
Total charge — 2004 restructuring	$	500			500
Cash payments — 2004 restructuring		(400	)		(400	)

Balance at December 31, 2004		100		$	100

Cash payments — 2005 restructuring		(100	)		(100	)

Balance at December 31, 2005	$	—		$	—

	Three Months Ended
	March 31,		March 31,
	2005		2004
	Unaudited
Revenue:
North America	$	1,510	$	1,189
Israel		1		34
Europe		146		415
	$	1,657	$	1,638

Note 4. Segments and Geographic Information

	March 31,		March 31,
	2005		2004
	Unaudited
Long-lived assets:
North America	$	104	$	193
Israel		50		102
Other		13		6
	$	167	$	301

BackWeb operates in one industry segment, the development, marketing and sales of network application software. Operations in Israel are primarily related to research and development. Operations in North America and Europe include sales and marketing, and administration. The following is a summary of operations within geographic areas based on the location of the legal entity making that sale (in thousands):

Revenue generated in the U.S. and Canada (collectively, North America) and Europe is all to customers located in those geographic regions. Revenue generated in Israel consists of export sales to end-customers located in the rest of the world, excluding North America and Europe. OEM sales are made to all geographic regions. One customer accounted for approximately $375,000, or 23% of our total revenue, and another accounted for approximately $330,000, or 20% of our total revenue, in the three months ended March 31, 2005.


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2005		2005		2005		2005
	Unaudited				Unaudited
Revenue:
North America	$	972	$	1,193	$	2,216	$	2,703
Israel		—		1		—		2
Europe		170		524		582		670

	$	1,142	$	1,718	$	2,798	$	3,375

Note 5. Guarantees


	June 30,		December 31,
	2006		2005
			Unaudited
Total assets:
North America	$	1,690	$	2,204
Israel		6,138		7,566
Other		296		233

	$	8,124	$	10,033

~~Under~~Revenue ~~the~~generated ~~terms~~in of the ~~Company’s~~U.S. ~~standard~~and ~~contract~~Canada ~~with~~(collectively, ~~its~~North ~~customers,~~America) ~~the~~and ~~Company~~Europe ~~agrees~~is all to ~~indemnify~~customers ~~the~~located ~~customer~~in ~~against~~those ~~certain~~geographic ~~liabilities~~regions. ~~and~~Revenue ~~damages~~generated in Israel consists of export sales to end-customers located in the ~~extent~~rest ~~such~~of ~~liabilities~~the world, excluding North America and Europe. OEM sales ~~damages~~are ~~arise~~made ~~from~~to ~~claims~~all ~~that~~geographic ~~such~~regions. One customer’s ~~use~~accounted offor ~~the~~approximately ~~Company’s~~$200,000, ~~software~~ or ~~services~~16% ~~infringes~~of ~~intellectual~~our ~~property~~total ~~rights~~revenue, ofand aanother ~~third~~customer ~~party.~~accounted ~~The~~for ~~Company~~approximately ~~believes~~$150,000, ~~that~~or ~~these~~13% ~~terms~~of ~~are~~our ~~common~~total revenue, in the ~~high~~three ~~technology~~months ~~industry~~ended June 30, 2006. ~~The~~One ~~Company~~customer ~~does~~accounted ~~not~~for ~~record~~approximately $330,000, aor ~~liability~~12% ~~for~~of ~~potential~~our ~~litigation claims~~total ~~related~~revenue, toand ~~indemnification~~another ~~obligations~~customer ~~with~~accounted ~~its~~for ~~customers~~approximately as$325,000, or it12% ~~has~~of ~~not~~our ~~had~~total ~~any~~revenue, ~~claims~~in ~~and does~~the ~~not~~six ~~believe~~months ~~any~~ended ~~are~~June 30, ~~likely~~2006.

~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~11

TheTable following discussion and analysis should be read in conjunction with, and is qualified by, our Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this report, as well as the “Risk Factors” section that is set forth below. 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. Contents

~~Overview~~Note 5. Guarantees

WeUnder ~~are in~~ the ~~mobility~~terms ~~market and offer a solution allowing users~~ of ~~enterprise~~the ~~Web applications~~Company’s tostandard ~~synchronize~~contract ~~those~~with ~~Web~~its ~~applications~~customers, tothe ~~laptop~~Company ~~and~~agrees ~~tablet PCs for use by individuals~~to ~~who~~indemnify ~~are frequently disconnected from~~ the ~~network.~~customer ~~Our~~against ~~enabling~~certain ~~software~~liabilities isand ~~designed~~damages to ~~integrate with~~the ~~web~~extent ~~applications~~such inliabilities aand damages ~~flexible~~arise ~~way~~from ~~such~~claims that ~~significant~~such ~~changes~~customer’s ~~are~~use ~~generally~~of ~~not required as changes are made to~~ the ~~company~~Company’s ~~existing~~software ~~enterprise~~or ~~web~~services ~~applications. This approach has the~~infringes ~~potential~~intellectual toproperty ~~bring~~rights ~~mobility~~of toa ~~enterprise~~third ~~web applications quickly and with low total cost of ownership~~party. ~~Our~~The ~~products~~Company ~~address~~believes ~~the~~that ~~need~~these ofterms ~~mobile users who~~ are ~~disconnected~~common ~~from a network to~~in ~~access~~the ~~and~~high ~~transact~~technology ~~with~~industry. ~~critical~~The ~~enterprise~~Company ~~Web~~does ~~content~~not ~~and~~record ~~applications,~~a ~~such~~liability asfor ~~sales~~potential ~~tools,~~litigation ~~forecast~~claims ~~management,~~related ~~contact~~to ~~lists,~~indemnification ~~service~~obligations ~~repair~~with ~~guides,~~its ~~expense~~customers ~~report~~as ~~updates,~~it ~~pricing~~cannot ~~data, time~~be ~~sheets, collaboration sessions, work orders, and other essential documents and information.~~estimated ~~Our~~accurately. ~~products~~The ~~are~~Company ~~designed~~does tonot ~~improve~~believe the ~~productivity~~likelihood of ~~mobile~~a ~~workforces~~material ~~and~~obligation ~~minimize~~is ~~the impact and costs on enterprise networks to support mobile users~~probable.

~~Our~~Note BackWeb Offline Access Server (OAS) product is designed to integrate with Web applications in a wide range of technical frameworks, including portal frameworks, intranets, and websites, to extend the usefulness and function of the web applications to users who are remote with poor connectivity and users who are frequently disconnected from the network6. ~~Its two~~Short-~~way synchronization~~Term ~~capability enables field personnel to access content from, publish to and conduct~~Investments transactions with web applications while disconnected, allowing for synchronization once the user is then reconnected to the Web. This enables the productive use of enterprise applications by mobile workers when they would otherwise be unable to interact with those applications.

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


	June 30,
	2006							2005
													Estimated
			Unrealized			Estimated				Unrealized			Fair
	Cost		Gain/(Loss)			Fair Value		Cost		Gains			Value
Money market	$	4,074		—		$	4,074	$	4,870		—		$	4,870

Commercial paper		—		—			—
Certificates of deposit		66	$	(1	)		65		1,360	$	(51	)		1,309

Totals	$	4,140	$	(1	)	$	4,139	$	6,230	$	(51	)	$	6,179

~~Our~~At ~~customers can offline-enable their websites and portals without rewriting code~~June 30, ~~creating an offline end-user experience that is essentially equal to being online. The BackWeb Polite Sync Server~~2006, ~~formerly~~the ~~known~~total ~~as BackWeb Foundation, uses network-sensitive background content delivery that can deliver large~~ amounts of ~~data~~investments ~~without~~due ~~impacting~~within ~~the~~one ~~performance~~year ~~of other network applications. This allows organizations to efficiently target~~ and ~~deliver~~due ~~sizeable~~after ~~digital~~one ~~data to~~year ~~users’~~were ~~desktops~~approximately ~~throughout the extended enterprise~~$4.1 million Atand ~~the~~$65,000, ~~core of our products is our patented Polite synchronization technology that is designed to distribute large amounts of data over narrow bandwidth connections while minimizing network costs~~respectively.

WeItem 2. ~~derive~~Management’s ~~revenue~~Discussion ~~from licensing our products~~ and ~~from~~Analysis maintenance, consulting and training services. Our products are marketed worldwide primarily through our direct sales force. We also have generated revenue through strategic alliances via our reseller channels. Since 2002, our direct sales force has accounted for a significant majority of ~~our~~Financial ~~revenue.~~Condition ~~While~~and weResults ~~expect our indirect channels to grow, we expect our direct sales efforts will continue to generate most~~ of ~~our~~Operations ~~revenue for the foreseeable future.~~

~~Business~~ The ~~Overview~~following discussion and analysis should be read in conjunction with, and is qualified by, our Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this report, as well as the “Risk Factors” section that is set forth Item 1A of Part II below. 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.

~~In the first three months of 2005, we accomplished our goals in terms of both revenue~~Overview stability and expense reduction. Our total revenue remained consistent as compared to the first quarter of 2004, and increased 8% as compared to the fourth quarter of 2004. License revenue in the first quarter of 2005 increased 15% compared to both last year and the sequential quarter. This increase was partially offset by a 29% decrease in our professional services revenue compared to the fourth quarter of 2004, which reflected non-billable investments in customer projects made by the professional services organization during the first quarter. We accomplished stability in our overall revenue while significantly reducing our operating expenses, resulting in a significant reduction in our net loss for the quarter to $(0.01) per share, an improvement of $0.02 per share as compared to the first quarter of 2004.

~~Our~~We ~~operating~~compete ~~expenses~~ in the ~~first~~mobility ~~quarter~~and mobile applications market and offer a solution allowing users of enterprise ~~2005~~Web ~~decreased~~applications ~~approximately~~to ~~51%~~synchronize those Web applications to their PCs for use while disconnected from the ~~first~~network. Our enabling software is designed to integrate with Web applications ~~quarter~~in ofa ~~2004,~~loosely-coupled ~~and~~way ~~34%~~that ~~from~~requires ~~the~~no ~~fourth~~in ~~quarter~~a ofcompany’s ~~2004~~enterprise web architecture and applications. This ~~decrease~~approach ~~was~~has ~~primarily~~the ~~due~~potential to bring mobile functionality to enterprise web applications quickly and with low total cost of ownership. Our products address the need of mobile ~~reduction~~users who spend important parts of their work time in ~~force~~situations ~~implemented~~in which fixed or wireless network connectivity is not practical. his includes mobile workers engaged in ~~the~~field ~~fourth~~sales, ~~quarter~~services, consulting and operational roles. Many of ~~2004~~these people must frequently disconnect from and reconnect to the network but require consistent access to their important web-based business applications. WeExamples ~~believe~~of ~~that~~such ~~our~~critical ~~spending~~business isapplications ~~now~~include customer relationship atmanagement, anor ~~appropriate~~CRM, ~~level~~systems, service management systems, service document repositories, training and ~~expect~~e-learning applications, human resources, or HR, applications, service repair guides, expense report ~~levels~~updates, pricing data, time sheets, work orders, and other essential documents and information. Our products are designed to ~~remain~~capitalize ~~fairly~~on ~~consistent~~the inpotential ~~future~~business ~~periods~~and return on investment benefits of mobile applications, including improved productivity of mobile workforces, faster completion of company workflows and increased levels of sales and customer satisfaction. They are also designed to reduce the cost of distributing information to field personnel and to minimize the impact and costs on enterprise networks to support mobile users.

~~Recent~~ Our ~~Events~~BackWeb Offline Access Server (OAS) product is designed to integrate with web applications in any web-based architecture , including portal frameworks, intranets, and websites, so the applications may be used by users who are frequently disconnected from the network. Its two-way synchronization capability enables people to access content from, publish to and conduct transactions on web applications while disconnected, enabling the productive combination of fully-featured enterprise applications and mobile use cases. This can be less expensive and easier to implement than the alternative of writing special client-server applications for use by mobile personnel.

~~During the first quarter of 2005, we made progress toward improving our business and operating~~12 performance, which we believe better positions us to achieve bottom-line improvements and top-line growth. We continue to make progress on our sales and marketing execution and have made progress in identifying our qualified customer prospects, which we believe reflects the maturation of enterprise web applications and increasing awareness of the business benefits of mobility. Contributing to our first quarter of 2005 performance were sales to existing customers Pfizer and Fidelity Management in new areas of their operations. We believe these sales confirm the value these customers are deriving from our solutions. We also recognized $375,000 in revenue related to our October 2004 license and distribution agreement with F-Secure, revenue that we will continue to recognize through the remainder of 2005.

InTable light of the decrease in our revenue during 2004, and in order to protect our cash reserves, we decided to restructure the company in October 2004. The focus of the restructuring was the reduction of management and administrative costs, and to a lesser extent, the reduction of our sales and marketing operation to a level consistent with our current sales level. Our product development, technical support and professional services operations experienced only modest reductions. We remain committed to our recently launched sales initiatives which focus on the ability to mobilize enterprise Web applications used by the revenue-critical field sales and field service organizations of our customers. We will also continue to remain actively engaged with IT organizations which are critical in evaluating and selecting the right technical solution for the enterprise, as well as ensuring a successful implementation and deployment. We intend to maintain our expense and cash management disciplines as we make prudent investments necessary to support our operations and pursue sales growth. Guiding our decision-making in these areas is our continued focus on the goal of achieving sustainable profitability. Contents

~~Critical~~ Using ~~Accounting~~HTML-type ~~Policies~~tags (called Offline Tagging Markup Language, or OTML), our customers can offline-enable their websites and portals without rewriting code, creating an offline end-user experience that is essentially the same as the online user experience. The BackWeb Polite Sync Server, formerly known as BackWeb Foundation, uses network-sensitive background content delivery that can deliver large amounts of data without impacting the performance of other network applications. This allows organizations to efficiently target and deliver sizeable digital data to users’ desktops throughout the extended enterprise. The Polite Sync Server utilizes our patented Polite synchronization technology that is designed to distribute large amounts of data over very good or very low quality network connections.

~~Our~~We ~~critical~~derive ~~accounting~~revenue ~~policies~~from licensing our products and from maintenance, consulting and training services. Our products are asmarketed ~~follows:~~worldwide primarily through our direct sales force. We also have generated revenue through our reseller, OEM and co-sales/marketing relationships. Since 2002, our direct sales force has accounted for a significant majority of our revenue.

•Second ~~Revenue~~Quarter ~~recognition;~~2006 •Business ~~Estimating valuation allowances and accrued liabilities, including the allowance for doubtful accounts; and~~Overview

12 In the fiscal second quarter of 2006, we made progress toward achieving certain of our strategic goals, but experienced some challenges in connection with these efforts. Our two key business objectives coming into the second quarter were to ramp our new sales personnel to overcome the expiration of license revenue recognition from a sale made to F-Secure Corporation (F-Secure) in the fourth quarter of 2004 and to expand our strategic alliances in order to cost-effectively expand our sales and marketing reach.

~~Table~~ As anticipated, the second quarter of ~~Contents~~2006 included no license revenue contribution from any F-Secure agreements, whereas during the second quarter of 2005 and the first quarter of 2006, we recognized license revenue of $375,000 and $245,000, respectively, from these agreements. In anticipation of this expiration in revenue recognition, we hired new sales personnel in the fourth quarter of 2005 and the first quarter of 2006 in order to expand our number of active sales territories in hopes of growing our license revenue not associated with F-Secure. In this regard, we had a somewhat disappointing result. We did not convert several larger opportunities in our pipeline into orders during the quarter which could have overcome the decrease in license revenue related to the F-Secure recognition. However, our license revenue not related to F-Secure was approximately $975,000 in the first half 2006 compared to approximately $875,000 in the first half 2005, which we believe demonstrates growing demand for our products.

• We ~~Accrued~~view ~~restructuring~~strategic ~~charges~~alliances as the key to growing our revenue in a cost-effective manner and improving our operating results. We work with both independent software vendors (ISV), which make and sell infrastructure and application software, and system integrators (SI), which, on a global or regional basis, provide a range of information technology (IT) services to major companies, including the creation of applications and the maintenance of IT systems. We currently work with ISVs such as Oracle and SAP. In 2005 and 2006, we also increased our efforts to partner with SI firms, beginning with those in our customer installed base and then expanding to new SI firms. Toward that end, in 2006, we established relationships with Adjoined Consulting (now Kanbay International), BearingPoint, BusinessEdge Solutions, Tata Consultancy Services, and Wipro Technologies. Our work with these SIs impacts our business in two primary ways. First, their inclusion of BackWeb software in their solutions for customers exposes our software to additional customers more quickly and economically than our own direct marketing and sales efforts. Second, they perform more of the IT services work associated with our products for our software license customers, which decreases our direct services revenue but often lowers the services cost to the customer because the SI is deeply integrated into the customers’ overall IT operations and often provides a low services rate. Our work with these SIs has expanded more quickly than we anticipated and, as a result, we are beginning to see increased opportunities in our pipeline, which represent future revenue potential and decreased direct services revenue. Because our direct consulting services revenue decreased more rapidly than we expected as a result of our expanding relationship with SI firms, we needed to reduce our consulting services headcount to reflect the evolution of our business. As a result, in July 2006, we reduced staffing in our services unit, as well as some other departments, and implemented other expense reduction measures, in order to better align our costs with revenues as we pursue our goal of profitability. Through these expense reduction measures, we believe we will reduce our ongoing expenses by approximately 20% from the second quarter of 2006 levels. We anticipate a charge of approximately $200,000 in the third quarter of 2006 to reflect severance and other costs related to the personnel and expense reductions. We expect this charge to offset the initial cost reductions we expect to realize and, as a result, believe that our total expenses in the third quarter of 2006 should be equal to or slightly above second quarter of 2006 levels. We expect that the reductions will begin to benefit our financial results in the fourth quarter of 2006.

~~Revenue Recognition~~13

WeTable derive revenue primarily from software license fees, maintenance service fees, and consulting services paid to us directly by corporate customers and resellers and, to a lesser extent, from royalty fees from original equipment manufacturers (“OEMs”). Revenue derived from resellers is not recognized until the software is sold through to the end user. Royalty revenue is recognized when reported to us by the OEM after delivery of the applicable products. In addition, royalty revenue can arise from the right of OEMs and other distributors to use our products. As described below, management estimates must be made and used in connection with the revenue we recognize in any accounting period. Contents

We ~~recognize~~remain ~~software~~focused ~~license~~on ~~revenue~~the inmarket ~~accordance~~to ~~with~~mobilize ~~Statement~~enterprise ofWeb ~~Position~~applications. 97Enterprise applications have migrated almost entirely to web-2based architectures, ~~“Software~~and with the advancement of ~~Revenue~~Service ~~Recognition”~~Oriented ~~(“SOP~~Architectures ~~97-2”~~(SOA), asweb ~~amended,~~services and ~~SOP~~composite ~~98-9~~applications, ~~“Modification~~we ofbelieve ~~SOP~~that 97the web-2,based ~~Software Revenue~~enterprise ~~Recognition~~architecture ~~with~~is ~~Respect~~becoming tothe ~~Certain~~foundation ~~Transactions”~~upon ~~(“SOP~~which ~~98-9”).~~all ~~SOP~~business ~~98-9~~processes ~~requires that~~will ~~revenue~~ be ~~recognized~~enabled ~~under~~or ~~the~~automated. ~~Residual~~Concurrently, ~~Method~~professional ~~when~~workers ~~vendor~~are ~~specific~~becoming ~~objective~~increasingly ~~evidence (“VSOE”) of~~mobile, ~~fair~~accomplishing ~~value~~their ~~exists~~work ~~for~~on ~~all~~laptops ~~undelivered~~while ~~elements~~they ~~and~~work nowith ~~VSOE~~customers, ~~exists~~partners ~~for~~and ~~the~~in ~~delivered~~remote ~~elements~~work environments. ~~Under the~~In ~~Residual~~their ~~Method~~mobile work, ~~any~~they ~~discounts~~are inoccasionally ~~the~~connected ~~arrangement~~via ~~are~~wireless ~~allocated~~networking but require their key applications to ~~the~~be ~~delivered~~always ~~element~~available, even between wireless connections.

~~When~~Our ~~contracts~~ability ~~contain~~to ~~multiple~~increase ~~elements~~our ~~wherein~~revenue ~~VSOE~~and ofachieve ~~fair~~profitability ~~value~~will ~~exists~~depend ~~for~~on ~~all~~our ~~undelivered~~ability to ~~elements,~~identify wethe ~~account~~key ~~for~~market ~~the~~segments ~~delivered~~and ~~elements~~execute in ~~accordance~~those segments with ~~the~~cost-effective ~~Residual Method prescribed~~partnerships. byWe ~~SOP~~believe ~~98-9.~~that ~~Maintenance~~our ~~revenue~~key ~~included~~market insegments ~~these~~include ~~arrangements~~e-learning, ishuman ~~deferred~~resources ~~and~~talent management/performance ~~recognized~~management, oncustomer ~~a straight-line~~relationship ~~basis~~management, ~~over~~knowledge ~~the~~management, ~~term~~clinical trials ofand ~~the~~content ~~maintenance agreement~~portals. ~~The~~Key ~~VSOE~~industry ofsegments ~~fair~~include ~~value of the undelivered elements (maintenance~~pharmaceuticals, ~~training,~~manufacturing and consulting. ~~services)~~We isintend ~~determined~~to ~~based~~manage onour ~~the price~~expenses ~~charged~~carefully ~~for~~while ~~the~~executing ~~undelivered~~in ~~element~~productive ~~when~~market segments ~~sold~~to ~~separately~~pursue revenue growth.

~~Revenue~~Critical ~~from~~Accounting ~~software license agreements is recognized when all of the following criteria are~~Policies met as set forth in SOP 97-2: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and (4) collectibility is probable. We do not generally grant a right of return to our customers. When a right of return exists, we defer revenue until the right of return expires, at which time revenue is recognized provided that all other revenue recognition criteria have been met. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer provided that all other revenue recognition criteria have been met.

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

At• ~~the~~Revenue time of each transaction, we assess whether the fee associated with our license sale is fixed or determinable. If the fee is not fixed or determinable, we recognize revenue as payments become due from the customer provided that all other revenue recognition; ~~criteria~~and ~~have~~• ~~been~~Estimating ~~met.~~valuation ~~In determining~~allowances ~~whether~~and ~~the~~accrued ~~fee is fixed or determinable~~liabilities, ~~we compare the payment terms of the transaction to our normal payment terms. We assess the likelihood of collection based on a number of factors,~~ including ~~past transaction history,~~ the ~~credit~~allowance ~~worthiness~~for ofdoubtful ~~the customer and, in some instances, a review of the customer’s financial statements~~accounts. We do not request collateral from our customers. If credit worthiness cannot be established, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon the receipt of cash.

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

13 We derive revenue primarily from software license fees, maintenance service fees, and consulting services paid to us directly by corporate customers and resellers and, to a lesser extent, from royalty fees from original equipment manufacturers (“OEMs”). Revenue derived from resellers is not recognized until the software is sold through to the end user. Royalty revenue is recognized when reported to us by the OEM after delivery of the applicable products. In addition, royalty revenue can arise from the right of OEMs and other distributors to use our products. As described below, management estimates must be made and used in connection with the revenue we recognize in any accounting period.

~~Table~~ We recognize software license revenue in accordance with Statement of ~~Contents~~Position 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended, and SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions” (“SOP 98-9”). SOP 98-9 requires that revenue be recognized under the Residual Method when vendor specific objective evidence (“VSOE”) of fair value exists for all undelivered elements and no VSOE of fair value exists for the delivered elements. Under the Residual Method, any discounts in the arrangement are allocated to the delivered element.

~~Deferred~~When ~~revenue~~contracts ~~includes~~contain ~~amounts~~multiple ~~billed~~elements towherein ~~customers~~VSOE ~~and~~of ~~cash~~fair ~~received~~value ~~from~~exists ~~customers~~for all undelivered elements, we account for the delivered elements in accordance with the Residual Method prescribed ~~which~~by SOP 98-9. Maintenance revenue ~~has~~included ~~not~~in ~~been~~these arrangements is deferred and recognized on a straight-line basis over the term of the maintenance agreement. The VSOE of fair value of the undelivered elements (maintenance, training, and consulting services) is determined based on the price charged for the undelivered element when sold separately.

~~Estimating~~Revenue ~~Valuation~~from ~~Allowances~~software license agreements is recognized when all of the following criteria are met as set forth in SOP 97-2: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and ~~Accrued~~(4) collectibility ~~Liabilities~~is probable. We do not generally grant a right of return to our customers. When a right of return exists, ~~Including~~we defer revenue until the ~~Allowance~~right ~~for~~of ~~Doubtful~~return expires, at which time revenue is recognized provided that all other ~~Accounts~~revenue recognition criteria have been met. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer provided that all other revenue recognition criteria have been met.

~~Management continually reviews the collectibility of trade accounts receivable and the~~14 adequacy of the allowance for doubtful accounts against the trade accounts receivable. Management specifically analyzes customer accounts, accounts receivable aging reports, history of bad debts, the business or industry sector to which the customer belongs, customer concentration, customer credit-worthiness, current economic trends, and any other pertinent factors. Generally, we make a provision for doubtful accounts when a trade receivable becomes 90 days past due. In exceptional cases, we will waive a provision after a trade receivable is 90 days or more past due when, in the judgment of management, after conducting due diligence with the management of the customer, the receivable is still collectible and the customer has demonstrated that payment is imminent.

ManagementTable believes that it is able to make reasonably objective judgments on the adequacy of other provisions relating to trade accruals. We have not made any provision for contingent liabilities which has involved significant management judgment that either we will prevail in the case of material litigation or that we have sufficient insurance to cover any adverse outcome. A discussion of our outstanding material litigation is contained in Part II, Item 1 “Legal Proceedings” of this Form 10-Q. Contents

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

WeAt ~~have~~the ~~made~~time ~~decisions~~of toeach ~~provide~~transaction, ~~for~~we ~~certain~~assess ~~costs~~whether the fee associated with ~~corporate~~our ~~restructurings~~license sale is fixed or determinable. If the fee is not fixed or determinable, we ~~believed~~recognize ~~were~~revenue ~~required~~as inpayments become ~~order~~due tofrom ~~align~~the ~~our~~customer ~~cost~~provided ~~structure~~that ~~with~~all ~~changing~~other ~~market~~revenue ~~conditions~~recognition criteria have been met. In ~~Before~~determining awhether ~~charge~~the fee is ~~executed~~fixed or determinable, ~~our~~we ~~executive~~compare ~~management~~the ~~and~~payment ~~Board~~terms of ~~Directors~~the transaction ~~approve~~to ~~the~~our ~~plan~~normal payment terms. ~~Our restructuring~~We ~~plans~~assess ~~executed~~the inlikelihood ~~recent~~of ~~years~~collection ~~resulted~~based inon a ~~reduction~~number of infactors, ~~headcount~~including ~~and~~past transaction history, the ~~consolidation~~ ofcredit ~~facilities~~worthiness ~~through~~of the ~~closing~~customer ofand, ~~excess~~in ~~field~~some instances, ~~offices.~~a Wereview ~~reassess~~of ~~this~~the ~~liability each~~customer’s ~~period~~financial ~~based~~statements. onWe ~~market~~do ~~conditions.~~not ~~Revisions~~request tocollateral from our customers. ~~estimates~~If ofcredit ~~this~~worthiness ~~liability~~cannot ~~could materially~~be ~~impact~~established, ~~our~~we ~~operating~~defer ~~results~~the fee and ~~financial~~recognize ~~position~~revenue inat the ~~future~~time ~~periods~~collection ifbecomes ~~anticipated events~~reasonably ~~and~~assured, ~~key~~which ~~assumptions~~is ~~either~~generally ~~change~~upon orthe doreceipt ~~not~~of ~~materialize~~cash.

InService ~~2002,~~revenue weis ~~recorded~~primarily acomprised ~~charge~~ of $4revenue from standard maintenance agreements and consulting services.~~7 million.~~ InCustomers ~~the~~licensing ~~fourth~~products ~~quarter~~generally ofpurchase ~~2003,~~the ~~management~~standard annual ~~reviews~~maintenance ~~determined~~agreement ~~that~~for anthe ~~additional~~products. ~~reserve~~We recognize revenue from maintenance over the contractual period of ~~$443~~the maintenance agreement,~~000~~ ~~was~~which ~~needed~~is ~~related~~generally toone ~~excess~~year. ~~leased facilities~~Maintenance ~~that~~is ~~were~~priced ~~part~~as a percentage of the ~~2002~~license ~~restructuring plan~~revenue. ~~During~~For those agreements where the ~~third~~maintenance ~~quarter~~and oflicense ~~2004,~~is wequoted ~~determined~~as ~~that~~one ~~there~~fee, ~~would~~we bevalue nothe ~~future~~maintenance ~~cash~~as ~~requirements~~an ~~under~~undelivered ~~the~~element ~~restructuring~~at ~~accrual,~~standard rates and recognize this ~~reversed~~revenue over the ~~accrual~~contractual inmaintenance ~~full~~period. ~~During~~Consulting ~~the~~services ~~fourth~~are ~~quarter~~billed ofat ~~2004~~an agreed-upon rate, weplus ~~recorded~~out-of-pocket aexpenses. We generally charge offor our consulting services on a time and ~~approximately~~materials ~~$500,000~~basis ~~related~~and torecognize ~~the~~revenue ~~termination~~from ofsuch 19services ~~employees~~as ~~throughout~~they ~~BackWeb,~~are ~~including~~provided ~~our~~to the customer. We ~~Chief~~account ~~Executive~~for ~~Officer~~fixed ~~and~~fee ~~Chief~~service ~~Financial~~arrangements ~~Officer.~~in ~~All~~a ~~amounts~~similar ~~related~~manner to ~~this~~an ~~action~~agreement ~~were~~containing an ~~expensed~~acceptance inclause. ~~2004,~~Our ~~and~~arrangements atdo ~~March 31,~~not ~~2005,~~generally ~~there~~include ~~was~~acceptance anclauses. ~~accrual~~However ofif ~~approximately~~an acceptance ~~$20~~provision exists,~~000~~ ~~related~~then ~~to severance~~we ~~and~~defer ~~other~~revenue ~~payments~~recognition ~~yet~~until towe bereceive ~~distributed~~written acceptance of the product from the customer.

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

~~The~~Estimating ~~following~~Valuation ~~table~~Allowances ~~sets~~and ~~forth~~Accrued ~~our~~Liabilities, ~~results~~Including ofthe ~~operations~~Allowance for ~~the three months ended March 31,~~Doubtful ~~2005 and 2004 expressed as a percentage of total revenue.~~Accounts

	Three Months Ended
	March 31,			March 31,
	2005			2004
	Unaudited
Revenue:
License		46	%		41	%
Service		54			59
Total revenue		100			100
Cost of revenue:
License		—			1
Service		10			24
Total cost of revenue		10			25
Gross profit		90			75
Operating expenses:
Research and development		36			58
Sales and marketing		44			59
General and administrative		24			37
Total operating expenses		104			155
Loss from operations		(14	)		(80	)
Interest and other income, net		(1	)		(4	)
Write-down of an equity investment		—			—
Net loss		(15	%)		(84	)%

Management continually reviews the collectibility of trade accounts receivable and the adequacy of the allowance for doubtful accounts against the trade accounts receivable. Management specifically analyzes customer accounts, accounts receivable aging reports, history of bad debts, the business or industry sector to which the customer belongs, customer concentration, customer credit-worthiness, current economic trends, and any other pertinent factors. Generally, we make a provision for doubtful accounts when a trade receivable becomes 90 days past due. In exceptional cases, we will waive a provision after a trade receivable is 90 days or more past due when, in the judgment of management, after conducting due diligence with the management of the customer, the receivable is still collectible and the customer has demonstrated that payment is imminent.

14 Management believes that it is able to make reasonably objective judgments on the adequacy of other provisions relating to trade accruals. We have not made any provision for contingent liabilities which has involved significant management judgment that either we will prevail in the case of material litigation or that we have sufficient insurance to cover any adverse outcome. A discussion of our outstanding material litigation is contained in Part II, Item 1 “Legal Proceedings” of this Form 10-Q.

~~Table of Contents~~15

Revenue Table of Contents

~~Total~~Results ~~revenue~~of Operations

	Three months ended,
	March 31,			Change					March 31,
	2005			$		%			2004
	(in thousands, except percentages)
Total revenue	$	1,657		$	19		1	%	$	1,638
As a percentage of total revenue		100	%		—		—			100	%

The following table sets forth our results of operations for the three and six months ended June 30, 2006 and 2005 expressed as a percentage of total revenue.

We derive revenue from license, maintenance, and consulting services for BackWeb OAS, BackWeb Polite Sync Server, and BackWeb e-Accelerator Suite. The increase in total revenue in the three months ended March 31, 2005 as compared to the same period in 2004 was primarily due to an increase in license revenue, which was partially offset by a decrease in services fees. We have limited visibility to forecast revenue and therefore we are unable to quantify future overall trends in our total revenue. However, in the sections below we discuss the changes in the individual components of total revenue and expected trends in these individual components.


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2006			2005			2006			2005
	Unaudited						Unaudited
Revenue:
License		40	%		50	%		45	%		48	%
Service		60			50			55			52

Total revenue		100			100			100			100

Cost of revenue:
Licenses		2			1			1			1
Service		16			11			15			10

Total cost of revenue		18			12			16			11

Gross profit		82			88			84			89
Operating expenses:
Research and development		54			32			43			34
Sales and marketing		86			47			73			45
General and administrative		42			26			39			25

Total operating expenses		182			105			155			104

Loss from operations		(100	)		(17	)		(71	)		(15	)
Interest and other income, net		4			3			2			1

Net loss		(96	%)		(14	%)		(69	)%		(14	)%

~~In the three months ended March 31, 2005, two customers accounted for approximately 23% and~~Revenue 20% of total revenue. We expect that a small number of customers will continue to account for a substantial portion of our total revenue for the foreseeable future and revenue from one or more of these customers may represent more than 10% of our total revenue in future periods.

~~License~~Total revenue

	Three months ended,
	March 31,			Change						March 31,
	June 30,			Change						June 30,
	2005			$			%			2004
	2006			$			%			2005
	(in thousands, except percentages)
License revenue	$	767		$	98			15	%	$	669
Total revenue	$	1,142			($576	)		(33.5	%)	$	1,718
As a percentage of total revenue		46	%		—			5	%		41	%

The increase in license revenue in the three months ended March 31, 2005 as compared to the same periods in 2004 was primarily due to a license sale of our OAS product made to a new division of an existing customer which accounted for approximately $300,000, or 39%, of license revenue for the three months ended March 31, 2005. Additionally, we recognized approximately $375,000, or 49% of license revenue, in the first quarter of 2005 from a sale of our Polite Sync Server product made to a customer in the fourth quarter of 2004. We will continue to recognize revenue related to this transaction throughout 2005.


	Six months ended,
	June 30,		Change						June 30,
	2006		$			%			2005
	(in thousands, except percentages)
Total revenue	$	2,798		($577	)		(17.1	%)	$	3,375

~~Service revenue~~16

	Three months ended,
	March 31,			Change						March 31,
	2005			$			%			2004
	(in thousands, except percentages)
Service revenue	$	890			($79	)		(8	%)	$	969
As a percentage of total revenue		54	%		—			(5	%)		59	%

~~Service~~We derive revenue, ~~which~~from ~~includes~~license sales, maintenance, and consulting services for BackWeb Offline Access Server, ~~decreased~~BackWeb ~~for~~Polite Sync Server, and BackWeb e-Accelerator Suite. The decrease in total revenue in the three and six months ended ~~March~~June 3130, ~~2005~~2006 ~~when~~ compared to the same ~~period~~periods in ~~2004~~2005 was primarily due to a decrease in license revenue, primarily related to the fact that we recognized $375,000 in revenue during each of the first and second quarters of 2005 from the F-Secure license agreement we entered into in the fourth quarter of 2004, but did not recognize any revenue from this agreement during either the first or the second quarter of 2006. In addition, total revenue declined in the three and six months ended June 30, 2006 due to a reduction in consulting ~~fees~~revenue. We ~~The~~have ~~decrease~~limited ~~was~~visibility ~~primarily~~to ~~related~~forecast revenue for the second half of 2006 and therefore we are unable to ~~non-billable~~quantify future overall trends in our total revenue. However, in the sections below we discuss the changes in the individual components of total revenue and expected trends in these individual components.

15 One customer accounted for approximately $200,000, or 16% of our total revenue, and another customer accounted for approximately $150,000, or 13% of our total revenue, in the three months ended June 30, 2006. One customer accounted for approximately $330,000, or 12% of our total revenue, and another customer accounted for approximately $325,000, or 12% of our total revenue, in the six months ended June 30, 2006. We expect that a small number of customers will continue to account for a substantial portion of our total revenue for the foreseeable future and revenue from one or more of these customers may represent more than 10% of our total revenue in future periods.

~~Table~~License ~~of Contents~~revenue

investments in customer projects during the first quarter of 2005. This decrease was partially offset by an increase in maintenance services fees. The vast majority of our consulting revenue during the period was associated with our BackWeb OAS product.


	Three months ended,
	June 30,			Change						June 30,
	2006			$			%			2005
	(in thousands, except percentages)
License revenue	$	462			($397	)		(46.2	%)	$	859
As a percentage of total revenue		40.5	%		—			(9.5	%)		50.0	%

During the balance of 2005, we expect service revenue to grow commensurately with our license sales. We expect that maintenance revenue associated with our older products will continue to decrease, offset by an increase in maintenance revenue associated with BackWeb OAS. Any increase in maintenance revenue from BackWeb OAS, however, is dependent upon an absolute dollar level increase in license revenue from that product, which may not occur. Further, while we expect consulting revenue to remain relatively flat over the balance of 2005, this too is dependent on increased licenses of our BackWeb OAS.


	Six months ended,
	June 30,			Change						June 30,
	2006			$			%			2005
	(in thousands, except percentages)
License revenue	$	1,253			($376	)		(22.9	%)	$	1,626
As a percentage of total revenue		44.8	%		—			(3.4	%)		48.2	%

~~Cost~~ The decrease in license revenue in the three and six months ended June 30, 2006 as compared to the same periods in 2005 was primarily due to the expiration of revenue ~~Revenue~~recognition related to the F-Secure agreement and our inability to increase our deal volume and/or deal size to offset the loss of the F-Secure revenue. Additionally, we experienced a decrease in the number of new license deals closed in both periods of 2006 as compared to 2005. A license sale to an existing customer accounted for approximately $200,000, or 43% of license revenue, for the three months ended June 30, 2006. A license sale to another existing customer accounted for $150,000, or 32% of license revenue, for the three months ended June 30, 2006. The license sale to F-Secure accounted for approximately $375,000, or 44% of license revenue, for the three months ended June 30, 2005 and approximately 750,000, or 46% of license revenue, for the six months ended June 30, 2005. A license sale to a new customer accounted for $449,000, or 28%, of license revenue, for the six months ended June 30, 2005.

	Three months ended,
	March 31,			Change						March 31,
	2005			$			%			2004
	(in thousands, except percentages)
Cost of revenue	$	164			($253	)		(61	%)	$	417
As a percentage of total revenue		10	%		—			(15	%)		25	%

CostTable of revenue decreased both in absolute dollars and as a percentage of revenue during the three months ended March 31, 2005 as compared to the same period in 2004. This decrease was due to a decrease in the size of the service team performing maintenance and consulting work, as well as a reduction in the use of more senior consultants on our professional services engagements. Contents

~~Cost~~Service ~~of License Revenue~~revenue

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


	Three months ended,
	June 30,			Change						June 30,
	2006			$			%			2005
	(in thousands, except percentages)
Service revenue	$	680			($179	)		(20.8	%)	$	859
As a percentage of total revenue		59.5	%		—			9.5	%		50.0	%

	Three months ended,
	Six months ended,
	March 31,			Change						March 31,
	June 30,			Change						June 30,
	2005			$			%			2004
	2006			$			%			2005
	(in thousands, except percentages)
Cost of license revenue	$	5			($19	)		(79	%)	$	24
Service revenue	$	1,545			($204	)		(11.7	%)	$	1,749
As a percentage of license revenue		1	%		—			(3	%)		4	%
As a percentage of total revenue		55.2	%		—			3.4	%		51.8	%
As a percentage of total revenue		—			—			(1	%)		1	%

~~Cost~~Service ~~of license~~ revenue, ~~decreased~~which asincludes amaintenance ~~percentage~~and ofconsulting ~~revenue~~services, ~~during~~decreased for the three and six months ended ~~March~~ June 3130, ~~2005~~2006 as compared to the same ~~period~~periods in ~~2004~~2005 ~~primarily~~ due to a ~~shift~~decrease in consulting ~~our~~projects ~~license revenue~~that ~~mix~~our ~~away~~services ~~from~~personnel ~~products~~worked ~~with~~on ~~higher~~during ~~associated~~the ~~royalties~~periods, inas ~~addition~~we continued to migrate aour ~~reduction~~service work to strategic resellers. Maintenance services fees in ~~the~~both periods remained ~~production~~relatively ~~costs~~constant. ~~associated~~The ~~with~~substantial ~~packaging~~majority ~~and~~of ~~design~~our ~~work~~consulting ofrevenue during the ~~physical~~period ~~media~~was associated ofwith our BackWeb Offline Access Server product.

16 During the balance of 2006, we expect service revenue to remain fairly consistent with the reduced level we experienced in the second quarter of 2006. We expect that maintenance revenue associated with our older products will continue to decrease, offset by an increase in maintenance revenue associated with BackWeb Offline Access Server. Any increase in maintenance revenue from BackWeb Offline Access Server, however, is dependent upon an absolute dollar level increase in license revenue from that product, which might not occur. Further, while we expect consulting revenue to remain consistent at this reduced level over the balance of 2006, this too is largely dependent on increased license sales of our BackWeb Offline Access Server.

~~Table~~Cost of ~~Contents~~Revenue

Cost of Service Revenue


	Three months ended,
	June 30,			Change					June 30,
	2006			$		%			2005
	(in thousands, except percentages)
Cost of revenue	$	201		$	1		0.5	%	$	200
As a percentage of total revenue		17.6	%		—		6.0	%		11.6	%

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


	Six months ended,
	June 30,			Change					June 30,
	2006			$		%			2005
	(in thousands, except percentages)
Cost of revenue	$	462		$	98		26.9	%	$	364
As a percentage of total revenue		16.5	%		—		5.7	%		10.8	%

	Three months ended,
	March 31,			Change						March 31,
	2005			$			%			2004
	(in thousands, except percentages)
Cost of service revenue	$	159			($234	)		(60	%)	$	393
As a percentage of service revenue		18	%		—			(24	%)		41	%
As a percentage of total revenue		10	%		—			(14	%)		24	%

Cost of revenue increased both in absolute dollars and as a percentage of revenue during the three and six months ended June 30, 2006 as compared to the same periods in 2005. This increase was due to the use of more senior resources on customer projects than in the comparable period.

Cost of ~~service~~License ~~revenue decreased as a percentage of total revenue as well as in absolute~~Revenue dollars during the three months ended March 31, 2005 as compared to the same periods in 2004 primarily due to a reduction in services revenue, both on a percentage of revenue and absolute dollar basis, a reduction in total services personnel, and a reduction in the use of more senior consultants on our professional services engagements , which decreased the related cost of delivering the service revenue.

~~Operating~~ Cost ~~Expenses~~of license revenue consists primarily of expenses related to media duplication, packaging of products and royalty payables to third party vendors.

Research and Development


	Three months ended,
	June 30,			Change					June 30,
	2006			$		%			2005
	(in thousands, except percentages)
Cost of license revenue	$	19		$	12		171.4	%	$	7
As a percentage of license revenue		4.1	%		—		330.0	%		.8	%
As a percentage of total revenue		1.7	%		—		1.3	%		.4	%

~~Research and development expenses consist of personnel costs, equipment and supply costs for~~18 ~~our development efforts. We charge these expenses to operations as they are incurred. We operate our research and development facilities in Israel.~~

	Three months ended,
	March 31,			Change						March 31,
	2005			$			%			2004
	(in thousands, except percentages)
Research and development	$	593			($378	)		(39	%)	$	971
As a percentage of total revenue		36	%		—			(23	%)		59	%

The decrease in research and development expenses during the three months ended March 31, 2005 as compared to the same period in 2004 was primarily due to lower personnel and third party contractor costs and a reduction in associated travel and other related expenses. In the latter portion of 2004, we significantly reduced our use of outside contractors and reduced headcount in our research and development department through attrition and personnel management.


	Six months ended,
	June 30,			Change					June 30,
	2006			$		%			2005
	(in thousands, except percentages)
Cost of license revenue	$	40		$	27		207.7	%	$	13
As a percentage of license revenue		3.2	%		—		2.5	%		.7	%
As a percentage of total revenue		1.4	%		—		1.0	%		.4	%

WeCost ~~believe~~of ~~that~~license ~~continued~~revenue ~~investment~~increased inas ~~research~~a ~~and~~percentage ~~development~~of isrevenue ~~important~~during inthe ~~order~~three ~~to attain~~and ~~our~~six ~~strategic~~months ended ~~objectives. However~~June 30, we2006 ~~intend~~as compared to ~~continually monitor expenses across~~ the ~~organization~~ ~~and~~same ~~continually~~period ~~strive~~in ~~for~~2005 ~~cost~~due ~~reductions,~~to ~~particularly,~~the inaddition ~~light~~ of ~~the changes in~~certain ~~personnel~~additional ~~implemented~~functionality into ~~October 2004,~~our inproducts ~~areas~~provided ~~such~~by asthird ~~facilities,~~parties ~~travel~~ and ~~entertainment,~~the ~~and~~related royalty payments ~~telecommunications~~associated ~~expenses~~with the increased functionality.

~~Sales~~ We ~~and~~expect ~~Marketing~~our cost of license revenue as a percentage of license revenue to remain relatively constant in the second half of 2006.

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

	Three months ended,
	March 31,			Change						March 31,
	2005			$			%			2004
	(in thousands, except percentages)
Sales and marketing	$	725			($227	)		(24	%)	$	952
As a percentage of total revenue		44	%		—			(14	%)		58	%

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

The decrease in sales and marketing expenses during the three months ended March 31, 2005 as compared to the same period in 2004 resulted primarily from a reduction in personnel related costs. This decrease was primarily due to the reduction in headcount as part of the reorganization we implemented in October 2004.


				Three months ended,
	June 30,			Change						June 30,
	2006			$			%			2005
				(in thousands, except percentages)
Cost of service revenue	$	182			($11	)		(5.7	%)	$	193
As a percentage of service revenue		26.8	%		—			4.3	%		22.5	%
As a percentage of total revenue		15.9	%		—			4.7	%		11.2	%


				Six months ended,
	June 30,			Change					June 30,
	2006			$		%			2005
				(in thousands, except percentages)
Cost of service revenue	$	422		$	71		20.2	%	$	351
As a percentage of service revenue		27.3	%		—		7.2	%		20.1	%
As a percentage of total revenue		15.1	%		—		4.7	%		10.4	%

~~Table~~ Cost of ~~Contents~~service revenue decreased during the three months ended June 30, 2006 compared to the same period in 2005 primarily due to a lower amount of billable expenses during the period as more projects were completed remotely as opposed to on-site at a customer location during the period. Cost of service revenue increased during the first six months of 2006 as compared to the same period in 2005 primarily due to the use of more senior resources on customer projects than in the comparable period. Cost of service revenue as a percentage of service revenue increased during the three and six months ended June 30, 2006 compared with the comparable periods in 2005 due primarily to the decrease in services revenue.

We ~~consider~~expect ~~maintaining a marketing presence and an effective sales organization to be vital to~~ the ~~achievement~~cost of ~~our~~service ~~strategic~~revenue ~~objectives. Though we intend~~ to ~~continually monitor expenses across the organization and continually strive for cost reductions, we expect to selectively~~ increase ~~our~~marginally ~~direct sales organization when~~ and ~~where~~remain ~~appropriate,~~relatively ~~particularly~~constant ~~in connection with~~as ~~our~~a ~~realigned~~percentage ~~sales~~of ~~strategy~~service ~~and~~revenue ~~personnel~~during ~~towards~~the ~~our~~second ~~focus~~half ~~on selling to line~~ of ~~business executives as opposed to our previous focus on IT organizations~~2006.

~~General~~Operating ~~and Administrative~~Expenses

~~General~~Research and ~~administrative expenses consist primarily of personnel and related costs and~~Development outside services for general corporate functions, including finance, accounting, general management, human resources, information services, legal, and the provision for bad and doubtful accounts receivable.

	Three months ended,
	March 31,			Change						March 31,
	2005			$			%			2004
	(in thousands, except percentages)
General and administrative	$	404			($205	)		(34	%)	$	609
As a percentage of total revenue		24	%		—			(13	%)		37	%

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

The decrease in general and administrative expenses during the three months ended March 31, 2005 as compared to the same period in 2004 was primarily due to a reduction in facilities costs and outside services expenses associated with our reorganization in October 2004. Additionally we have reduced the fees associated with third party consultants and replaced higher cost vendors with more cost-effective alternatives where possible.


	Three months ended,
	June 30,			Change					June 30,
	2006			$		%			2005
	(in thousands, except percentages)
Research and development	$	619		$	72		13.2	%	$	547
As a percentage of total revenue		54.2	%		—		22.4	%		31.8	%

~~Interest and Other Income (Expense), Net~~19

InterestTable and other income, net includes interest income earned on our cash, cash equivalents and short-term investments, offset by interest expense and the effects of exchange gains and losses arising from the re-measurement of transactions in foreign currencies. Contents

	Three months ended,
	Six months ended,
	March 31,			Change						March 31,
	June 30,			Change						June 30,
	2005			$			%			2004
	2006			$			%			2005
	(in thousands, except percentages)
Interest and other income (expense), net		($20	)		($40	)		67	%		($60	)
Research and development	$	1,201		$	61			5.4	%	$	1,140
As a percentage of total revenue		(142.9	%)		—			39.1	%		(433.8	)%

The ~~decrease~~increase in ~~interest~~research and ~~other~~development ~~income~~expenses ~~(expense), net~~ during the three and six months ended ~~March~~June 3130, ~~2005~~2006 as compared to the same ~~period~~periods in ~~2004~~2005 was primarily due to athe ~~reduction~~expiration inof ~~bank~~an ~~service~~Israeli ~~fees~~research and ~~fluctuations~~development funding grant. During the second quarter of 2005, we received funding from an Israeli government sponsored development program that offsets new research and development costs, and which will be repaid if and when the related project that is being funded is offered commercially. This funding reduced research and development expenses for the three and six month periods ended June 30, 2005 by $28,000 and $82,000, respectively. We also recognized approximately $50,000 and $100,000 in ~~foreign~~the ~~exchange~~three ~~rates~~and six months ended June 30, 2006, respectively, in expenses in connection with the implementation of SFAS 123R. These additional expenses were offset by other general cost reductions in the research and development department in the periods. Research and development expenses as a percentage of total revenue increased during the three and six months ended June 30, 2006 compared with the comparable periods in 2005 due primarily to the increase in research and development expenses in absolute dollars combined with the decrease in total revenue.

~~Income~~ We ~~Taxes~~believe that continued investment in research and development is important in order to attain our strategic objectives. However, we intend to continually monitor expenses across the organization and continually strive for cost reductions, particularly in areas such as facilities, travel and entertainment, and telecommunications expenses. As a result, we expect that research and development expenses will remain fairly constant during the second half of 2006.

~~There~~Sales ~~was no provision for income taxes because we have incurred operating losses. As of March 31, 2005, we had approximately $100.0 million of Israeli net operating loss carry forwards~~ and ~~$7.3~~Marketing million of U.S. federal net operating loss carry forwards available to offset future taxable income. The U.S. net operating loss carry forwards expire in varying amounts between the years 2011 and 2024. The Israeli net operating loss carry forwards have no expiration date.

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

Other than operating lease commitments, we do not have any off-balance sheet financing arrangements or liabilities, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity. We do provide standard indemnification agreements to our customers related to our product. We do not have any majority-owned subsidiaries that are not included in the consolidated financial statements.


	Three months ended,
	June 30,			Change					June 30,
	2006			$		%			2005
	(in thousands, except percentages)
Sales and marketing	$	979		$	174		21.6	%	$	805
As a percentage of total revenue		85.7	%		—		38.8	%		46.9	%

Liquidity and Capital Resources


	Six months ended,
	June 30,			Change					June 30,
	2006			$		%			2005
	(in thousands, except percentages)
Sales and marketing	$	2,054		$	524		34.2	%	$	1,530
As a percentage of total revenue		73.4	%		—		28.1	%		45.3	%

AsThe ofincrease ~~March~~in sales and marketing expenses during the three and six months ended June 3130, 2006 compared to the same periods in 2005, weresulted ~~had~~primarily from an increase in personnel related costs related to the addition of two vice presidents as well as additional field level staff. We also recognized approximately $~~10.1 million~~50,000 ofand ~~cash~~$100,000 ~~cash~~in ~~equivalents~~the three and six months ended June 30, 2006, ~~short~~respectively, in expenses in connection with the implementation of SFAS 123R. Additionally, in the first quarter of 2006, we recognized approximately $100,000 of one-~~term~~time ~~investments~~separation ascosts ~~compared~~related to the ~~$10~~termination of certain employees.~~3 million~~ Sales and marketing expenses as a percentage of ~~December~~total revenue increased during the three and six months ended June 3130, ~~2004.~~2006 compared with the comparable periods in 2005 due primarily to the increase in sales and marketing expenses in absolute dollars combined with the decrease in total revenue.

18 We consider maintaining a marketing presence and an effective sales organization to be vital to the achievement of our strategic objectives. Though we intend to continually monitor expenses across the organization and continually strive for cost reductions, we expect to selectively increase our direct sales organization when and where appropriate. We expect that any reduced expenses in areas of facilities, travel and entertainment, and telecommunications expenses to be more than offset by increased personnel expenses and, thus, we expect sales and marketing expenses will increase during the second half of 2006.

~~Table of Contents~~20

NetTable cash used in operating activities was approximately $386,000 and $1.1 million for the three months ended March 31, 2005 and 2004, respectively, and was primarily used to fund our ongoing operational needs. The decrease in cash used in operating activities was primarily due to the ongoing effect of the restructuring that was implemented in October 2004, which resulted in significant headcount and other operational cost reductions combined with further reductions in subsequent periods. Cash provided by investing activities was approximately $97,000 and $225,000 for the three months ended March 31, 2005 and 2004, respectively, and primarily represents the net proceeds from the purchases and sales of short-term investments to fund operational needs. Cash provided by financing activities in the three months ended March 31, 2005 and 2004 was approximately $31,000 and $1.0 million respectively.. These amounts consisted primarily of proceeds from the issuance of Ordinary Shares under our 1999 Employee Stock Purchase Plan and as a result of the exercise of stock options issued under our 1998 Employee Stock Option Plan. Contents

InGeneral May, 2004, we entered into a $1.5 million line of credit with a lender. The amount of borrowings available under the line of credit is based on a formula using accounts receivable. The line of credit has a stated maturity date of May 21, 2005 provides for an automatic renewal unless cancelled by either party. The Company expects to renew this line. The line of credit provides that the lender may demand payment in full of the entire outstanding balance of the loan at any time. The line of credit is secured by substantially all of our assets. The line requires that we meet certain financial covenants, provides payment penalties for noncompliance and ~~prepayment,~~Administrative limits the amount of other debt we can incur, and limits the amount of spending on fixed assets. During the third quarter of 2004, we moved the $500,000 deposit related to our lease space in San Jose, California to a restriction under its line of credit. As a result, at March 31, 2005, we had unused borrowing capacity of $785,000 under the line of credit.

AsGeneral ofand ~~March 31,~~administrative ~~2005,~~expenses weconsist ~~had~~primarily ~~no material commitments for capital expenditures. Our capital requirements depend on numerous factors, including market acceptance~~ of ~~our~~personnel ~~products, the resources we devote to developing, marketing, selling~~ and ~~supporting~~related ~~our~~costs ~~products~~ and ~~the timing and extent~~ ofoutside ~~establishing~~services additional operations. As a result of the restructuring we implemented in October 2004, we believe that our current cash, cash equivalent and short-term investment balances will be sufficient to fund our operations for atgeneral ~~least~~corporate ~~the next 12 months. However~~functions, ~~our~~including ~~business may not go as planned~~finance, ~~and we may need to or we may elect to raise additional funds prior to the expiration of this period. If we decide to raise additional funds~~accounting, ~~it could be difficult to obtain additional~~general ~~financing on favorable terms~~management, ifhuman ~~at all. We may try to obtain additional financing by issuing Ordinary Shares or convertible debt securities~~resources, ~~which~~information ~~could dilute our existing shareholders. If we cannot raise needed funds on acceptable terms~~services, ~~or at all~~legal, weand ~~may~~the ~~not~~provision befor ~~able~~bad toand ~~develop or enhance~~doubtful ~~our products, respond to competitive pressures or grow our business, or could even be obligated to further reduce our expenditures which could harm our business~~debts.

Contractual Obligations


	Three months ended,
	June 30,			Change					June 30,
	2006			$		%			2005
	(in thousands, except percentages)
General and administrative	$	479		$	33		7.4	%	$	446
As a percentage of total revenue		41.9	%		—		15.9	%		26.0	%

The following summarizes our contractual obligations which consisted solely of operating leases at March 31, 2005 (in thousands):


	Six months ended,
	June 30,			Change					June 30,
	2006			$		%			2005
	(in thousands, except percentages)
General and administrative	$	1,084		$	234		27.5	%	$	850
As a percentage of total revenue		38.7	%		—		13.5	%		25.2	%

~~Payments~~ The ~~Due~~increase byin ~~Period~~general and administrative expenses during the three and six months ended June 30, 2006 as compared to the same period in 2005 was primarily due to the reclassification of our Chief Executive Officer into the general and administrative department following the hiring of our Vice President of Sales and Business Development. In addition, we recognized approximately $20,000 and $30,000 in the three and six months ended June 30, 2006, respectively, in expenses in connection with the implementation of SFAS 123R in the first quarter of 2006. General and administrative expenses as a percentage of total revenue increased during the three and six months ended June 30, 2006 compared with the comparable periods in 2005 due primarily to the increase in general and administrative expenses in absolute dollars combined with the decrease in total revenue.

2005	$	683,000
2006		844,000
2007		65,000
2008		—
	$	1,592,000

We expect general and administrative expenses will decrease on an absolute basis during the second half of 2006 due to a continued focus on cost reduction programs.

~~Effective~~Interest ~~Corporate~~and ~~Tax~~Other ~~Rates~~Income, Net

~~Our~~Interest ~~tax~~and ~~rate~~other ~~reflects~~income, anet ~~mix~~includes ofinterest ~~the~~income ~~U.S.~~earned ~~statutory tax rate~~ on our ~~U.S. income~~cash, ~~versus~~cash ~~European~~equivalents ~~country~~and ~~tax~~short-term ~~rates~~investments, onoffset ~~our~~by ~~individual~~interest ~~European~~expense ~~country income~~ and the ~~Israeli~~effects ~~tax rate discussed below. We expect that most~~ of ~~our~~exchange ~~future~~gains ~~taxable income will be generated in Israel. Israeli companies are generally subject to corporate tax on their taxable income at a rate of 35% in the 2005 tax year, 32% in the 2006 tax year,~~ and ~~30% in and after the 2007 tax year. However, as~~losses ~~discussed~~arising ~~below, the rate is effectively reduced for income derived~~ from ~~an Approved Enterprise. The majority of our income is derived from our capital investment program with “Approved Enterprise” status under~~ the ~~Law~~re-measurement ~~for the Encouragement~~ of ~~Capital~~transactions ~~Investments, and is eligible for tax benefits. As a result of these benefits, we expect to have a tax exemption on income derived during the first two years~~ in which this investment program produces taxable income, provided that we do not distribute such income as a dividend, and a reduced tax rate of 10% to 25% for the following 5 to 8 years, depending upon the proportion of foreign ~~ownership of BackWeb~~currencies.


	Three months ended,
	June 30,			Change						June 30,
	2006			$			%			2005
	(in thousands, except percentages)
Interest and other income, net	$	40			($7	)		(14.9	%)	$	47
As a percentage of total revenue		3.5	%		—			0.8	%		2.7	%


	Six months ended,
	June 30,			Change					June 30,
	2006			$		%			2005
	(in thousands, except percentages)
Interest and other income, net	$	64		$	37		137.0	%	$	27
As a percentage of total revenue		2.3	%		—		1.5	%		.8	%

~~All~~The ofdecrease ~~these~~in ~~tax~~interest ~~benefits~~and ~~are~~other ~~subject~~income, tonet ~~various~~during ~~conditions~~the ~~and~~three ~~restrictions.~~months Weended ~~cannot~~June 30, ~~assure~~2006 as ~~you~~compared ~~that~~to wethe ~~will~~same ~~obtain~~period ~~approval~~in ~~for~~2005 ~~additional~~was ~~Approved~~primarily ~~Enterprise~~due ~~Programs~~to the use of cash for operations, orwhich decreases ~~that~~the amount of interest income our cash generates. This same decrease in the six months ~~provisions~~ended June 30, 2006 was more than offset by a reduction in bank service fees in the first quarter of 2006 . We expect interest and other income, net to decrease gradually during the ~~law~~second half of 2006 as we expect we will ~~not~~continue ~~change~~to use cash during 2006 and, as a result, earn less investment and interest income.

~~Since we have incurred tax losses through March 31, 2005, we have not yet used the tax~~21 ~~benefits for which we are eligible.~~

ImpactTable of Inflation and Currency Fluctuations Contents

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

~~RISK~~ There ~~FACTORS~~was no provision for income taxes because we incurred operating losses during the three and six months ended June 30, 2006. As of June 30, 2006, we had approximately $100 million of Israeli net operating loss carry forwards and $7 million of U.S. federal net operating loss carry forwards available to offset future taxable income. The U.S. net operating loss carry forwards expire in varying amounts between the years 2011 and 2022. The Israeli net operating loss carry forwards have no expiration date.

We operate in a rapidly changing environment that involves numerous risks and uncertainties, some of which are beyond our control. The following discussion highlights some of these risks and uncertainties. You should consider the following factors, as well as other information set forth in this Quarterly Report on Form 10Off-Q,Balance inSheet ~~connection~~Financings ~~with~~And ~~any investment in our Ordinary Shares. If~~Liabilities any of the risks described below occurs, our business, results of operations and financial condition could be adversely affected. In such cases, the price of our Ordinary Shares could decline, and you could lose part or all of your investment.

~~Risks~~ Other ~~Relating~~than tooperating ~~Our~~lease ~~Business~~commitments, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not included in the consolidated financial statements.

WeLiquidity ~~have a history of losses~~ and weCapital ~~expect future losses.~~Resources

~~Since~~ As ~~our~~of ~~inception~~June 30, we2006, ~~have not achieved profitability and~~ we ~~expect~~had ~~to continue to incur net losses for the foreseeable future. We incurred net losses of~~ approximately $~~250,000 for the three months ended March 31, 2005, $5~~6.1 million inof ~~the year ended December 31~~cash, ~~2004,~~cash ~~$10.7 million~~equivalents ~~in the~~and ~~year~~short-term ~~ended~~investments ~~December 31,~~compared ~~2003,~~to ~~and~~ $247.9 million ~~for~~as ~~the~~of ~~year ended~~ December 31, ~~2002. As of March 31,~~ 2005~~, we had an accumulated deficit of approximately $144~~.~~0 million. We expect to continue to~~ incur significant sales and marketing, research and development, and general and administrative expenses through the remainder of 2005. As a result, we will need to significantly increase our revenue to achieve and maintain profitability, and we may not be able to do so. Failure to achieve profitability or achieve and sustain the level of profitability expected by investors and securities analysts may adversely affect the market price of our common stock.

~~Our~~ Net cash ~~business~~used ~~strategy~~in ~~requires~~operating ~~that~~activities was approximately $2.0 million and $1.2 million for the six months ended June 30, 2006 and 2005, respectively, and was primarily used to fund our ongoing operational needs. The increase in cash used in operating activities was primarily due to the investment we ~~derive~~made ain ~~significant~~the ~~amount~~sales and marketing efforts of ~~license~~the ~~revenue~~business ~~from~~in late 2005 and a reduction in our ~~OAS~~total revenue. Cash provided by investing activities was ~~product~~approximately $2.1 million Iffor ~~demand~~the six months ended June 30, 2006, and cash used by investing activities was approximately $1.2 million for ~~OAS~~the ~~does~~six ~~not~~months ~~increase~~ended June 30, ~~our~~2005. ~~total~~The ~~revenue~~cash ~~will~~provided ~~not~~by ~~increase~~investing in six months ended June 30, 2006 consisted of the net proceeds from the purchases and ~~our~~sales ~~business~~of short-term investments ~~will~~to ~~suffer~~fund operational needs, and the cash used by investing activities in six months ended June 30, 2005 consisted of an increase in our invested funds during the second quarter of 2005. Cash provided by financing activities was approximately $286,000 and $65,000 for the six months ended June 30, 2006 and 2005, respectively, and consisted primarily of proceeds from the issuance of Ordinary Shares under our 1999 Employee Stock Purchase Plan and from the exercise of stock options issued under our 1998 Employee Stock Option Plan.

~~Our~~ As ~~business~~of ~~strategy~~June 30, ~~requires~~2006, ~~that~~ we ~~derive~~had ano ~~significant~~material ~~amount~~commitments offor ~~license~~capital ~~revenue~~expenditures. ~~from~~Our capital ~~licensing~~requirements depend on numerous factors, including market acceptance of our ~~OAS~~products, ~~product~~the resources we devote to developing, marketing, selling and ~~derive~~supporting ~~additional~~our ~~related~~products ~~revenue~~and ~~through~~the ~~providing~~timing ~~related~~and extent ~~consulting~~of ~~and~~establishing ~~maintenance~~additional ~~services~~operations. ~~Accordingly,~~We believe that our ~~future~~current ~~operating~~cash, ~~results~~cash equivalent and short-term investment balances will ~~depend~~be onsufficient ~~the demand~~to fund our operations for ~~OAS~~at byleast ~~future~~the ~~customers~~next 12 months. ToHowever, ~~date~~our business may not go as planned, and we ~~have~~may ~~not~~need ~~succeeded~~to inraise ~~generating~~additional ~~significant~~funds ~~revenue~~prior ~~from~~to ~~licensing~~the ~~our~~expiration ~~OAS~~of ~~product~~this period, ~~which~~or ~~has~~we ~~negatively~~may ~~impacted~~elect ~~our~~to ~~operating~~raise ~~results.~~additional Iffunds ~~our~~prior to the ~~competitors~~expiration ~~release~~of ~~products~~this ~~that~~period ~~are~~if ~~superior~~we tobelieve ~~OAS~~such infunds ~~performance~~will orhelp ~~price,~~achieve ~~OAS~~strategic ~~does~~goals. ~~not~~If ~~become~~we decide ~~widely~~to ~~accepted~~raise byadditional ~~the market~~funds, orit wecould ~~fail~~be difficult to ~~enhance~~obtain ~~OAS~~additional ~~and~~financing ~~introduce~~on ~~new~~favorable ~~versions~~terms, if inat aall. ~~timely manner,~~We we may ~~never~~try ~~generate~~to ~~significant~~obtain ~~license~~additional ~~revenue~~financing ~~from~~by ~~this~~issuing ~~product~~Ordinary Shares or convertible debt securities, which could dilute our existing shareholders. If ~~demand~~we ~~for~~cannot ~~our~~raise ~~OAS~~needed funds on ~~product~~acceptable ~~does~~terms, ~~not~~or ~~significantly~~at ~~increase~~all, aswe amay ~~result~~not ofbe ~~competition,~~able ~~technological~~to ~~change~~develop or ~~other factors,~~enhance itour ~~would~~products, ~~significantly~~respond ~~and~~to competitive ~~adversely~~pressures ~~affect~~or grow our business, ~~financial~~and ~~condition,~~we ~~and~~may be required to undertake further expense ~~operating~~reduction ~~results~~measures.

~~We have restructured our company in October 2004, which could make it more difficult for us to~~22 ~~achieve our business objectives or could result in further restructurings if we don’t meet the goals of the restructuring.~~

InTable October 2004, we restructured our company in order to reduce management and administrative costs and bring our sales and marketing operations in line with our current sales level. While the restructuring has reduced cash operating expenses, our ability to adequately reduce cash used in operations, and ultimately generate profitable results from operations, will depend upon successful execution of our business plan and obtaining new customers. As a result of the reduction in personnel, however, we may not have Contents

20Contractual Obligations

~~Table~~ The offollowing ~~Contents~~summarizes our contractual obligations at June 30, 2006 (in thousands):

~~sufficient~~Payments ~~resources~~Due toby ~~execute our refocused sales strategy, particularly with respect to our OAS~~Period product, which could adversely affect our revenues and operating results. In addition, we reorganized our management team in connection with the restructuring, including changing our chief executive officer and chief financial officer. Our management team must work together effectively and in a timely manner in order for us to successfully execute our business strategy. If we do not meet our restructuring objectives, we may have to implement additional restructuring plans, which could impact the long-term viability of our company. Further, these plans may not achieve our desired goals due to such factors as significant costs or restrictions that may be imposed in some international locales on workforce reductions and a potential adverse affect on employee morale that could harm our efficiency and our ability to act quickly and effectively in the rapidly changing technology markets in which we sell our products.

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


			Less than		1-3		3-5
	Total		1 year		years		years
Operating Lease Obligations	$	588	$	588	$	—	$	—

Total Contractual Commitments	$	588	$	588	$	—	$	—

~~Despite~~We ~~recent~~are ~~signs~~currently ofin ~~improvement,~~negotiations ~~general~~with ~~economic indicators suggest continued uncertain economic conditions for~~ the ~~near~~landlord ~~future. Weak or uncertain economic conditions may continue to cause a reduction in or irregular information technology spending generally. In addition, some~~ of ~~our~~ customers continue to operate Internet-centric businesses, and these companies have been more acutely affected by uncertain economic conditions and have encountered significant difficulties in raising additional capital. If our ~~customers~~San ~~experience~~Jose ~~financial~~office ~~difficulties,~~space itnegotiating ~~could have~~ an ~~adverse~~extension ~~impact~~to on the ~~demand~~existing ~~for~~lease ~~our~~space ~~products,~~that ~~which~~we ~~would~~expect ~~adversely~~will ~~affect~~reduce our ~~results~~ongoing ~~of operations.~~rent ~~In addition~~expense, ~~predictions regarding economic conditions have a low degree of certainty,~~as ~~and~~current ~~further~~lease ~~predicting~~rates ~~the~~are ~~effects of the changing economy is even~~ more ~~difficult.~~favorable Wethan ~~may not accurately gauge~~ the ~~effect~~terms ofwhen the ~~general~~lease ~~economy~~was onoriginally ~~our business~~negotiated. ~~As a result, we may not react~~ ~~to changing conditions in a timely manner, which could adversely impact our business and results of operations and cause the price of our Ordinary Shares to decline.~~

~~Our~~Effective ~~business~~Corporate isTax ~~difficult to evaluate because our operating history is limited, and we have changed~~Rates ~~our strategic focus and repositioned our product line.~~

WeOur ~~have~~tax rate reflects a ~~limited~~mix ~~operating~~of ~~history~~the ~~generally~~U.S. ~~and~~statutory antax ~~even~~rate ~~more~~on ~~limited~~our ~~history~~U.S. ~~operating~~income, ~~our~~European ~~business~~country intax rates on our ~~current~~individual ~~markets~~European country income and the Israeli tax rate discussed below. We ~~cannot~~expect bethat ~~certain~~most ~~that~~of our ~~business~~future ~~strategy~~taxable income will be ~~successful~~ generated in Israel. WeIsraeli companies were ~~incorporated~~generally onsubject ~~August 31,~~to ~~1995,~~corporate ~~and~~tax ~~did~~at ~~not~~the ~~begin~~rate ~~generating~~of ~~revenue~~34% ~~until~~of their taxable income in ~~December 1996~~2005. InPursuant ~~early~~to ~~1998~~tax reform legislation that came into effect in 2003, wethe ~~changed~~corporate ~~our~~tax ~~strategic~~rate ~~focus~~is to ~~from~~undergo afurther ~~consumer-oriented~~staged reductions to ~~an enterprise-oriented~~25% ~~Internet~~by ~~communications~~the ~~company~~year 2010. In ~~2001,~~order weto ~~again~~implement ~~re-positioned~~these reductions, ~~our~~the ~~products to~~corporate ~~focus~~tax onrate ~~the~~is ~~portal~~scheduled ~~market.~~to ~~During~~decline ~~2003,~~to we31% ~~expanded~~in ~~our~~2006, ~~market~~29% ~~focus~~in to2007, ~~include~~27% ~~corporate~~in ~~intranets~~2008, and ~~other~~26% ~~Web-based~~in ~~applications~~2009. ~~During~~However, ~~2004we~~the ~~realigned~~rate ~~our~~is ~~sales~~effectively ~~strategy~~reduced tofor ~~focus~~income ~~on selling~~derived tofrom ~~the~~an ~~line~~Approved Enterprise. ofThe ~~business~~majority ~~owner~~of asour ~~opposed~~income tois ~~the~~derived ITfrom ~~department.~~our ~~These~~capital ~~changes~~investment ~~required~~program ~~us to~~with ~~adjust~~“Approved ~~our~~Enterprise” ~~business~~status ~~processes~~under ~~and~~the ~~make~~Law afor ~~number~~the Encouragement of ~~significant~~Capital ~~personnel~~Investments, ~~changes~~and is eligible therefore for tax benefits. ToAs ~~date~~a result of these benefits, we ~~have only~~expect ~~generated~~to ~~limited~~have ~~revenue~~a ~~from~~tax exemption ~~our~~on ~~new~~income ~~strategic~~derived ~~focus,~~during ~~and~~the wefirst dotwo ~~not~~years ~~know~~in ifwhich wethis ~~will~~investment ~~ever~~program produces ~~generate~~taxable ~~significant~~income, ~~revenue~~provided ~~from~~that ~~our~~we ~~new~~do ~~products.~~not Todistribute ~~the~~such ~~extent~~income weas doa ~~not~~dividend, ~~succeed~~and ina ~~generating~~reduced tax ~~significant~~rate ~~revenue~~of ~~from~~10% ~~licensing~~to ~~our~~25% ~~new~~for ~~products,~~the ~~particularly~~following ~~our~~five ~~OAS~~to ~~product~~eight years, ~~our~~depending ~~business, operating~~upon ~~results~~the ~~and~~proportion ~~financial~~of ~~conditions~~foreign ownership ~~will~~of ~~suffer~~BackWeb.

We On ~~are~~April 1, ~~increasingly~~2005, ~~relying~~an onamendment ~~our~~to ~~direct~~the ~~sales~~Law ~~force,~~for ~~rather~~the ~~than~~Encouragement ~~strategic~~of ~~relationships~~Capital Investments in Israel came into effect, which revised the criteria for investments qualified to receive tax ~~revenue~~benefits. ~~generation~~An ~~and~~eligible ~~this~~investment ~~trend~~program ~~could~~under ~~negatively~~the ~~affect~~amendment ~~our~~will ~~revenues~~qualify for benefits as a Privileged Enterprise (rather than the previous terminology of Approved Enterprise). Among other things, the amendment provides tax benefits to both local and foreign investors and simplifies the approval process. The amendment does not apply to investment programs approved prior to December 31, 2004. The new tax regime will apply to new investment programs only.

~~Until~~ As ~~recently,~~a weresult ~~had~~of ~~expected~~the ~~revenue~~amendment, totax-exempt beincome generated ~~increasingly~~under ~~through or by our various strategic relationships and our business plans and budgets reflected such expectations. However, in~~ the ~~three~~provisions ~~months~~of ~~ended March 31, 2005 and in~~ the ~~year~~new ~~ended December 31, 2004, we did not generate~~law ~~significant~~will ~~revenue~~subject ~~from~~us ~~our~~to ~~strategic~~taxes ~~reseller~~upon ~~relationships.~~distribution ~~We do not know if these existing~~ or ~~any~~ ~~future~~liquidation ~~strategic~~and ~~relationships~~we ~~will~~may ~~prove to~~ be ~~successful,~~required orto ifrecord ~~we will derive material~~deferred ~~revenue~~tax ~~from~~liability ~~them. Moreover, these companies are constantly evaluating their product offerings and evaluating build or buy scenarios~~ with respect to ~~market offerings. Indeed, we are aware that certain of our strategic relationships,~~ such astax-exempt ~~IBM~~income. ~~and~~We ~~SAP, and potential resellers~~ are ~~actively~~ currently evaluating ~~and~~the ~~may~~impact ~~be developing their own offline solutions that could be competitive with or replace our OAS technology solution. In addition, one or more of these companies may use~~ the ~~information~~amendment ~~they~~will ~~gain from their relationship with us to develop or market competing products. Such events would~~ have ~~an adverse impact~~ on ~~our revenue~~us. AsBased ~~a result, we are increasingly relying~~ on our ~~direct~~ ~~sales~~preliminary ~~force~~analysis, ~~rather~~it ~~than~~will ~~strategic relationships, for sales of licenses to our new products. If our direct sales force is~~ not ~~successful~~adversely inaffect ~~these efforts, we may not achieve~~ our ~~business plans~~2006 orfinancial ~~attain our revenue goals~~statements.

If All weof ~~require~~these ~~additional~~tax ~~financing~~benefits ~~for~~are ~~our~~subject ~~future~~to ~~capital~~various ~~needs~~conditions ~~but~~and ~~are~~restrictions. ~~not~~See ~~able~~“Note to12 ~~obtain~~— Income ~~it,~~Taxes we— Israeli Income Taxes — Tax Benefits under the Law for the Encouragement of Capital ~~may~~Investments, be1959,” ~~unable~~of Notes to ~~develop~~the orConsolidated ~~enhance~~Financial Statements reporting our ~~products~~Annual Report on Form 10-K for the year ended December 31, ~~expand~~2005. ~~operations~~We cannot assure you that we will obtain approval for additional Approved Enterprise Programs, or ~~respond~~that tothe ~~competitive~~provisions of the law will not ~~pressures~~change.

~~Our~~Impact ~~cash, cash equivalents and short-term investments balances have declined from $14.5 million as~~ of ~~December 31,~~Inflation ~~2003 to $10.3 million as of December 31, 2004,~~ and toCurrency ~~$10.1 million as~~Fluctuations ~~of March 31, 2005, and we expect to continue to use cash in our~~

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

~~Table of Contents~~23

operationsTable for the foreseeable future. As a result, we might need to raise additional capital to fund expansion, product development, acquisitions or working capital. This need may arise sooner than we anticipate if our revenue does not grow in line with our expectations, particularly revenue from licensing our OAS product, if our costs are higher than we expect or if we change our strategic plans. If we were required to raise additional funds, it could be difficult to obtain additional financing on favorable terms, or at all, due to our financial condition. In the event that we obtain additional financing by issuing Ordinary Shares or securities that are convertible into Ordinary Shares, the interests of existing shareholders would be diluted. If we cannot raise needed funds on acceptable terms, or at all, we may not be able to develop or enhance our products, respond to competitive pressures or grow our business or we may be required to further reduce our expenditures, any of which could harm our business. Contents

~~Our~~Item 3. ~~long~~Quantitative and ~~unpredictable~~Qualitative ~~sales~~Disclosures ~~cycle~~About ~~depends~~Market ~~on factors outside our control and may cause our~~Risk ~~license revenue to vary significantly.~~

To We ~~date,~~develop ~~our~~products ~~average~~in ~~engagement~~Israel ~~with our customers have typically taken between 3~~ and ~~12 months~~sell ~~for~~ them toin ~~evaluate~~the ~~our products before making their purchasing decisions~~U. ~~The long~~S., ~~and often unpredictable~~Canada, ~~sales and implementation cycles for our products have caused~~Europe, and ~~may~~Israel. ~~continue~~As toa ~~cause~~result, our ~~license~~financial ~~revenue~~results ~~and~~could ~~operating~~be ~~results~~affected toby ~~vary~~factors ~~significantly~~such ~~from~~as ~~period~~changes toin ~~period.~~foreign ~~Sales~~currency ofexchange ~~licenses~~rates ~~and~~or ~~implementation~~weak ~~schedules~~economic ~~are~~conditions ~~subject~~in toforeign amarkets. ~~number~~As most of ~~risks~~our ~~over~~sales ~~which~~are ~~we have little~~currently ormade noin ~~control,~~U.S. ~~including customer budgetary constraints~~dollars, ~~customer~~a ~~internal~~strengthening ~~acceptance~~of ~~reviews,~~ the ~~success~~ ~~and~~dollar ~~continued~~could ~~internal~~make ~~support~~our ofproducts ~~customers’~~less ~~own~~competitive ~~development efforts, the sales and~~in ~~implementation~~foreign ~~efforts~~markets. ofOur ~~businesses~~interest ~~with~~income ~~which~~is wesensitive ~~have~~to ~~relationships,~~changes in the ~~nature,~~general ~~size~~level ~~and specific needs~~ of aU.S. ~~customer~~interest rates, ~~and~~particularly since the ~~possibility~~majority of ~~cancellation~~our ofinvestments ~~projects~~are byin ~~customers~~short-term instruments. ~~Along~~We ~~with~~regularly ~~our~~assess ~~distributors,~~these werisks ~~spend~~and ~~significant~~have ~~time~~established ~~educating~~policies and ~~providing~~business ~~information~~practices to ~~our~~protect ~~prospective~~against ~~customers regarding~~ the ~~use~~adverse ~~and~~effects ~~benefits~~ of ~~our~~these ~~products~~and ~~with~~other nopotential ~~guarantee~~exposures. ~~that~~As ~~such investment will result in~~ a ~~sale. In addition~~result, ~~our~~we ~~customers~~do ~~often begin by purchasing our products~~not onanticipate amaterial ~~pilot~~losses ~~basis~~in ~~before~~these ~~they decide whether or not to purchase additional licenses for full deployment~~areas. ~~For~~Due ~~example, even after purchase, our customers tend~~ to ~~deploy our OAS solution slowly, depending upon~~ the ~~skill~~nature ~~set~~ of ~~the~~our ~~customer,~~short-term ~~the size of the deployment~~investments, ~~the~~we ~~stage of the~~have ~~customer’s~~concluded ~~deployment~~that ofthere ais ~~portal,~~no ~~the~~material ~~complexity~~market ofrisk ~~the~~exposure. ~~customer’s~~Therefore, ~~network~~no ~~environment~~quantitative ~~and the~~tabular ~~quantity~~disclosures ofare ~~hardware and the degree of hardware configuration necessary to deploy the products~~required.

~~Our~~Foreign ~~quarterly~~Currency ~~operating~~Exchange ~~results~~Rate ~~are subject to fluctuations.~~Risk

~~Our~~We ~~operating~~conduct ~~results~~our ~~are~~business ~~difficult~~and sell our products directly to ~~predict.~~customers ~~Our~~primarily ~~revenue~~in North America and ~~operating~~Europe. ~~results~~In ~~have~~the normal course of business, our financial position is routinely subject to market ~~fluctuated~~risks associated with foreign currency rate fluctuations due to balance sheet positions in ~~the~~other local ~~past~~foreign currencies. Our policy is to ensure that business exposures to foreign exchange risks are identified, measured and ~~may~~minimized using foreign currency forward contracts to reduce such risks, inshould the ~~future~~risks of such exposure outweigh the cost of forward contracts. The foreign currency forward contracts, ~~vary~~when ~~significantly~~placed, ~~from~~generally ~~quarter~~expire towithin ~~quarter~~90 days. ~~due~~The tochange ain fair value ~~number~~of these forward contracts is recorded as income/loss in our Consolidated Statements of ~~factors~~Operations as a component of interest and other income, ~~including:~~net. There were no forward contracts placed in 2005 or 2006.

•Item 4. ~~demand~~Controls ~~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.Procedures

~~Due~~Evaluation toof disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the ~~foregoing~~Securities ~~factors~~Exchange Act of 1934 (the “Exchange Act”), wethat ~~believe~~are designed to ensure that ~~quarter-~~information required to~~-quarter~~ ~~comparisons~~be ofdisclosed ~~our~~by ~~operating~~us ~~results~~in ~~are~~reports ~~not~~that ~~necessarily~~we afile ~~good~~or ~~indication~~submit ofunder ~~our~~the ~~future~~Exchange ~~performance.~~Act Weis ~~incur~~recorded, ~~expenses~~processed, ~~based~~summarized, and ~~predominantly~~reported onwithin ~~operating~~the ~~plans~~time periods specified in Securities and ~~estimates~~Exchange ofCommission ~~future~~rules ~~revenue.~~and ~~Our~~forms, and ~~expenses~~that ~~are~~such information is accumulated and communicated to aour ~~large~~management, including our Chief ~~extent~~Executive ~~fixed~~Officer and weVice ~~may~~President, ~~not~~Finance, beas ~~able~~appropriate, to ~~adjust~~allow ~~them~~timely ~~quickly~~decisions toregarding required ~~meet~~disclosure. aIn ~~shortfall~~designing inand ~~revenue~~evaluating ~~during~~our disclosure controls and procedures, management ~~any~~recognized ~~particular~~that ~~quarter.~~disclosure ~~Any~~controls ~~significant~~and ~~shortfall~~procedures, inno ~~revenue~~matter inhow ~~relation~~well toconceived ~~our~~and ~~expenses~~operated, ~~would~~can ~~decrease~~provide ~~our~~only ~~net~~reasonable, ~~income~~not orabsolute, ~~increase~~assurance ~~our~~that ~~operating~~the ~~losses~~objectives ~~and~~of ~~would~~the ~~also~~disclosure ~~harm~~controls ~~our financial~~and ~~condition~~procedures are met. InAdditionally, ~~some~~in ~~recent~~designing ~~quarters~~disclosure controls and procedures, our ~~operating~~management necessarily ~~results~~was ~~have~~required ~~been~~to ~~below~~apply its judgment in evaluating the ~~expectations~~cost-benefit ofrelationship ~~public~~of ~~market~~possible ~~analysts~~disclosure controls and ~~investors~~procedures. ItThe isdesign ~~likely~~of ~~that~~any disclosure controls and procedures also is based in ~~some~~part upon certain assumptions about the likelihood of future ~~quarters~~events, ~~our~~and ~~operating~~there ~~results may~~can ~~also~~ be ~~below~~no ~~such~~assurance ~~expectations,~~that ~~which~~any ~~would~~design ~~likely~~will ~~cause~~succeed ~~our~~in ~~stock~~achieving ~~price~~its tostated ~~decline~~goals under all potential future conditions.

22 Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Vice President, Finance have concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

~~Table~~ Changes ofin ~~Contents~~internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

~~We typically derive a significant portion of our license revenue in each quarter from a small number of relatively large orders. For example, in the three months ended March~~Item ~~31, 2005, we derived approximately 88% of our license revenue from sales to two existing customers~~1. ~~Our operating~~Legal ~~results for a particular fiscal quarter could be materially and adversely affected if we~~Proceedings are unable to complete one or more substantial license sales forecasted for that quarter. Additionally, we also offer volume-based pricing, which may adversely affect our operating margins. We typically have very little backlog and, accordingly, generate substantially all of our revenue for a given quarter in that quarter.

If On weNovember 13, ~~lose~~2001, aBackWeb, ~~major~~six ~~customer,~~of our ~~revenue~~officers ~~could~~and ~~suffer~~directors, ~~because~~and ofvarious underwriters for our ~~customer~~initial ~~concentration~~public offering were named as defendants in a consolidated action captioned In re BackWeb Technologies Ltd. Initial Public Offering Securities Litigation, Case No. 01-CV-10000, a purported securities class action lawsuit filed in the United States District Court, Southern District of New York. Similar cases have been filed alleging violations of the federal securities laws in the initial public offerings of more than 300 other companies, and these cases have been coordinated for pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92. A consolidated amended complaint filed in the case asserts that the prospectus from our June 8, 1999 initial public offering failed to disclose certain alleged improper actions by the underwriters for the offering, including the receipt of excessive brokerage

~~We have historically generated a substantial portion of our revenue from a limited number of~~24 customers, and we expect this to continue for the foreseeable future. As a result, if we lose a major customer, or if there is a decline in the use of our products within our existing customers’ organizations, our revenue would be adversely affected. In the three months ended March 31, 2005, two customers accounted for 43% of our total revenue. In 2004, our three largest customers represented approximately 34% of our total revenue. In 2003, our three largest customers represented approximately 28% of our total revenue. In 2002, our three largest customers represented approximately 40% of our total revenue, with one OEM customer, whose contract with us terminated in early 2002, accounting for 20% of our total revenue. We signed a new reseller agreement with this customer, but the agreement does not require the customer to purchase any product from us. In 2004 and, for the three months ended March 31, 2005, we did not generate any significant revenue from this reseller agreement, and we cannot assure you that we will derive revenue from this reseller agreement in the future.

OurTable financial performance and workforce reductions may adversely affect the morale and performance of our personnel and our ability to hire new personnel. Contents

Incommissions ~~connection with the evolution of our business model~~ and inagreements ~~order~~with tocustomers ~~reduce~~regarding ~~our~~aftermarket ~~cash expenses,~~purchases weof ~~have~~shares ~~adopted a number~~ of ~~changes in personnel, including significant workforce~~our ~~reductions~~stock. The ~~changes~~complaint inalleges ~~personnel~~violations ~~may~~of ~~adversely~~Sections 11 ~~affect morale~~ and ~~our~~15 ~~ability~~of tothe ~~attract~~Securities ~~and retain~~Act ~~key~~of ~~personnel. In addition~~1933, Sections ~~recent~~10(b) ~~trading~~and ~~levels~~20(a) of ~~our~~the ~~common~~Securities ~~stock~~Exchange ~~have~~Act ~~decreased the value~~ of ~~the~~1934, ~~stock~~and ~~options~~Rule 10b-5 ~~granted~~promulgated tounder the ~~employees~~Securities ~~pursuant~~Exchange toAct ~~our~~of ~~stock option plan~~1934. AsOn aor ~~result~~about ~~of these factors~~July 15, ~~our remaining personnel may seek employment with larger~~2002, ~~more~~an ~~established~~omnibus ~~companies or~~motion ~~companies they perceive~~ to ~~have~~dismiss ~~better prospects. If this were to occur, our revenue could~~was ~~decline~~filed ~~and our operations~~ in ~~general~~the ~~could~~coordinated belitigation ~~impacted.~~on ~~None~~behalf of ~~our~~defendants, ~~officers~~including orBackWeb, ~~key~~on ~~employees~~common ispleadings ~~bound by an employment agreement for any specific term~~issues. ~~Our~~In ~~relationships with these officers and key employees are at will. Moreover~~October 2002, wethe doCourt ~~not~~dismissed ~~have~~all ~~“key~~six ~~person”~~individual ~~life~~defendants ~~insurance~~from ~~policies~~the ~~covering~~litigation ~~any~~without ~~of our employees. Additionally the economic environment in Israel and the US is improving~~prejudice, ~~making~~ itpursuant ~~more challenging~~ to ~~retain~~a ~~our people~~stipulation. AsOn aFebruary 19, ~~result~~2003, ofthe ~~these~~Court ~~factors,~~denied wethe ~~have~~motion ~~experienced~~to andismiss ~~increased~~with ~~level~~respect ofto ~~employee~~the ~~departures~~claims ~~and~~against ~~our~~us. ~~remaining~~No ~~personnel~~trial ~~may~~date ~~seek~~has ~~other~~yet ~~employment opportunities~~been ~~in the future~~set.

We A ~~depend~~proposal onhas ~~increased~~been ~~business~~made ~~from~~for ~~new~~the ~~customers,~~settlement asand ~~well~~release asof ~~additional~~claims ~~business~~against ~~from~~the ~~existing~~issuer ~~customers~~defendants, ~~and~~including ifBackWeb. weWe ~~fail~~have agreed to ~~grow~~the ~~our~~proposal. ~~customer~~The ~~base~~settlement oris ~~generate~~subject ~~repeat~~to ~~business~~a number of conditions, ~~our~~including ~~operating~~approval of the proposed settling parties and the court. In ~~results~~September 2004, ~~could~~an beagreement ~~harmed~~of settlement was submitted to the court for preliminary approval.

~~Our~~If ~~business~~the ~~model~~settlement ~~generally~~does ~~depends~~not onoccur, ~~the~~and ~~sale~~litigation ofagainst ~~our~~us ~~products~~continues, towe ~~new~~believes ~~customers~~we ~~as well as~~have ~~expanded~~meritorious ~~use~~defenses ofand ~~our~~intend ~~products~~to ~~within~~defend ~~our~~the ~~existing~~case ~~customers’ organizations~~vigorously. IfHowever, wethe ~~fail~~results toof ~~grow our~~any ~~customer~~litigation ~~base~~are orinherently touncertain ~~generate repeat~~ and ~~expanded~~can ~~business~~require ~~from~~significant ~~our~~management ~~current~~attention, and ~~future~~we ~~customers,~~could ~~our~~be ~~business~~forced ~~and~~to ~~operating~~incur ~~results~~substantial ~~will~~expenditures, beeven ~~seriously~~if ~~harmed~~we ultimately prevail. In ~~some~~the ~~cases,~~event ~~our~~there ~~customers initially~~were ~~make~~an aadverse ~~limited~~outcome, ~~purchase of~~ our ~~products~~business ~~and~~could ~~services~~be ~~for~~harmed. ~~trials~~Thus, ~~pilot~~we orcannot ~~proof~~assure ofyou ~~concept programs.~~that ~~These~~this ~~customers~~lawsuit ~~might~~ will not ~~choose~~materially toand ~~acquire~~adversely ~~additional~~affect ~~licenses~~our tobusiness, ~~expand~~results ~~their~~of ~~use~~operations or the price of our Ordinary ~~products~~Shares.

~~In addition~~Additionally, asBackWeb wewas ~~have~~jointly ~~introduced~~named ~~new~~in ~~versions~~a ofjudgment ~~our~~during ~~products~~September 2005 orfor ~~new products, such as our~~approximately ~~OAS~~$500,000 werelated ~~have~~to ~~experienced~~ a ~~decline~~claim inagainst ~~licensing~~its ~~revenue~~dormant ~~generated~~French ~~from our older products, such as Polite Sync Server and e-Accelerator, and we anticipate future declines in licensing revenue from these products~~subsidiary. ~~However,~~The itjudgment is ~~also~~related ~~possible~~to ~~that~~a dispute ~~our~~between ~~current~~a ~~customers~~former ~~might~~French ~~not~~distributor ~~require the functionality~~ of ~~our~~BackWeb ~~new products~~ and ~~might~~one ~~not~~of ~~ultimately~~the ~~license~~distributor’s ~~these~~end ~~products~~user customers. ~~Because~~While ~~the total amount of maintenance and support fees~~ we ~~receive~~believe ~~in any period depends, in large part, on the size and number of licenses that~~ we have ~~previously~~additional ~~sold,~~defenses ~~any~~against ~~downturn~~the inclaim ~~our software license revenue would negatively affect our future maintenance~~ and ~~support~~will ~~revenue.~~ultimately ~~In addition, if~~not ~~customers~~be ~~elect~~responsible ~~not~~for topayments ~~renew~~under ~~their~~the ~~maintenance agreements~~judgment, ~~our~~we ~~services~~accrued ~~revenue~~approximately ~~will decline significantly. Further~~$250,000, ~~some of our customers are telecommunications~~ or ~~information technology~~approximately ~~companies,~~one-half ~~which~~of ~~have~~the ~~been~~total ~~forced~~judgment toagainst ~~significantly~~the ~~reduce~~distributor ~~their~~and ~~operations~~us, in ~~light~~the ofthird ~~limited access~~quarter ~~to sources~~ of ~~financing and the national and global economic uncertainty~~2005. ~~If customers are~~ ~~unable~~

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

~~Table~~Item 1A. ofRisk ~~Contents~~Factors

to We ~~pay~~operate ~~for~~in ~~their~~a ~~current~~rapidly ~~products~~changing orenvironment that involves numerous risks and uncertainties, some of which are ~~unwilling~~beyond toour ~~purchase~~control. ~~additional~~The ~~products~~following discussion highlights some of these risks and uncertainties. You should consider the following factors, as well as other information set forth in this Quarterly Report on Form 10-Q, in connection with any investment in our Ordinary Shares. If ~~revenue~~any ~~will~~of ~~decline~~the risks described below occurs, ~~which~~our ~~would~~business, ~~likely~~results ~~materially~~of operations and financial condition could be adversely ~~affect~~affected. ~~our~~In ~~revenue~~such cases, ~~operating~~the price of our Ordinary Shares could ~~results~~decline, and ~~stock~~you ~~price~~could lose part or all of your investment.

~~Rapid~~Risks ~~technological~~Relating ~~changes could cause our products~~ to ~~become~~Our ~~obsolete.~~Business

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

~~Our~~ Since ~~market~~our isinception, ~~susceptible~~we tohave ~~rapid~~not ~~changes~~achieved ~~due~~profitability and we expect to ~~technology~~continue ~~innovation,~~to ~~evolving~~incur ~~industry~~net ~~standards,~~losses ~~and~~for ~~frequent~~the ~~new~~foreseeable ~~service~~future. ~~and~~In ~~product~~addition, ~~introductions.~~our ~~New~~net ~~services~~loss ~~and~~significantly ~~products~~increased ~~based~~during onthe ~~new~~first ~~technologies~~six ormonths ~~new~~of ~~industry~~2006 ~~standards~~as ~~expose~~compared us to ~~risks~~our ofnet ~~technical~~loss orfor ~~product~~the ~~obsolescence. For~~first ~~example,~~six ~~emerging~~months ~~technologies,~~of ~~such~~2005. asWe ~~wireless,~~incurred net ~~that~~losses ~~take~~of aapproximately ~~different~~$1.9 million ~~approach~~for to the ~~challenge~~ ofsix ~~offline~~months ~~Web~~ended ~~access~~June 30, by2006, $1.0 million for the ~~example~~year ended December 31, ~~re-engineering~~2005, ~~platforms~~$5.1 million ~~and~~in ~~applications~~the year ended December 31, ~~pose~~2004 ~~a competitive~~and ~~challenge~~$10.7 million Inin ~~addition,~~the ~~other~~year ~~companies~~ended December 31, ~~including~~2003. ~~some~~As of ~~our~~June 30, ~~partners~~2006, ~~also~~we ~~approach the~~had ~~issue~~an accumulated deficit of approximately ~~offline~~$147 million. ~~Web~~We ~~architecture~~expect ~~differently~~to ~~than~~continue weto doincur insignificant ~~some~~sales ~~cases~~and marketing, research and ~~such~~development, ~~approaches~~and ~~may achieve~~general aand ~~greater~~administrative ~~degree~~expenses ofthrough ~~market~~the ~~acceptance.~~remainder Ifof we2006. doAs a ~~not~~result, ~~use~~we ~~leading~~will ~~technologies~~need ~~effectively, meet~~to ~~the~~significantly ~~challenges~~increase ~~posed~~our byrevenue ~~emerging~~to ~~technologies~~achieve orand ~~other~~maintain ~~architectures~~profitability, and ~~continue~~we tomay ~~develop~~not ~~our technical~~be ~~expertise~~able ~~and~~to ~~enhance~~do ~~our~~so. ~~existing~~Failure ~~products~~to onachieve aprofitability ~~timely~~or ~~basis,~~achieve weand ~~may~~sustain bethe ~~unable to~~level ~~compete~~of ~~successfully~~profitability inexpected ~~this~~by ~~industry,~~investors ~~which~~and ~~would~~securities analysts may adversely affect ~~our~~the ~~business~~market price ~~and~~of ~~results~~our ~~of operations~~common stock.

~~Our~~Wireless ~~inability~~networking totechnology ~~integrate~~and ~~our~~geographic ~~products~~coverage ~~with other third-party software~~ could ~~adversely~~limit ~~affect market acceptance of~~ our ~~products~~market.

~~Our~~ Emerging ~~ability~~wireless totechnologies, ~~compete~~such ~~successfully~~as ~~depends~~wireless onfidelity, ~~the~~or ~~continued~~WiFi, ~~compatibility~~ and cellular data ~~interoperability~~networks, ofmay ~~our~~pose ~~products~~a ~~with~~competitive ~~products~~challenge ~~and~~as ~~systems~~an ~~sold~~alternative byto ~~various~~BackWeb’s ~~third~~capabilities ~~parties,~~or ~~such~~they asmay ~~portal~~be ~~framework~~a ~~vendors.~~source ~~Currently,~~of ~~these~~growth ~~vendors~~to ~~have~~BackWeb ~~open~~as ~~applications~~they ~~program~~raise ~~interfaces,~~awareness ~~which facilitate~~of ~~our~~the ~~ability~~benefits toof ~~integrate~~mobility ~~with~~and potentially ~~their~~highlight ~~systems.~~increased ~~These~~needs ~~vendors~~for ~~have~~solutions ~~also~~like ~~been~~BackWeb. ~~willing~~While ~~to license~~we tobelieve usthat ~~rights~~many toof ~~build~~our potential ~~integrations~~mobile tobusiness ~~their~~customers’ ~~products~~needs ~~and~~will ~~use~~not ~~their~~be ~~development~~met ~~tools.~~by ~~If any~~wireless ~~one~~networking offor ~~them~~the foreseeable ~~were~~future, tothe ~~close~~reality ~~their~~and ~~programs’~~promise ~~interfaces~~of orwireless ~~fail~~connectivity towill ~~grant~~make usit necessary ~~licenses,~~for ~~our~~BackWeb ~~ability~~ to ~~provide~~target aand ~~close~~educate ~~integration~~its ofprospects ~~our~~intelligently. ~~products~~If ~~could~~we ~~become~~fail ~~more~~to ~~difficult~~successfully ~~and~~target ~~could~~those ~~delay~~market orsegments ~~prevent~~which ~~our~~are ~~products’~~not ~~integration~~served ~~with~~by ~~future~~wireless ~~systems~~networking, then our operating results could suffer.

~~Failure to successfully develop versions and updates of our products that run on the operating~~25 ~~systems used by our current and prospective customers could reduce our sales.~~

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

InOur ~~addition,~~business ~~our~~strategy ~~products~~requires ~~may~~that ~~face~~we ~~competition~~derive a significant amount of license revenue from ~~operating~~our ~~system~~OAS product. ~~software~~If ~~providers~~demand for OAS does not increase, ~~which may~~our ~~elect~~total torevenue ~~incorporate~~will ~~similar~~not ~~technology~~increase ~~into~~and ~~their~~our ~~own~~business will ~~products~~suffer.

~~Competition~~ Our inbusiness strategy requires that we derive a significant amount of license revenue from licensing our OAS product and derive additional related revenue through providing related consulting and maintenance services. Accordingly, our future operating results will depend on the demand ~~Internet~~for ~~communications~~OAS ~~market~~by ~~may~~future ~~reduce~~customers. While our OAS revenue accounted for the ~~demand~~majority of our license revenue for the first time in 2005, orwhich ~~price~~continued in the first half of 2006, our overall license ~~products~~sales to new customers declined in the first six months of 2006 compared to the first six months of 2005. As a result, we need to realize additional growth during the remainder of 2006 and beyond or our operating results will be negatively impacted. If our competitors release products that are superior to OAS in performance or price, OAS does not become widely accepted by the market, or we fail to enhance OAS and introduce new versions in a timely manner, we may never generate significant license revenue from this product. If demand for our OAS product does not significantly increase, as a result of competition, technological change or other factors, it would significantly and adversely affect our business, financial condition, and operating results.

~~The Internet communications market is intensely competitive and rapidly changing.~~ We ~~expect that~~restructured ~~competition~~our ~~will~~company ~~intensify~~ in ~~the~~October 2004 ~~near-term~~and ~~because~~further there are very limited barriers to entry. Our primary long-term competitors may not have entered the market yet because the Internet communications market is relatively new. Competition could impact us through price reductions, fewer customer orders, reduced ~~gross~~headcount ~~margin~~in ~~and loss of market share~~2006, ~~any of~~ which could ~~cause our~~make ~~business~~it tomore ~~suffer.~~difficult ~~Many~~for ofus ~~our~~to ~~current~~achieve ~~and~~our ~~potential~~business ~~competitors~~objectives ~~have~~or ~~greater~~could ~~name~~result ~~recognition, longer~~in ~~operating histories, larger customer bases and significantly greater financial, technical,~~further ~~marketing,~~restructurings ~~public~~if ~~relations, sales, distribution and other resources than~~ we ~~do.~~don’t ~~Some~~meet ~~of our potential competitors are among~~ the ~~largest~~goals ~~and~~of ~~most well capitalized software companies in~~ the ~~world.~~ ~~For example, both Microsoft and IBM have~~restructuring.

24 In October 2004, we restructured our company in order to reduce management and administrative costs and bring our sales and marketing operations in line with our then current sales level. In July 2006, we again reduced headcount in an effort to reduce our cash burn. While the restructurings have reduced cash operating expenses, our ability to adequately reduce cash used in operations, and ultimately generate profitable results from operations, will depend upon successful execution of our business plan and obtaining new customers. If we do not meet our restructuring objectives, we may have to implement additional restructuring plans, which could impact the long-term viability of our company. Further, these plans may not achieve our desired goals due to such factors as significant costs or restrictions that may be imposed in some international locales on workforce reductions and a potential adverse affect on employee morale that could harm our efficiency and our ability to act quickly and effectively in the rapidly changing technology markets in which we sell our products.

~~Table~~If ofwe ~~Contents~~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.

~~announced~~ Our cash, cash equivalents and short-term investments balances have declined from $10.3 million as of December 31, 2004 to $7.9 million as of December 31, 2005 and to $6.1 million as of June 30, 2006, and we expect to continue to use cash in our operations. As a result, we might need to raise additional capital to fund expansion, product ~~plans~~development, ~~addressing~~acquisitions ~~the~~or ~~offline~~working capital. ~~Web~~This ~~application~~need ~~market~~may ~~segment~~arise ~~served~~sooner bythan we anticipate if our revenue does not grow in line with our expectations, particularly revenue from licensing our OAS product, if our costs are higher than we expect or if we change our strategic plans. If ~~such~~we ~~companies~~were ~~enter~~required ~~this~~to ~~market~~raise ~~segment~~additional funds, it could be difficult to obtain additional financing on favorable terms, or at all, due to our financial condition. In the event that we obtain additional financing by issuing Ordinary Shares or securities that are convertible into Ordinary Shares, the interests of existing shareholders would be diluted. If we cannot raise needed funds on acceptable terms, or at all, we may not be able to ~~compete~~ ~~successfully~~develop or enhance our products, ~~and~~respond to competitive pressures or grow our business or we may be required to further reduce our expenditures, any of which could harm our business.

~~The~~Our ~~loss~~quarterly license revenue typically depends on a small number of ~~our~~large ~~right~~orders, and any failure to ~~use~~complete ~~software~~one ~~licensed~~or tomore ussubstantial bylicense ~~third~~sales ~~parties~~in a quarter could ~~harm~~materially and adversely affect our ~~business~~operating results.

We ~~license~~typically ~~technology~~derive ~~that~~a issignificant ~~incorporated~~portion ~~into~~of our ~~products~~license ~~from~~revenue ~~third~~in ~~parties,~~each ~~including~~quarter from a small ~~security~~number ~~and~~of ~~encryption~~relatively ~~software~~large orders. ~~Any~~For ~~interruption~~example, in the ~~supply~~three ormonths ~~support~~ended ofJune 30, ~~any~~2006, ~~licensed~~we derived ~~software~~approximately ~~could~~73% ~~disrupt~~of our ~~operations~~license ~~and~~revenue ~~delay~~from ~~our~~ sales, ~~unless~~to ~~and~~two ~~until~~existing wecustomers. ~~can~~Our ~~replace the~~operating ~~functionality~~results ~~provided~~for bya ~~this~~particular ~~licensed~~fiscal ~~software.~~quarter ~~Because~~could ~~our~~be ~~products~~materially ~~incorporate~~and ~~software developed~~adversely ~~and~~affected ~~maintained~~if bywe ~~third~~are ~~parties,~~unable to wecomplete ~~depend~~one onor ~~these~~more ~~third~~substantial ~~parties~~license tosales ~~deliver~~forecasted ~~and~~for ~~support reliable~~that ~~products~~quarter. Additionally, ~~enhance~~we also ~~their~~offer ~~current~~volume-based ~~products~~pricing, ~~develop~~which ~~new~~may ~~products~~adversely onaffect aour ~~timely~~operating ~~and~~margins. We typically ~~cost-effective~~have ~~basis~~very little backlog and, ~~respond~~accordingly, ~~effectively~~generate tosubstantially ~~emerging~~all ~~industry~~of ~~standards~~our ~~and~~revenue ~~other~~for ~~technological~~a given ~~changes~~quarter in that quarter.

~~Our growth may suffer because of the complexities involved in implementing our products.~~26

TheTable use of our products by our customers often requires implementation services, and our growth will be limited in the event we are unable to expand our implementation services personnel or subcontract these services to qualified third parties. In addition, customers could delay product implementations. In the second half of 2003, 2004 and the first quarter of 2005, there were a greater number of deployments of our OAS solution by customers, and that solution is being subjected to actual commercial use and implementation. Initial implementation typically involves working with sophisticated software, computers and communications systems. If we experience difficulties with implementation or do not meet project milestones in a timely manner, we could be obligated to devote more customer support, engineering and other resources to a particular project at the expense of other projects. Contents

Our ~~business~~long ~~will~~and ~~suffer~~unpredictable ifsales ~~the~~cycle ~~Internet~~depends ~~infrastructure~~on ~~cannot~~factors ~~support~~outside ~~the~~our ~~demands~~control ~~placed~~and onmay itcause our license revenue to vary significantly.

~~Our~~ To ~~future~~date, ~~revenue~~our ~~and~~average ~~profits,~~engagement ifwith ~~any,~~our ~~depend~~customers ~~upon~~has ~~the~~typically ~~widespread~~taken ~~acceptance~~between 3 and ~~use~~12 months for ofthem ~~the Internet~~to asevaluate anour ~~effective~~products ~~medium~~before ofmaking ~~business~~their purchasing decisions. The long, and ~~communication~~often unpredictable, bysales ~~our~~and ~~customers.~~implementation ~~Rapid~~cycles ~~growth~~for inour ~~the use~~products ofhave caused, and ~~interest~~may incontinue to cause, ~~the~~our ~~Internet~~license ~~has~~revenue ~~placed~~and ~~increased~~operating ~~demands~~results onto ~~its~~vary ~~infrastructure~~significantly from period to period. ~~Our~~Sales ~~success~~of ~~will~~licenses ~~depend~~and implementation schedules are subject to a number of risks over which we have little or no control, inincluding ~~large~~customer ~~part~~budgetary constraints, oncustomer ~~the~~internal acceptance ofreviews, the success ~~Internet~~and incontinued internal support of customers’ own development efforts, the ~~commercial~~sales ~~marketplace~~ and implementation onefforts of businesses with which we have relationships, the ~~ability~~nature, size and specific needs of ~~third~~a ~~parties~~customer toand ~~provide~~the apossibility ~~reliable~~of ~~Internet~~cancellation ~~infrastructure~~of ~~network~~projects ~~with~~by ~~the~~customers. Along ~~speed,~~with ~~data~~our ~~capacity~~distributors, ~~security~~we spend significant time educating and ~~hardware~~providing ~~necessary~~information ~~for~~to ~~reliable~~our prospective ~~Internet~~customers ~~access~~regarding the use and ~~services~~benefits of our products with no guarantee that such investment will result in a sale. ToIn addition, our customers often begin by purchasing our products ~~the~~on ~~extent~~a ~~that~~pilot ~~the~~basis ~~Internet~~before ~~continues~~they decide whether or not to ~~experience~~purchase ~~increased~~additional ~~numbers~~licenses offor ~~users~~full deployment. For example, ~~increased~~even after purchase, our customers tend to deploy our OAS solution slowly, ~~frequency~~depending ofupon ~~use~~the orskill ~~increased~~set ~~bandwidth~~of ~~requirements~~the customer, the ~~Internet~~size ~~infrastructure~~of ~~may~~the ~~not~~deployment, bethe ~~able~~stage of the tocustomer’s ~~support~~deployment of a portal, the ~~demands~~complexity ~~placed~~of onthe itcustomer’s network environment and the quantity ~~performance~~of orhardware ~~reliability~~and the degree of ~~the~~hardware ~~Internet~~configuration ~~could suffer~~necessary to deploy the products.

~~Factors~~The ~~outside~~economic ~~our~~outlook ~~control~~has ~~may~~adversely ~~cause~~affected, ~~the~~and ~~timing~~may ofcontinue ~~our~~to ~~license~~adversely ~~revenue~~affect, tothe ~~vary~~demand ~~from~~for ~~quarter-to-quarter,~~our ~~possibly~~current ~~adversely~~products ~~affecting~~and our ~~operating~~ results of operations.

We General ~~recognize~~economic ~~license~~indicators ~~revenue~~suggest ~~when~~continued ~~persuasive~~uncertain ~~evidence~~economic ofconditions anfor ~~agreement~~the ~~exists,~~near future. ~~the~~Weak ~~product~~or ~~has been~~uncertain ~~delivered,~~economic ~~the~~conditions ~~license~~may ~~fee~~continue isto ~~fixed~~cause a reduction in or ~~determinable,~~irregular information ~~and~~technology ~~collection~~spending generally. In addition, some of ~~the~~our ~~fee~~customers iscontinue ~~probable.~~to Ifoperate anInternet-centric ~~arrangement~~businesses, ~~requires~~and ~~acceptance~~these ~~testing~~companies orhave ~~specialized~~been ~~professional~~more ~~services,~~acutely ~~recognition~~affected ofby ~~the~~uncertain ~~associated~~economic ~~license~~conditions and ~~service~~have ~~revenue~~encountered ~~would~~significant bedifficulties ~~delayed.~~in ~~The~~raising ~~timing~~additional ofcapital. ~~the~~If our ~~commencement~~customers ~~and completion~~experience offinancial ~~these~~difficulties, ~~services~~it iscould ~~subject~~have toan ~~factors~~adverse ~~that~~impact ~~may~~on bethe ~~beyond~~demand for our ~~control~~products, ~~such~~which aswould ~~access to~~adversely ~~the~~affect ~~customer’s~~our ~~facilities~~results ~~and~~of ~~coordination~~operations. ~~with~~In ~~the~~addition, ~~customer’s~~predictions regarding ~~personnel~~economic ~~after~~conditions ~~delivery~~have a low degree of certainty, and further predicting the effects of ~~software.~~the Ifchanging ~~new~~economy oris ~~existing~~even ~~customers~~more ~~have~~difficult. ~~difficulty~~We ~~deploying~~may ~~our~~not ~~products~~accurately orgauge ~~require significant~~the ~~amounts~~effect of ~~our~~the ~~professional~~general economy ~~services~~on ~~support~~our ~~for~~business. ~~specialized~~As ~~features~~a result, ~~our~~we ~~revenue~~may not react to changing conditions in a timely manner, ~~recognition~~which could beadversely ~~further~~impact ~~delayed~~our business and ~~our~~results ~~costs~~of ~~could~~operations ~~increase,~~and ~~causing~~cause ~~increased~~the ~~variability~~price in of our Ordinary ~~operating~~Shares ~~results~~to decline.

WeOur ~~may~~business ~~experience~~is ~~tax~~difficult ~~liabilities~~to inevaluate ~~connection~~because ~~with~~our ~~the~~operating ~~liquidation~~history ofis ~~wholly~~limited, ~~owned~~and ~~subsidiaries that~~we have ~~ceased~~changed our ~~trading~~strategic focus and repositioned our product line.

As We have a ~~result~~limited ofoperating ~~the~~history ~~restructuring~~generally ~~plans~~and wean ~~announced~~even onmore ~~July 1,~~limited ~~2001~~history ~~and~~operating ~~September 30,~~our business ~~2002,~~in ~~we ceased~~our ~~commercial~~current ~~operations~~markets. ofWe ~~the~~cannot ~~following~~be ~~subsidiaries:~~certain ~~BackWeb~~that ~~Technologies~~our ~~B.V.,~~business ~~BackWeb Technologies~~strategy ~~(U.K.)~~will ~~Ltd~~be successful., ~~BackWeb~~We ~~Technologies~~were ~~S.a.r.l.,~~incorporated ~~BackWeb~~on ~~Technologies~~August 31, ~~A.B.~~1995, ~~BackWeb~~and ~~Canada~~did not begin generating revenue until ~~Inc~~December 1996. In early 1998, ~~and~~we ~~BackWeb~~changed ~~K.K.~~our ~~Ltd.~~strategic Wefocus ~~decided~~from a consumer-oriented to ~~liquidate~~an enterprise-oriented ~~these~~Internet ~~companies~~communications incompany. ~~order~~In to2001, ~~further~~we ~~streamline~~again re-positioned our products to focus on the portal market. During 2003, we expanded our ~~operations~~market ~~and~~focus to ~~simplify~~include ~~our~~corporate intranets ~~legal~~and ~~entity~~other ~~structure~~Web-based applications. WeDuring ~~cannot~~2004, ~~assure~~we ~~you~~realigned ~~that~~our wesales ~~will~~strategy ~~not~~to focus ~~have~~on ~~any~~selling ~~termination~~to ~~liability~~the ~~issues~~line ~~with~~of ~~the~~business ~~appropriate~~owner ~~tax~~as ~~authorities~~opposed into ~~each~~the ~~jurisdiction~~IT department. ~~If such~~These ~~termination~~changes ~~liability~~required ~~issues~~us to ~~were~~adjust toour ~~arise~~business processes and wemake ~~did~~a ~~not~~number ~~prevail,~~of wesignificant ~~might~~personnel bechanges. ~~required~~To tothe ~~pay~~extent we do not succeed in generating significant ~~taxes~~revenue ~~and~~from ~~penalties,~~licensing ~~which~~our ~~could~~new ~~adversely~~products, ~~affect~~particularly our OAS product, our ~~cash~~business, ~~balances~~operating results and ~~results~~financial ~~of operations~~conditions will suffer.

WeOur ~~may~~quarterly ~~experience~~operating ~~difficulties~~results ~~managing~~are ~~our~~subject ~~operations~~to ~~and geographic dispersion~~fluctuations.

Our ~~ability~~operating results are difficult to ~~successfully~~predict. ~~offer~~Our ~~products~~revenue and ~~services~~operating ~~and~~results tohave fluctuated ~~implement~~in ~~our~~the ~~business~~past ~~plan~~and may, in the ~~rapidly~~future, ~~evolving~~vary ~~Internet~~significantly ~~communications~~from ~~market~~quarter ~~requires~~to anquarter ~~effective~~due ~~planning~~to ~~and management~~a ~~process.~~number ~~These~~of factors, ~~together with our anticipated future~~including:

25 • 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;

~~Table of Contents~~27

operationsTable andof geographic dispersion, will continue to place a significant strain on our management systems and resources. We expect that we will need to continue to improve our financial and managerial controls and reporting systems and procedures, and expand, train and manage our work force worldwide. Contents

~~Our~~• ~~international~~new ~~operations~~product ~~are~~introductions ~~subject~~or internal development efforts by competitors or strategic allies; • costs related to ~~additional~~acquisitions ~~risks~~of technology or businesses; and • economic conditions generally, as well as those specific to the Internet and related industries.

~~Revenue~~ Due ~~from~~to ~~customers outside~~ the ~~United~~foregoing ~~States~~factors, ~~represented~~we ~~approximately~~believe ~~$550,000,~~that orquarter-to-quarter ~~34%~~comparisons of our operating results are not necessarily a good indication of our ~~total~~future ~~revenue,~~performance. ~~for~~We ~~the~~incur ~~three~~expenses ~~months~~based predominantly ~~ended~~on ~~March 31,~~operating ~~2005,~~plans and ~~$960,000,~~estimates orof ~~18%~~future ofrevenue. ~~our~~Our ~~total~~expenses are to a large ~~revenue,~~extent ~~for~~fixed ~~the~~and ~~year~~we ~~ended~~may ~~December 31,~~not ~~2004.~~be ~~Our~~able ~~international~~to ~~operations~~adjust ~~will~~them ~~continue~~quickly to bemeet a shortfall in revenue during ~~subject~~any particular quarter. Any significant shortfall in revenue in relation to aour ~~number~~expenses would decrease our net income or increase our operating losses and would also harm our financial condition. In some recent quarters our operating results have been below the expectations of ~~risks~~public market analysts and investors. It is likely that in some future quarters, ~~including~~our operating results may also be below such expectations, ~~but~~which ~~not~~would ~~limited~~likely cause our stock price to: decline.

•If ~~laws~~we ~~and~~lose ~~business~~a ~~practices~~major ~~favoring local competition; • compliance with multiple~~customer, ~~conflicting~~our ~~and~~revenue ~~changing~~could ~~laws~~suffer ~~and~~because ~~regulations;~~of •our ~~longer~~customer 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 instabilityconcentration.

~~Our~~ We ~~international~~have ~~operations~~historically ~~also~~generated ~~face~~a ~~foreign-currency-related~~substantial ~~risks.~~portion Toof ~~date,~~our ~~substantially all~~revenue from a limited number of customers, ~~our~~and ~~revenue~~we ~~has~~expect ~~been~~this ~~denominated~~to incontinue Ufor the foreseeable future.S. ~~dollars~~As a result, ~~but~~if we ~~believe~~lose ~~that~~a major customer, or if there is a decline in the ~~future,~~use ~~an increasing~~of ~~portion~~our ofproducts within our existing customers’ organizations, our revenue ~~may~~would be ~~denominated~~adversely inaffected. ~~foreign~~In ~~currencies,~~the ~~including~~six ~~the~~months ~~Euro~~ended ~~and~~June 30, 2006, two ~~the~~customers ~~British~~accounted ~~Pound.~~for ~~Fluctuations~~24% inof ~~the~~our ~~value~~total ofrevenue. ~~foreign~~In ~~currencies~~2005, ~~may~~our ~~cause~~two ~~further~~largest ~~volatility~~customers inaccounted for ~~our~~43% ~~operating~~of ~~results,~~our ~~reduce~~total ~~the~~revenue. ~~accuracy~~In of2004, our ~~financial~~three ~~forecasts~~largest ~~and~~customers ~~could~~represented ~~have~~approximately a34% ~~material~~of our ~~adverse~~total ~~effect~~revenue. onIn 2003, our ~~business,~~three ~~operating~~largest ~~results~~customers ~~and~~represented ~~financial~~approximately ~~condition~~28% of our total revenue.

26Our financial performance and workforce reductions may adversely affect the morale and performance of our personnel and our ability to hire new personnel.

~~Table~~ In connection with the evolution of ~~Contents~~our business model and in order to reduce our cash expenses, we have adopted a number of changes in personnel, including significant workforce reductions. The changes in personnel may adversely affect morale and our ability to attract and retain key personnel. In addition, the current trading levels of our common stock have decreased the value of many of the stock options granted to employees pursuant to our stock option plan. As a result of these factors, our remaining personnel may seek employment with larger, more established companies or companies they perceive to have better prospects. If this were to occur, our revenue could decline and our operations in general could be impacted. None of our officers or key employees is bound by an employment agreement for any specific term. Our relationships with these officers and key employees are at will. Moreover, we do not have “key person” life insurance policies covering any of our employees. Additionally the economic environment in Israel and the US is improving, making it more challenging to retain our people. As a result of these factors, we have experienced an increased level of employee departures and our remaining personnel may seek other employment opportunities in the future.

~~Our~~We ~~efforts~~depend on increased business from new customers, as well as additional business from existing customers, and if we fail to ~~protect~~grow our ~~proprietary~~customer ~~rights~~base ~~may~~or generate repeat business, our operating results could be ~~inadequate~~harmed.

To Our ~~protect~~business ~~our~~model ~~proprietary~~generally ~~rights,~~depends weon ~~rely~~the ~~primarily~~sale onof aour ~~combination~~products ofto ~~patent,~~new ~~copyright,~~customers as well as ~~trade~~expanded ~~secret~~use ~~and~~of ~~trademark~~our ~~laws,~~products ~~confidentiality~~within ~~agreements~~our ~~with~~existing ~~employees~~customers’ ~~and~~organizations. ~~third~~If ~~parties,~~we ~~and~~fail to grow our ~~protective~~customer ~~contractual~~base ~~provisions~~or ~~such~~to asgenerate ~~those~~repeat ~~contained~~and inexpanded ~~license~~business ~~agreements~~from ~~with~~our current and future customers, ~~consultants~~our business and ~~vendors.~~operating ~~However,~~results ~~these~~will ~~parties~~be ~~could~~seriously ~~breach~~harmed. ~~such~~For ~~confidentiality~~example, ~~agreements~~we ~~and~~experienced a ~~other~~reduction ~~protective~~in ~~contracts.~~license Insales ~~addition,~~to wenew ~~have~~customers ~~not~~during ~~signed~~the ~~confidentiality~~second ~~agreements~~quarter inof ~~every~~2006 compared with the ~~case.~~second ~~Despite~~quarter ~~our~~of ~~efforts~~2005 which contributed to ~~protect~~the overall decline in our ~~proprietary~~license ~~rights~~revenue. In some cases, ~~unauthorized~~our ~~parties~~customers ~~may~~initially ~~copy~~make ~~aspects~~ a limited purchase of our products and ~~obtain~~services ~~and~~for ~~use~~trials, pilot ~~information~~or ~~that~~proof weof ~~regard~~concept ~~as proprietary~~programs. WeThese ~~may~~customers might not ~~become aware~~choose ~~of,~~to oracquire ~~have~~additional ~~adequate~~licenses to ~~remedies~~expand intheir ~~the~~use ~~event~~ of, ~~such~~our ~~breaches~~products.

In addition, as we have introduced new versions of our products or new products, such as our OAS, we have experienced a decline in licensing revenue generated from our older products, such as Polite Sync Server and e-Accelerator, and we anticipate future declines in licensing revenue from these products. However, it is also possible that our current customers might not require the functionality of our new products and might not ultimately license these products. Because the total amount of maintenance and support fees we receive in any period depends, in large part, on the size and number of licenses that we have previously sold, any downturn in our software license revenue would negatively affect our future maintenance and support revenue. In addition, if customers elect not to renew their maintenance agreements, our services revenue will decline significantly. Further, some of our

~~We pursue the registration of some of our trademarks and service marks in the United States~~28 and in certain other countries, but we have not secured registration of all our marks. We license certain trademark rights to third parties. Such licensees may not abide by compliance and quality control guidelines with respect to such trademark rights and may take actions that would adversely affect our trademarks.

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

~~Our~~customers ~~products~~are ~~may~~telecommunications beor ~~used~~information technology companies, which have been forced to significantly reduce their operations in anlight ~~unintended~~of limited access to sources of financing and ~~negative~~the national ~~manner~~and global economic uncertainty. If customers are unable to pay for their current products or are unwilling to purchase additional products, our revenue will decline, which would likely materially and adversely affect our revenue, operating results and stock price.

~~Our~~Rapid ~~products~~technological ~~are~~changes ~~used to transmit information through the Internet. Our products~~ could because used to transmit harmful applications, negative messages, unauthorized reproduction of copyrighted material, inaccurate data, or computer viruses to end users in the course of delivery. Any such transmission could damage our ~~reputation~~products ~~or could give rise~~ to ~~legal~~become ~~claims against us~~obsolete. ~~We have~~ received emails from certain of our customers’ end users, claiming that our technology is a form of spyware, and we are actively engaged in challenging such accusations. In the event such allegations result in litigation, we could spend a significant amount of time and money pursuing or defending legal claims, which could have a material adverse effect on our business.

We The ~~may~~Internet ~~not~~communications ~~have~~market ~~sufficient~~is ~~insurance~~characterized toby ~~cover~~rapid ~~all~~technological ~~potential~~change, frequent new product ~~liability~~introductions, changes in customer requirements and ~~warranty~~evolving ~~claims~~industry standards. If we are unable to develop and introduce products or enhancements in a timely manner to meet these technological changes, we may not be able to successfully compete. In addition, our products may become obsolete, in which event we may not remain a viable business.

Our ~~products~~market ~~are~~is ~~integrated~~susceptible ~~into~~to ~~our~~rapid ~~customers’~~changes ~~networks.~~due ~~The~~to ~~sale~~technology innovation, evolving industry standards, and ~~support~~frequent ofnew ~~our~~service and product introductions. New services and products based on ~~may~~new ~~entail~~technologies ~~the~~or ~~risk~~new industry standards expose us to risks of technical or product ~~liability~~obsolescence. For orexample, ~~warranty~~emerging ~~claims~~technologies, ~~based~~such onas ~~damage~~wireless, that take a different approach to ~~these~~the challenge ~~networks~~of offline Web access by, for example, re-engineering platforms and applications, pose a competitive challenge. In addition, ~~the~~other ~~failure~~companies, including some of our ~~products~~strategic toresellers, also ~~perform~~approach tothe ~~customer~~issue ~~expectations~~of ~~could~~offline ~~give~~Web ~~rise~~architecture todifferently than we do in some cases, and such ~~warranty~~approaches ~~claims~~may achieve a greater degree of market acceptance. ~~Although~~If we ~~carry~~do ~~general~~not ~~commercial~~use ~~liability~~leading ~~insurance~~technologies effectively, ~~our~~meet ~~insurance~~the ~~may~~challenges ~~not~~posed by emerging technologies or other architectures, continue to ~~cover~~develop ~~potential~~our ~~claims~~technical ofexpertise ~~this~~and ~~type~~enhance orour ~~may~~existing ~~not~~products beon ~~adequate~~a timely basis, we may be unable to ~~protect~~compete ussuccessfully ~~from~~in ~~all~~this ~~liability~~industry, ~~that~~which would adversely affect our business and ~~may~~results beof ~~imposed~~operations.

27Our inability to integrate our products with other third-party software could adversely affect market acceptance of our products.

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

~~Legislation~~Failure ~~and~~to ~~regulatory~~successfully ~~changes~~develop ~~may~~versions ~~cause~~and usupdates toof ~~incur~~our ~~increased~~products ~~costs,~~that ~~limit~~run ~~our~~on ~~ability~~the tooperating ~~obtain~~systems ~~director~~used ~~and~~by ~~officer~~our ~~liability~~current ~~insurance,~~ and ~~make~~prospective itcustomers ~~more~~could ~~difficult~~reduce ~~for~~our ~~us to attract and retain qualified officers and directors~~sales.

~~Changes~~ Many inof ~~the~~our ~~laws~~products ~~and~~run ~~regulations~~on ~~affecting~~the ~~public~~Microsoft ~~companies~~Windows NT, ~~including~~Microsoft ~~the~~Windows ~~provisions~~2000 ofor certain versions of the ~~Sarbanes-Oxley~~Sun ~~Act~~Solaris ofUnix ~~2002~~operating systems, and ~~rules~~some ~~adopted~~require by the ~~SEC~~use ~~and~~of ~~Nasdaq,~~third ~~have~~party software. ~~required~~Any ~~changes~~change ~~in some~~to of our ~~corporate~~customers’ ~~governance~~operating systems could require us to modify our products and ~~accounting~~could ~~practices.~~cause Weus ~~expect~~to ~~these~~delay ~~laws,~~product ~~rules~~releases. In addition, ~~and~~any decline in the market acceptance of ~~regulations~~these operating systems we support may require us to ~~increase~~ensure that all of our ~~legal~~products and ~~financial~~services are ~~compliance~~compatible ~~costs~~with ~~and~~other tooperating ~~make~~systems ~~some~~to ~~activities~~meet ~~more difficult,~~the ~~time~~demands ~~consuming~~of ~~and~~our ~~costly~~customers. ~~The~~If ~~new~~potential customers ~~rules~~do ~~could~~not ~~also~~want ~~make~~to ituse ~~more~~the ~~difficult~~Microsoft ~~for~~or usSun ~~to obtain~~Solaris ~~certain~~operating ~~types~~systems ofwe ~~insurance~~support, ~~including~~we ~~director~~will need ~~and~~to ~~officer~~develop ~~liability~~more ~~insurance,~~products ~~and~~that werun ~~may be~~on ~~forced~~other tooperating ~~accept~~systems ~~reduced~~adopted ~~policy~~by ~~limits~~our ~~and~~customers. ~~coverage~~If orwe cannot ~~incur~~successfully ~~substantially~~develop ~~higher~~these ~~costs~~products in response to ~~obtain~~ ~~the~~customer ~~same~~demands, orour ~~similar~~business ~~coverage~~could be adversely impacted. The ~~impact~~development of ~~these~~new ~~events~~products ~~could~~in ~~also~~response ~~make~~to itthese ~~more~~risks ~~difficult for~~would require us to commit ~~attract~~a substantial investment of resources, and ~~retain~~we ~~qualified~~might ~~persons~~not be able to ~~serve~~develop or introduce new products on ~~our~~a ~~board~~timely ofor ~~directors~~cost-effective basis, ~~particularly~~or onat all, which could lead potential customers to choose alternative products. In addition, our ~~audit~~products ~~committee~~may face competition from operating system software providers, orwhich asmay ~~executive~~elect ~~officers~~to incorporate similar technology into their own products.

~~Risks~~Competition ~~Relating~~in tothe ~~Our~~Internet ~~Location~~communications inmarket ~~Israel~~may reduce the demand for, or price of, our products.

~~Any~~ The ~~major~~Internet ~~developments~~communications market is intensely competitive and rapidly changing. We expect that competition will intensify in the ~~political~~near-term orbecause ~~economic~~there ~~conditions~~are invery ~~Israel~~limited barriers to entry. Our primary long-term competitors may not have entered the market yet because the Internet communications market is relatively new. Competition could impact us through price reductions, fewer customer orders, reduced gross margin and loss of market share, any of which could cause our ~~business~~ business to suffer. ~~because~~Many weof ~~are~~our ~~incorporated~~current inand ~~Israel~~potential ~~and~~competitors have ~~important~~greater ~~facilities~~name recognition, longer operating histories, larger customer bases and significantly greater financial, technical, marketing, public relations, sales, distribution and other resources ~~located~~than we do. Some of our potential competitors are among the largest and most well capitalized software companies in ~~Israel~~the world. For example, both Microsoft and IBM have

~~We are incorporated under the laws of the State of Israel. Our research and development~~29 facilities, as well as one of our executive offices, are located in Israel. Although substantial portions of our sales are currently made to customers outside of Israel, any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could significantly harm our business. Since September 2000, a continuous armed conflict with the Palestinian Authority has been taking place. We cannot predict the effect on BackWeb of an increase in the degree of violence in Israel or of any possible military action elsewhere in the Middle East we incur a large portion of our costs from operations in Israel in NIS. If Israel’s economy is impaired by a high inflation rate or if the timing of the devaluation of the NIS against the U.S. dollar were to lag considerably behind inflation, our operations and financial condition may be negatively impacted to the extent that the inflation rate exceeds the rate of devaluation of the NIS against the U.S. dollar.

AnyTable future profitability may be diminished if tax benefits from the State of Israel are reduced or withheld. Contents

~~Pursuant~~announced toproduct ~~the~~plans ~~Law~~addressing ~~for~~ the ~~Encouragement~~offline ofWeb ~~Capital~~application ~~Investments,~~market ~~the~~segment ~~Israeli~~served ~~Government~~by ~~has~~our ~~granted~~OAS ~~“Approved~~product. ~~Enterprise”~~If ~~status~~such tocompanies ~~our~~enter ~~existing~~this ~~capital~~market ~~investment programs. Consequently~~segment, we ~~are~~ ~~eligible for tax benefits for the first several years in which we generate taxable income. Our future profitability~~ may benot ~~diminished if all or portions of these tax benefits are reduced or eliminated. These tax benefits may~~ be ~~cancelled~~able ~~if we fail~~ to ~~comply with requisite conditions and~~compete ~~criteria. Currently the most significant conditions that we must continue to meet include making specified investments in fixed assets~~successfully, ~~financing at least 30% of these investments through the issuance of capital stock,~~ and ~~maintaining~~competitive ~~the~~pressures ~~development~~may ~~and~~harm ~~production nature of~~ our ~~facilities~~business. In addition, the law and regulations prescribing the benefits provide for an expiration date for the grant of new benefits. The expiration date has been extended several times in the past and was in the process of being extended at March 31, 2005. The expiration date may be extended by ministerial decision until June 30, 2005, and no new benefits will be granted after that date unless the expiration date is extended. We cannot assure you that new benefits will be available after June 30, 2005 or that the benefits will be continued in the future at their current levels or at any level.

28The loss of our right to use software licensed to us by third parties could harm our business.

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

~~Israeli~~Our ~~regulations~~growth may ~~limit~~suffer ~~our~~because ~~ability~~of tothe ~~engage~~complexities involved in ~~research~~implementing ~~and development and export~~ our products.

~~Under~~ The ~~Israeli~~use ~~law,~~of weour ~~are~~products ~~required~~by toour ~~obtain~~customers anoften ~~Israeli~~requires ~~government~~implementation ~~license~~services, toand ~~engage in~~our ~~research~~growth ~~and~~will ~~development~~be ~~and~~limited in the ~~export~~event ofwe ~~the~~are ~~encryption~~unable ~~technology~~to ~~incorporated~~expand in our ~~products.~~implementation services personnel ~~Our~~or ~~current~~subcontract ~~government~~these ~~license~~services to ~~engage~~qualified inthird ~~these~~parties. ~~activities~~In ~~expires~~addition, incustomers ~~April 2005~~could delay product implementations. ~~Our~~In ~~research~~ 2003, 2004, 2005 and ~~development~~the ~~activities~~first insix ~~Israel~~months of 2006, ~~together~~there ~~with~~were ~~our~~a ~~ability~~greater number toof ~~export~~deployments of our ~~products~~OAS ~~out~~solution ~~of Israel~~by customers, ~~would~~and bethat ~~limited~~solution ifis ~~the~~being ~~Israeli~~subjected ~~government~~to actual ~~revokes~~commercial ~~our~~use ~~current~~and ~~license,~~implementation. ~~our~~Initial ~~current~~implementation ~~license is~~typically ~~not~~involves ~~renewed~~working with sophisticated software, ~~our~~computers ~~license~~and ~~fails~~communications tosystems. ~~cover~~If ~~the~~we ~~scope~~experience ofdifficulties ~~the~~with implementation ~~technology~~or do not meet project milestones in ~~our~~a ~~products~~timely manner, orwe ~~Israeli~~could be obligated to ~~law~~devote ~~regarding~~more ~~research~~customer support, engineering and ~~development~~other orresources ~~export~~to ofa ~~encryption~~particular ~~technologies~~project ~~were~~at tothe expense ~~change~~of other projects.

~~Israeli~~Our ~~courts~~business ~~might~~will ~~not~~suffer ~~enforce~~if ~~judgments~~the ~~rendered~~Internet ~~outside~~infrastructure ofcannot ~~Israel~~support ~~that~~the ~~may~~demands ~~make~~placed ~~it difficult to collect~~ on ~~judgments rendered against us~~it.

~~Some~~ Our offuture ~~our~~revenue ~~directors~~ and ~~executive~~profits, ~~officers~~if ~~are~~any, ~~not~~depend ~~residents~~upon of the ~~United~~widespread ~~States~~acceptance and ~~some~~ use of ~~their~~the Internet ~~assets~~as ~~and~~an ~~our~~effective ~~assets~~medium ~~are~~of ~~located~~business ~~outside~~and ~~the~~communication ~~United~~by ~~States~~our customers. ~~Service~~Rapid ofgrowth ~~process~~in ~~upon these~~the ~~directors~~use of, and ~~executive~~interest ~~officers~~in, ~~and~~the ~~enforcement~~Internet ofhas ~~judgments~~placed ~~obtained~~increased indemands ~~the~~on ~~United~~its ~~States~~infrastructure. Our ~~against~~success uswill depend, ~~and~~in ~~these~~large ~~directors~~part, ~~and~~on ~~executive~~the ~~officers,~~acceptance ~~may~~of bethe ~~difficult~~Internet toin ~~obtain~~the ~~within~~commercial ~~the~~marketplace ~~United~~and ~~States.~~on ~~BackWeb~~the ~~Technologies,~~ability ~~Inc.,~~of ~~our~~third ~~U.S.~~parties ~~subsidiary,~~to isprovide ~~the~~a ~~U.S.~~reliable ~~agent~~Internet ~~authorized~~infrastructure tonetwork with the ~~receive~~speed, ~~service~~data ofcapacity, ~~process~~security inand ~~any~~hardware ~~action~~necessary ~~against~~for usreliable inInternet ~~any~~access ~~federal~~and orservices. ~~state~~To the ~~court~~extent ~~arising~~that ~~out~~the ~~of our~~Internet ~~initial~~continues ~~public~~to ~~offering~~experience orincreased ~~any~~numbers ~~related~~of ~~purchase~~users, increased frequency of use or ~~sale~~increased ofbandwidth ~~securities.~~requirements, Wethe ~~have~~Internet infrastructure may not ~~given~~be able ~~consent~~to ~~for~~support ~~this~~the ~~agent~~demands toplaced ~~accept~~on ~~service~~it ofand ~~process~~the inperformance ~~connection~~or ~~with~~reliability ~~any~~of ~~other~~the ~~claim~~Internet could suffer.

WeFactors ~~have~~outside ~~been informed by~~ our ~~legal~~control ~~counsel~~may incause ~~Israel, Naschitz, Brandes & Co., that there is doubt as to~~ the ~~enforceability~~timing of ~~civil~~our ~~liabilities~~license ~~under~~revenue ~~U.S.~~to ~~securities~~vary ~~laws in original actions~~from ~~instituted in Israel. However, subject~~ quarter-to ~~certain time limitations~~-quarter, anpossibly ~~Israeli~~adversely ~~court~~affecting ~~may~~our ~~declare~~operating aresults. ~~foreign civil judgment enforceable if it finds that:~~

• We ~~the~~recognize ~~judgment~~license ~~was~~revenue ~~rendered~~when bypersuasive aevidence ~~court~~of ~~that~~an ~~was~~arrangement exists, ~~according~~the toproduct has been delivered, the ~~laws~~license offee ~~the~~is ~~state~~fixed or determinable, and collection of the ~~court,~~fee ~~competent~~is probable. toIf ~~render~~an ~~the~~arrangement ~~judgment;~~requires •acceptance testing or specialized professional services, recognition of the ~~judgment~~associated islicense noand ~~longer~~service ~~able~~revenue towould be ~~appealed;~~delayed. •The timing of the commencement ~~obligation~~and ~~imposed~~completion byof ~~the~~these ~~judgment~~services is ~~enforceable~~subject ~~according~~to factors that may be beyond our control, such as access to the ~~rules~~customer’s ~~relating~~facilities toand coordination with the ~~enforceability~~customer’s personnel after delivery of ~~judgments~~the insoftware. ~~Israel~~If ~~and~~new ~~the~~or ~~substance~~existing customers have difficulty deploying our products or require significant amounts of ~~the~~our ~~judgment~~professional isservices ~~not~~support ~~contrary~~for tospecialized ~~public~~features, ~~policy;~~our revenue ~~and~~recognition •could ~~the~~be ~~judgment~~further isdelayed ~~executory~~and inour ~~the~~costs ~~state~~could inincrease, ~~which~~causing itincreased variability ~~was~~in ~~given~~our operating results.

~~Even~~We ifmay ~~the~~experience ~~above~~difficulties ~~conditions~~managing ~~are~~our ~~satisfied,~~operations anand ~~Israeli~~geographic court will not enforce a foreign judgment if it was given in a state whose laws do not provide for the enforcement of judgments of Israeli courts (subject to exceptional cases) or if its enforcement is likely to prejudice the sovereignty or security of the State of Israeldispersion. ~~An Israeli court also will not declare a foreign~~ ~~judgment enforceable if:~~

• Our ~~the~~ability ~~judgment~~to ~~was~~successfully ~~obtained~~offer byproducts ~~fraud;~~and •services ~~there~~and ~~was~~to noimplement ~~due~~our ~~process;~~business •plan in the ~~judgment~~rapidly ~~was~~evolving ~~rendered~~Internet bycommunications amarket ~~court~~requires ~~not~~an ~~competent~~effective toplanning ~~render~~and itmanagement process. ~~according~~These tofactors, ~~the~~together ~~laws~~with ofour ~~private~~anticipated ~~international~~future ~~law~~operations inand ~~Israel;~~geographic •dispersion, will ~~the~~continue ~~judgment~~to isplace ata ~~variance~~significant ~~with~~strain ~~another~~on ~~judgment~~our ~~that~~management ~~was~~systems ~~given in the same matter between the same parties~~ and ~~which~~resources. isWe ~~still~~expect ~~valid;~~that we orwill •need atto ~~the~~continue ~~time~~to ~~the~~improve ~~action~~our ~~was~~financial ~~brought~~and inmanagerial ~~the~~controls ~~foreign~~and ~~court~~reporting asystems ~~suit~~and procedures, inand ~~the~~expand, ~~same~~train ~~matter~~ and ~~between~~manage ~~the~~our ~~same~~work ~~parties~~force ~~was pending before a court or tribunal in Israel~~worldwide.

IfOur ainternational ~~foreign~~operations ~~judgment~~are issubject ~~enforced by an Israeli court, it generally will be payable in NIS, which can then be converted into non-Israeli currency and transferred out of Israel. The usual practice in an action~~ to ~~recover~~additional an amount in non-Israeli currency is for the Israeli court to render judgment for the equivalent amount in NIS at the rate of exchange on the date of payment, but the judgment debtor also may make payment in non-Israeli currencyrisks. ~~Pending collection, the~~ amount of the judgment of an Israeli court stated in NIS ordinarily will be linked to the Israel consumer price index plus interest at the annual rate (set by Israeli law) prevailing at that time. Judgment creditors bear the risk of unfavorable exchange rates.

29 Revenue from customers outside the United States represented approximately $575,000, or 21% of our total revenue, for the six months ended June 30, 2006, and $2.9 million, or 41% of our total revenue, for the year ended December 31, 2005. Our international operations will continue to be subject to a number of risks, including, but not limited to:

~~Table of Contents~~30

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

~~Provisions~~• oflaws ~~Israel~~and ~~corporate~~business practices favoring local competition; • compliance with multiple, conflicting and ~~tax~~changing ~~law~~laws and ofregulations; ~~our~~• ~~articles~~longer ofsales ~~association,~~cycles; ~~such~~• asgreater ~~our staggered~~difficulty ~~Board,~~or ~~may~~delay ~~have~~in ~~the~~accounts ~~effect~~receivable ofcollection; ~~delaying,~~• ~~preventing~~import orand ~~making~~export ~~more~~restrictions ~~difficult~~and atariffs; ~~merger~~• ~~or other~~difficulties ~~acquisition~~in ofstaffing ~~BackWeb,~~and ~~even~~managing ifforeign anoperations; ~~acquisition~~• ~~would~~difficulties bein ~~beneficial~~investing in foreign operations at appropriate levels to ~~our~~compete ~~shareholders~~effectively; and • political and economic instability.

~~Israeli~~ Our ~~corporate~~international ~~law~~operations ~~regulates~~also ~~acquisitions~~face foreign-currency-related risks. To date, substantially all of ~~shares~~our ~~through~~revenue ~~tender~~has ~~offers~~been denominated in U.S. dollars, ~~requires~~but ~~special approvals~~we ~~for~~believe ~~transactions~~that, ~~involving~~in ~~significant~~the ~~shareholders~~future, ~~and~~an increasing ~~regulates~~portion ~~other~~of ~~matters~~our ~~that~~revenue may be ~~relevant~~denominated toin ~~these~~foreign ~~types~~currencies, ofincluding ~~transactions~~the Euro and the British Pound. ~~Furthermore,~~Fluctuations ~~Israeli~~in ~~tax~~the ~~considerations~~value of foreign currencies may ~~make potential~~cause ~~transactions~~further ~~unappealing~~volatility toin our usoperating orresults, toreduce ~~some~~the accuracy of our ~~shareholders.~~financial Inforecasts ~~addition,~~and ~~our~~could ~~articles~~have a material ofadverse ~~association~~effect ~~provide~~on ~~for~~our abusiness, ~~staggered~~operating ~~board~~results ofand ~~directors~~financial condition.

~~The~~Our ~~new~~efforts ~~tax~~to ~~reform~~protect ~~in Israel may reduce~~ our ~~tax~~proprietary ~~benefit,~~rights ~~which~~may ~~might~~be ~~adversely affect our profitability~~inadequate.

On To ~~January 1,~~protect ~~2003,~~our aproprietary ~~comprehensive~~rights, ~~tax~~we ~~reform~~rely ~~took~~primarily ~~effect~~on ina ~~Israel.~~combination Weof ~~have~~patent, ~~performed an~~copyright, ~~analysis~~trade ofsecret ~~the~~and ~~likely~~trademark ~~implications~~laws, ofconfidentiality ~~the~~agreements ~~new~~with ~~tax~~employees ~~reform~~and ~~legislation~~third onparties, ~~our results of operations.~~and ~~Our~~protective ~~evaluation~~contractual ~~concluded~~provisions ~~that~~such ~~the~~as ~~impact~~those ofcontained ~~the~~in ~~tax~~license ~~reform~~agreements onwith ~~both~~customers, consultants ~~our corporate~~ and ~~income~~vendors. ~~tax framework~~However, ~~would~~these ~~not~~parties ~~have~~could abreach ~~material~~such ~~effect~~confidentiality onagreements ~~our results~~ and other ~~operations~~protective contracts. ~~This~~In ~~evaluation was based~~addition, ~~in part, on the assumptions that~~ we ~~would~~have not ~~expand~~signed ~~beyond~~confidentiality ~~the~~agreements ~~countries~~ in ~~which we~~every ~~already~~case. ~~operate~~Despite ~~and~~our ~~that~~efforts weto ~~would~~protect ~~remain~~our inproprietary arights, ~~net~~unauthorized ~~operating~~parties ~~loss~~may ~~for~~copy ~~tax~~aspects of ~~purposes~~our ~~for~~products atand ~~least~~obtain ~~the next~~and ~~three~~use ~~years.~~information Wethat ~~cannot~~we ~~assure~~regard ~~you~~as ~~that~~proprietary. ~~these~~We ~~assumptions~~may ~~will~~not bebecome aware ~~met~~of, ~~and~~or ~~the~~have ~~tax~~adequate ~~reform~~remedies ~~will not~~in ~~materially~~the ~~and~~event ~~adversely affect our results~~ of, ~~operations~~such breaches.

~~Our~~ We ~~results~~pursue the registration of ~~operations~~some ~~may~~of beour ~~negatively~~trademarks ~~affected~~and byservice marks in the ~~obligation~~United States and in certain other countries, but we have not secured registration of ~~key~~all ~~personnel~~our tomarks. ~~perform~~We license ~~military~~certain ~~service~~trademark rights to third parties. Such licensees may not abide by compliance and quality control guidelines with respect to such trademark rights and may take actions that would adversely affect our trademarks.

~~Certain~~ We ofdo not conduct comprehensive patent searches to determine whether the technology used in our ~~officers~~products ~~and~~infringes ~~employees~~patents ~~are~~held ~~currently~~by ~~obligated~~third toparties. ~~perform~~Product ~~annual~~development ~~reserve~~is ~~duty~~inherently uncertain in ~~the~~a ~~Israel~~rapidly ~~Defense~~evolving ~~Forces~~technological ~~and~~environment in which there may be numerous patent applications pending, which are confidential when filed, with regard to potentially similar technologies. We expect that software products may be increasingly subject to ~~being~~third-party ~~called~~infringement ~~for~~claims ~~active~~as ~~military~~the number ~~duty~~of atcompetitors ~~any~~in ~~time.~~our industry segment grows and the functionality of products in different industry segments overlaps. Although we ~~have~~believe ~~operated~~that ~~effectively~~our ~~under~~products ~~these~~do ~~requirements~~not ~~since~~infringe ~~our~~the ~~inception,~~proprietary rights weof ~~cannot predict~~any ~~the~~third ~~effect~~parties, ~~these~~third ~~obligations~~parties ~~will~~could ~~have~~assert oninfringement claims against us in the future. ~~Our~~The ~~operations~~defense ~~could~~of beany such claims would require us to incur substantial costs and would divert ~~disrupted~~management’s byattention ~~the~~and ~~absence~~resources, ~~for~~which could materially and adversely affect our financial condition and operations. If a ~~significant~~party ~~period~~succeeded in making such a claim we could be liable for substantial damages, ofas ~~one~~well as injunctive or ~~more~~equitable ofrelief ~~our~~that ~~officers~~could oreffectively ~~key~~block ~~employees~~our ~~due~~ability to ~~military~~sell ~~service~~our products and services. ~~Such~~Royalty ~~military~~or ~~requirement~~licensing ~~could~~agreements, if required, may not be available ~~increased~~on inacceptable ~~the~~terms, ~~event~~if ofat ~~war~~all. orAny such outcome could have a material adverse effect on ~~military~~our ~~action~~business, ~~involving~~financial ~~Israel~~condition, operating results and stock price.

~~Risks~~Our ~~Relating~~products tomay ~~Our~~be ~~Ordinary~~used ~~Shares~~in an unintended and negative manner.

Our products are used to transmit information through the Internet. Our products could be used to transmit harmful applications, negative messages, unauthorized reproduction of copyrighted material, inaccurate data, or computer viruses to end users in the course of delivery. Any such transmission could damage our reputation or could give rise to legal claims against us. We have received emails from certain of our customers’ end users, claiming that our technology is a form of spyware, and we are actively

~~Our stock price has been volatile and could fluctuate in the future.~~31

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

•engaged in ~~response~~challenging tosuch ~~quarterly~~accusations. ~~variations~~In ~~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~~event ~~software~~such orallegations ~~portal~~result ~~industry; •~~ in ~~reaction~~litigation, we tocould ~~changes~~spend ina ~~financial~~significant ~~estimates~~amount byof ~~securities~~time ~~analysts,~~ and ~~our~~money ~~failure~~pursuing ~~to meet~~ or ~~exceed~~defending ~~the~~legal ~~expectations~~claims, ofwhich could ~~analysts~~have ora ~~investors;~~material •adverse ineffect ~~response~~on to our ~~announcements of strategic relationships or joint ventures; and • in response to sales of our Ordinary Shares~~business.

InWe ~~the~~may ~~past,~~not ~~following~~have ~~periods~~sufficient ofinsurance ~~volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We are currently subject~~ to acover ~~securities~~all ~~class~~potential ~~action~~product ~~described~~liability ~~in Part II, Item 1 “Legal Proceedings” of this Quarterly Report,~~ and ~~the~~warranty ~~volatility of our stock price could make us a target for additional suits~~claims. ~~Securities class action litigation could result in substantial costs and a diversion of our~~ ~~management’s attention and resources, which could seriously harm our business and results of operations.~~

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

~~Table~~Legislation ofand ~~Contents~~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.

~~Our~~ Changes ~~stock~~in isthe ~~listed~~laws onand regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted by the SEC and Nasdaq, ~~SmallCap~~have ~~Market~~required changes in some of our corporate governance and accounting practices. We expect these laws, rules, and regulations to continue to increase our ~~continued~~legal ~~listing~~and onfinancial ~~the~~compliance ~~Nasdaq~~costs ~~SmallCap~~and to make some ~~Market~~activities ~~listing~~more isdifficult, ~~not~~time ~~assured~~consuming and costly. These rules could also make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, particularly on our audit committee, or as executive officers.

InRisks ~~order~~Relating to ~~remain~~Our ~~eligible~~Location ~~to be quoted on the Nasdaq SmallCap Market, we must remain~~ in ~~compliance~~ ~~with the applicable continued listing requirements which require, among other things,~~Israel that (i) we have shareholders’ equity of $2.5 million, (ii) we have $500,000 in net income, or (iii) the market value of our publicly held shares be $35 million or more. At March 31, 2005, we met these listing requirements. However, we cannot assure you that we will be able to maintain the continued listing requirements, and, as a result, may be delisted from trading on the Nasdaq SmallCap Market. If our Ordinary Shares are delisted from trading on the Nasdaq SmallCap Market, then the trading market for our Ordinary Shares, and the ability of our shareholders to trade our shares and obtain liquidity for their shares, may be significantly impaired and the market price of our Ordinary Shares may decline significantly.

~~Holders~~Any ofmajor developments in the political or economic conditions in Israel could cause our ~~Ordinary~~business to ~~Shares~~suffer ~~who~~because we are ~~United~~incorporated ~~States~~in ~~residents~~Israel ~~face~~and ~~income~~have ~~tax~~important ~~risks~~facilities and resources located in Israel.

We ~~believe~~are ~~that~~incorporated weunder ~~will be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. Our treatment as a PFIC could result in a reduction in~~ the ~~after-tax~~ ~~return~~laws ~~to the holders~~ of ~~our Ordinary Shares and may cause a reduction in~~ the ~~value~~State of ~~such~~ ~~shares~~Israel. ~~For~~Our ~~U.S.~~research ~~federal~~and ~~income tax purposes~~development facilities, weas ~~will~~well ~~be classified~~ as aone ~~PFIC for any taxable year in which either (i) 75% or more~~ of our ~~gross~~executive ~~income is passive income~~offices, orare ~~(ii) at~~located ~~least~~in ~~50%~~Israel. ofAlthough substantial ~~the~~portions ~~average value~~ of ~~all of~~ our ~~assets~~sales ~~for the taxable year produce or~~ are ~~held~~currently ~~for~~made ~~the production of passive income. For this purpose, cash is considered~~ to becustomers anoutside ~~asset,~~of ~~which produces passive income. Passive income also includes dividends~~Israel, ~~interest,~~any ~~royalties,~~major ~~rents, annuities and the~~hostilities ~~excess~~involving ofIsrael ~~gains~~or ~~over losses from~~ the ~~disposition~~interruption ofor ~~assets,~~curtailment ~~which produce passive income. As a result~~ of ~~our~~trade ~~cash~~between ~~position~~Israel and ~~the~~its ~~decline~~present intrading partners ~~the~~could ~~value~~significantly ofharm our ~~stock,~~business. weSince ~~might~~September 2000, ~~be considered~~ a ~~PFIC~~ ~~under~~continuous aarmed ~~literal~~conflict with ~~application of~~ the ~~asset~~Palestinian ~~test~~Authority ~~that~~has ~~looks~~been ~~solely~~taking toplace ~~market~~with ~~value. If we are a~~increased ~~PFIC~~hostilities ~~for~~since ~~U.S.~~the ~~federal~~beginning ~~income tax purposes, holders~~ of ~~our~~2006. ~~Ordinary~~We ~~Shares~~cannot ~~who~~predict ~~are residents of~~ the ~~United~~ ~~States~~effect ~~(“U.S.~~on ~~Holders”)~~BackWeb ~~would~~of ~~be required, in certain circumstances, to pay~~ an ~~interest~~ ~~charge~~increase ~~together~~in ~~with~~the ~~tax~~degree ~~calculated~~of atviolence ~~maximum~~in ~~rates~~Israel onor ~~certain~~of ~~“excess distributions,” including~~ any ~~gain~~possible onmilitary ~~the~~action ~~sale~~elsewhere ofin ~~Ordinary~~the Middle ~~Shares~~East.

~~The~~Because ~~consequences~~our ~~described~~revenues ~~above~~are ~~can~~generated bein ~~mitigated if the~~ U.S. ~~Holder~~dollars ~~makes~~but ~~an election to treat us as~~ a ~~qualified~~large ~~electing~~portion ~~fund,~~of orour ~~QEF.~~expenses ~~A shareholder making the QEF election~~ is ~~required~~ ~~for~~incurred ~~each taxable year to include~~ in ~~income~~New aIsraeli ~~pro~~Shekels ~~rata share of the net capital gain of the QEF as long-term capital gain~~(NIS), ~~subject~~our toresults ~~a separate election to defer payment~~ of ~~taxes,~~operations ~~which~~may deferral is subject to an interest charge. We have agreed to supply U.S. Holders with the information needed to report income and gain pursuant to a QEF election. The QEF election is made on a shareholder-by-shareholder basis and can be ~~revoked~~seriously ~~only~~harmed ~~with the consent of the Internal Revenue~~by ~~Service,~~currency ~~or IRS~~fluctuations.

As We anincur ~~alternative~~a tolarge ~~making~~portion ~~the QEF election, the U.S. Holder~~ of ~~PFIC~~our ~~stock~~costs ~~which~~from isoperations ~~publicly traded~~in ~~could~~Israel ~~mitigate~~in ~~the~~NIS. ~~consequences~~If ofIsrael’s ~~the~~economy ~~PFIC~~is impaired ~~rules~~ by ~~electing~~a tohigh ~~mark~~inflation ~~the~~rate ~~stock to market annually, recognizing as ordinary income~~ or ~~loss~~if ~~each year an amount equal to~~ the ~~difference~~timing as of the ~~close~~devaluation of the ~~taxable~~NIS ~~year~~against ~~between~~ the ~~fair~~U.S. dollar ~~market~~were ~~value~~to oflag ~~the~~considerably ~~PFIC~~behind ~~stock~~inflation, our operations and ~~the~~financial ~~U.S.~~condition ~~Holder’s~~may be ~~adjusted~~negatively ~~tax~~impacted ~~basis~~to in the ~~PFIC~~extent ~~stock.~~that ~~Losses~~the ~~would~~inflation berate ~~allowed~~exceeds ~~only~~the torate ~~the~~of ~~extent~~devaluation of ~~net~~the ~~mark-to-market~~NIS ~~gain~~against ~~previously included by~~ the U.S. ~~Holder under the election for prior taxable years~~dollar.

~~All~~Any ~~U.S.~~future ~~Holders~~profitability ~~are~~may ~~advised~~be todiminished ~~consult~~if ~~their own~~ tax ~~advisers~~benefits ~~about~~from the ~~PFIC~~State ~~rules generally and about the advisability, procedures and timing~~ of ~~their~~Israel ~~making~~are ~~any~~reduced ~~of the available tax elections, including the QEF~~ or ~~mark-to-market elections~~ withheld.

~~Our~~ Pursuant ~~officers~~to the Law for the Encouragement of Capital Investments, ~~directors~~the ~~and~~Israeli ~~affiliated~~Government ~~entities~~has granted ~~own~~“Approved aEnterprise” ~~large~~status ~~percentage~~to our existing capital investment programs. Consequently, we are eligible for tax benefits for the first several years in which we generate taxable income. Our future profitability may be diminished if all or portions of ~~BackWeb~~these tax benefits are reduced or eliminated. These tax benefits may be cancelled if we fail to comply with requisite conditions and criteria. ~~could~~Currently the most significant conditions that we must continue to meet include making ~~significantly~~specified ~~influence~~investments in fixed assets, financing at least 30% of these investments through the issuance ~~outcome~~of capital stock, and maintaining the development and production nature of ~~actions~~our facilities. We cannot assure you that the benefits will be continued in the future at their current levels or at any level.

~~Our~~Israeli ~~executive~~regulations ~~officers,~~may ~~directors~~limit ~~and entities affiliated with them, in the aggregate, beneficially owned approximately 28% of~~ our ~~outstanding~~ability ~~Ordinary Shares as of March 31, 2005. These shareholders, if acting together, would be able~~ to ~~significantly~~engage ~~influence~~in ~~all~~research ~~matters~~and ~~requiring approval~~development ~~by our shareholders, including the election of directors~~ and ~~the~~export ~~approval of mergers or~~our ~~other business combination transactions~~products.

Under Israeli law, we are required to obtain an Israeli government license to engage in research and development and the export of the encryption technology incorporated in our products. Our research and development activities in Israel, together with our ability to export our products out of Israel, would be limited if the Israeli government revokes our current license, our current license

~~Item 3. Quantitative and Qualitative Disclosures About Market Risk~~32

WeTable develop products in Israel and sell them in the U.S., Canada, Europe, and Israel. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As most of our sales are currently made in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets. Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. We regularly assess these risks and have established policies and business practices to protect against Contents

31is not renewed, our license fails to cover the scope of the technology in our products, or Israeli law regarding research and development or export of encryption technologies were to change.

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

Some of our directors and executive officers are not residents of the ~~adverse~~United ~~effects~~States and some of ~~these~~their assets and ~~other~~our ~~potential~~assets ~~exposures.~~are Aslocated aoutside ~~result,~~the weUnited doStates. ~~not~~Service ~~anticipate material~~of ~~losses~~process inupon these directors ~~areas.~~and ~~Due~~executive toofficers, ~~the~~and ~~nature~~enforcement of ~~our~~judgments ~~short-term~~obtained ~~investments,~~in wethe ~~have~~United ~~concluded~~States ~~that~~against ~~there~~us, isand nothese ~~material~~directors ~~market~~and ~~risk~~executive ~~exposure. Therefore~~officers, nomay ~~quantitative~~be ~~tabular~~difficult ~~disclosures~~to ~~are~~obtain within the ~~required~~United States.

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

We• ~~hedge~~the ~~certain~~judgment ~~forecasted~~was ~~committed~~rendered ~~expenses~~by ~~that~~a ~~are~~court ~~payable~~that inwas, ~~NIS~~according to ~~minimize our exposure to fluctuations in~~ the ~~exchange~~laws ~~rate~~of ~~between~~ the ~~NIS~~state ~~and~~of the ~~U.S.~~court, ~~dollar.~~competent ~~We compare budgeted NIS exchange rates~~ to ~~the~~render ~~forward contract rates for~~ the ~~NIS~~judgment; ~~for~~• ~~various periods of time into~~ the ~~future~~judgment ~~where~~is weno ~~are~~longer ~~reasonably~~able ~~confident~~to ~~that~~be weappealed; ~~can~~• ~~forecast~~the aobligation ~~stable~~imposed ~~stream~~by ofthe ~~expenses payable~~judgment inis ~~NIS.~~enforceable ~~Taking~~according ~~all~~to ~~industry~~the ~~specific~~rules ~~and~~relating ~~macroeconomic indicators into account, in order~~ to ~~protect~~ ~~ourselves from fluctuating exchange rates, we enter into forward contracts. The contracts are generally monthly and timed in~~ the ~~month~~enforceability ~~to mature when we incur most~~ of ~~our~~judgments ~~expense~~ in ~~NIS, which~~Israel ~~are payroll~~ and ~~related~~the ~~expenses.~~substance ~~We take out a number~~ of ~~forward~~the ~~contracts~~judgment atis anot ~~time~~contrary ~~for future~~to ~~months,~~public ~~depending~~policy; ~~on how confident we feel about both our forecasted NIS expenses~~ and ~~our visibility~~• ~~into~~the ~~future~~judgment ~~exchange~~is ~~rate~~executory ~~movement.~~in Wethe dostate ~~not~~in ~~anticipate~~which ~~any~~it ~~material~~was ~~adverse effect on our consolidated financial position utilizing our current hedging strategy~~given. ~~At March 31, 2005, we had no forward contracts in place.~~

~~Item~~ Even 4if the above conditions are satisfied, an Israeli court will not enforce a foreign judgment if it was given in a state whose laws do not provide for the enforcement of judgments of Israeli courts (subject to exceptional cases) or if its enforcement is likely to prejudice the sovereignty or security of the State of Israel. ~~Controls~~An ~~and~~Israeli ~~Procedures~~court also will not declare a foreign judgment enforceable if:

~~Evaluation~~• ofthe ~~disclosure~~judgment ~~controls~~was ~~and~~obtained ~~procedures.~~by Wefraud; ~~maintain~~• ~~“disclosure~~there ~~controls~~was ~~and procedures,”~~no asdue ~~such~~process; ~~term~~• ~~is defined in Rule 13a-15(e) under~~ the ~~Securities~~judgment ~~Exchange~~was ~~Act~~rendered ofby ~~1934 (the~~a ~~“Exchange~~court ~~Act”),~~not ~~that~~competent ~~are designed~~ to ~~ensure~~render ~~that~~it ~~information~~according ~~required~~ to ~~be disclosed by us in reports that we file or submit under~~ the ~~Exchange~~laws ~~Act~~of isprivate ~~recorded,~~international ~~processed,~~law ~~summarized,~~in ~~and reported~~Israel; ~~within~~• the ~~time~~judgment ~~periods specified in Securities and Exchange Commission rules and forms, and that such information~~ is ~~accumulated~~at ~~and~~variance ~~communicated~~with toanother ~~our~~judgment management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that ~~disclosure~~was ~~controls~~given ~~and~~in ~~procedures,~~the nosame matter ~~how~~between ~~well~~the ~~conceived~~same parties and ~~operated,~~which ~~can provide~~is ~~only~~still ~~reasonable,~~valid; ~~not~~or ~~absolute,~~• ~~assurance~~at ~~that~~ the ~~objectives~~time of the ~~disclosure~~action ~~controls~~was ~~and procedures~~brought ~~are met. Additionally,~~ in ~~designing~~the ~~disclosure~~foreign ~~controls~~court ~~and~~a ~~procedures,~~suit ~~our management necessarily was required to apply its judgment~~ in ~~evaluating~~ the ~~cost-benefit~~same ~~relationship~~matter ~~of possible disclosure controls~~ and ~~procedures.~~between ~~The design of any disclosure controls and procedures also is based in part upon certain assumptions about~~ the ~~likelihood~~same ofparties ~~future~~was ~~events,~~pending ~~and~~before ~~there~~a ~~can be~~court noor ~~assurance~~tribunal ~~that any design will succeed~~ in ~~achieving its stated goals under all potential future conditions~~Israel.

~~Based~~ If ona ~~their~~foreign ~~evaluation~~judgment asis ofenforced ~~the~~by ~~end~~an ofIsraeli ~~the~~court, ~~period~~it ~~covered~~generally bywill ~~this~~be ~~Quarterly~~payable ~~Report~~in ~~on Form 10-Q~~NIS, which ~~our~~can ~~Chief~~then ~~Executive~~be ~~Officer~~converted into non-Israeli currency and ~~Chief~~transferred ~~Financial~~out ~~Officer~~of ~~have~~Israel. ~~concluded~~The ~~that,~~usual practice ~~subject~~in an action to recover an amount in non-Israeli currency is for the Israeli court to ~~limitations~~render ~~noted~~judgment ~~above,~~for ~~our~~the ~~disclosure~~equivalent ~~controls~~amount ~~and~~in ~~procedures~~NIS ~~were~~at ~~effective~~the torate ~~ensure~~of ~~that material~~exchange ~~information~~on ~~relating~~the todate usof payment, but ~~including~~the ~~our~~judgment ~~consolidated~~debtor ~~subsidiaries~~also may make payment in non-Israeli currency. Pending collection, isthe amount ~~made~~of ~~known~~the judgment of an Israeli court stated in NIS ordinarily will be linked to ~~them~~the Israel byconsumer ~~others~~price ~~within~~index ~~those~~plus ~~entities,~~interest ~~particularly~~at ~~during~~ the ~~period~~annual inrate ~~which~~(set ~~this~~by ~~Quarterly~~Israeli ~~Report~~law) onprevailing at that time. ~~Form~~Judgment ~~10-Q~~creditors ~~was~~bear ~~being~~the ~~prepared~~risk of unfavorable exchange rates.

~~Changes~~We inhave ~~internal~~adopted ~~control~~anti-takeover ~~over~~provisions ~~financial reporting. There was no change in our internal control over financial reporting~~ that ~~occurred~~could ~~during~~delay ~~the~~or ~~period~~prevent ~~covered~~an byacquisition ~~this~~of ~~Quarterly Report~~BackWeb, oneven ~~Form~~if ~~10-Q~~an ~~that~~acquisition ~~has~~would ~~materially~~be ~~affected,~~beneficial ~~or is reasonably likely~~ to ~~materially affect,~~ our ~~internal~~ ~~control over financial reporting~~shareholders.

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

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

~~PART II — OTHER INFORMATION~~33

Item 1.Table Legalof Proceedings Contents

OnTax ~~November 13,~~reform ~~2001, BackWeb, six of its officers and directors, and various underwriters for BackWeb’s initial public offering were named as defendants~~ in aIsrael ~~consolidated~~may ~~action~~reduce captioned In re BackWeb Technologies Ltd. Initial Public Offering Securities Litigation, Case No. 01-CV-10000, a purported securities class action lawsuit filed in the United States District Court, Southern District of New York. Similar cases have been filed alleging violations of the federal securities laws in the initial public offerings of more than 300 other companies, and these cases have been coordinated for pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92. A consolidated amended complaint filed in the BackWeb case asserts that the prospectus from our ~~September 8,~~ ~~1999~~tax ~~initial public offering failed to disclose certain alleged improper actions by the underwriters for the offering~~benefit, ~~including~~which ~~the~~might ~~receipt~~adversely ofaffect ~~excessive brokerage commissions and agreements with customers regarding aftermarket purchases of shares of~~ our ~~stock~~profitability. ~~The complaint~~ alleges violations of Sections 11 and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated under the Securities Exchange Act of 1934. On or about July 15, 2002, an omnibus motion to dismiss was filed in the coordinated litigation on behalf of defendants, including BackWeb, on common pleadings issues. In October 2002, the Court dismissed all six individual defendants from the litigation without prejudice, pursuant to a stipulation. On February 19, 2003, the Court denied the motion to dismiss with respect to the claims against BackWeb. No trial date has yet been set.

A On ~~proposal~~January 1, ~~has~~2003, ~~been~~a ~~made~~comprehensive ~~for~~tax ~~the~~reform ~~settlement~~took ~~and~~effect ~~release~~in Israel. We performed an analysis of ~~claims~~the ~~against~~likely implications of the ~~issuer defendants,~~tax ~~including~~reform ~~BackWeb~~legislation on our results of operations. ~~The~~Our evaluation ~~settlement~~concluded isthat ~~subject~~the toimpact of the tax reform on both our corporate and income tax framework would not have a ~~number~~material ofeffect ~~conditions,~~on ~~including~~our results and operations. This evaluation was ~~approval~~based, ofin part, on the ~~proposed~~assumptions ~~settling~~that ~~parties~~we would not expand beyond the countries in which we already operate and that we would remain in a net operating loss for tax purposes for at least the next ~~court~~three years. InWe ~~September 2004~~cannot assure you that these assumptions will be met, anand ~~agreement~~the oftax reform will ~~settlement~~not ~~was~~materially ~~submitted~~and toadversely ~~the~~affect ~~court~~our ~~for~~results ~~preliminary~~of ~~approval~~operations.

IfOur ~~the settlement does not occur, and litigation against BackWeb continues, BackWeb believes it has meritorious defenses and intends to defend the case vigorously. However, the~~ results of ~~any litigation~~operations ~~are~~may ~~inherently uncertain and can require significant management attention, and we could~~ be ~~forced~~negatively toaffected ~~incur~~by ~~substantial expenditures, even if we ultimately prevail. In~~ the ~~event~~obligation ~~there were an adverse outcome, our business could be harmed. Thus, we cannot assure you that this lawsuit will not materially and adversely affect our business, results~~ of ~~operations~~key orpersonnel ~~the~~to ~~price of our~~perform ~~Ordinary~~military ~~Shares~~service.

~~From~~ Certain ~~time~~of toour ~~time~~officers weand employees are ~~involved~~currently obligated to perform annual reserve duty in ~~litigation~~the ~~incidental~~Israel Defense Forces and are subject to ~~the~~being ~~conduct~~called offor ~~our~~active ~~business~~military duty at any time. ~~Apart~~Although ~~from~~we ~~the~~have ~~litigation~~operated ~~described~~effectively ~~above~~under these requirements since our inception, we ~~are~~cannot predict ~~not~~the ~~party~~effect tothese ~~any~~obligations ~~lawsuit~~will orhave ~~proceeding~~on ~~that,~~us in the future. Our operations could be ~~our~~disrupted ~~opinion~~by the absence, isfor ~~likely~~a tosignificant ~~seriously~~period, ~~harm~~of one or more of our ~~business~~officers or key employees due to military service. Such military requirement could be increased in the event of war or military action involving Israel.

~~Item 2.~~Risks ~~Unregistered~~Relating ~~Sales~~to ofOur ~~Equity~~Ordinary ~~Securities and Use of Proceeds~~Shares

~~None~~Our stock price has been volatile and could fluctuate in the future.

~~Item 3~~ The market price of our Ordinary Shares has been volatile. ~~Defaults~~We ~~Upon~~expect ~~Changes~~our ofstock ~~Senior~~price ~~Securities~~to continue to fluctuate:

~~None~~• in response to quarterly variations in operating results; • in response to announcements of technological innovations or new products by us or our competitors or strategic allies; • 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.

~~Item 4.~~ In ~~Submission~~the past, following periods of ~~Matters~~volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We are currently subject to a ~~Vote~~securities class action described in Part II, Item 1 “Legal Proceedings” of this ~~Security~~Quarterly ~~Holders~~Report, and the volatility of our stock price could make us a target for additional suits. Securities class action litigation could result in substantial costs and a diversion of our management’s attention and resources, which could seriously harm our business and results of operations.

~~None.~~If we do not regain compliance with the Nasdaq continued listing requirements within the time frame prescribed by Nasdaq, our Ordinary Shares may be delisted from trading on The Nasdaq Capital Market, and the ability of our shareholders to trade our shares and obtain liquidity for their shares, may be significantly impaired and the market price of our Ordinary Shares may decline significantly.

~~Item~~ In 5May 2006, Nasdaq implemented a change in its continued listing requirements to stipulate that non-U.S. ~~Other~~companies ~~Information~~must now comply with Nasdaq Marketplace Rule 4320(e)(2)(E)(i) (the Rule), which states that the closing per share bid price of Nasdaq listed companies must be at or above at $1.00. As a result, we must now comply with this Rule. On July 25, 2006, we received notification from Nasdaq indicating that for the last 30 consecutive business days, the bid price of our Ordinary Shares had closed below the minimum $1.00 per share requirement for continued inclusion on The Nasdaq Capital Market. In accordance with Nasdaq rules, we will be provided 180 calendar days, or until January 16, 2007, to regain compliance by having the bid price of our shares close at

~~None.~~34

ItemTable 6.of ExhibitsContents

$1.00 per share or more for a minimum of 10 consecutive trading days. If we have not gained compliance by January 16, 2007, Nasdaq staff will determine if we continue to meet The ~~exhibits~~Nasdaq Capital ~~filed~~Market initial listing criteria as ~~part~~set offorth ~~this~~in ~~quarterly~~Marketplace ~~report~~Rule 4320(e), onexcept ~~Form~~for 10the bid price requirement. If we meet the initial listing criteria, Nasdaq staff will notify us that we have been granted an additional 180 calendar-Qday compliance period. If we are ~~listed~~not ineligible for an additional compliance period, Nasdaq staff will provide written notification that our Ordinary Shares will be delisted. At that time, we may appeal the ~~Exhibit~~Nasdaq staff’s determination to delist ~~Index~~our ~~immediately~~Ordinary ~~preceding~~Shares to a Nasdaq Listing Qualifications Panel. We cannot assure you that we will be able to maintain the ~~exhibits~~initial or continued listing requirements or that we would succeed in any appeal to the Nasdaq Listing Qualification Panel, and, ~~are~~as ~~incorporated~~a ~~herein~~result, may be delisted from trading on The Nasdaq Capital Market. If our Ordinary Shares are delisted from trading on the Nasdaq Capital Market, then the trading market for our Ordinary Shares, and the ability of our shareholders to trade our shares and obtain liquidity for their shares, may be significantly impaired and the market price of our Ordinary Shares may decline significantly.

33Holders of our Ordinary Shares who are United States residents face income tax risks.

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

Exhibit
No.		Description
31.1		Certification of BackWeb’s Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of BackWeb’s Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certifications, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of BackWeb’s Chief Executive Officer and Chief Financial Officer, dated August 13, 2004*

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

* As ~~These~~an ~~certifications~~alternative ~~are~~to ~~furnished~~making ~~with~~the ~~this~~QEF ~~Quarterly~~election, ~~Report~~the onU.S. ~~Form 10-Q~~Holder ~~and~~of ~~are~~PFIC ~~not~~stock ~~deemed~~which is publicly ~~filed~~traded ~~with~~could mitigate the ~~SEC~~consequences ~~and~~of ~~are~~the ~~not~~PFIC rules by electing to bemark ~~incorporated~~the bystock ~~reference~~to inmarket annually, ~~any~~recognizing ~~filing~~as ofordinary ~~BackWeb~~income ~~under~~or loss each year an amount equal to the difference as of ~~Securities~~the ~~Act~~close of ~~1933~~the ortaxable year between the ~~Securities~~fair ~~Exchange~~market ~~Act~~value of ~~1934,~~the ~~irrespective~~PFIC ofstock ~~any~~and ~~general~~the U.S. Holder’s ~~incorporation~~adjusted ~~language~~tax basis in ~~any~~the ~~filings~~PFIC stock. Losses would be allowed only to the extent of net mark-to-market gain previously included by the U.S. Holder under the election for prior taxable years.

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

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

~~SIGNATURE~~ Our executive officers, directors and entities affiliated with them, in the aggregate, beneficially owned approximately 27% of our outstanding Ordinary Shares as of June 30, 2006. These shareholders, if acting together, would be able to significantly influence all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions.

~~Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly~~35 ~~caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.~~

		BACKWEB TECHNOLOGIES LTD.
	By:	/s/ KEN HOLMES
		Ken Holmes
Date: May 13, 2005		Vice President, Finance
		(Mr. Holmes is the Principal Financial Officer and has been
		duly authorized to sign on behalf of Registrant.)

35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~Table of Contents~~ None.

~~EXHIBIT~~Item 3. ~~INDEX~~Defaults Upon Changes of Senior Securities

Exhibit
No.		Description
31.1		Certification of BackWeb’s Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of BackWeb’s Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certifications, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of BackWeb’s Chief Executive Officer and Chief Financial Officer, dated August 13, 2004*

None.

*Item 4. ~~These~~Submission ~~certifications~~of ~~are~~Matters ~~furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the SEC and are not~~ to bea ~~incorporated~~Vote ~~by reference in any filing~~ of ~~BackWeb~~Security ~~under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings.~~Holders

36 None.

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are filed herewith.


Exhibit
No.		Description
31.1		Certification of BackWeb’s Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of BackWeb’s Vice President, Finance, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certifications, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of BackWeb’s Chief Executive Officer and Vice President, Finance

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


			BACKWEB TECHNOLOGIES LTD.
	By:	/s/ KEN HOLMES
		Ken Holmes
Date: August 14, 2006		Vice President, Finance (Mr. Holmes is the Principal Financial Officer and has been duly authorized to sign on behalf of Registrant.)

EXHIBIT INDEX


Exhibit
No.		Description
31.1		Certification of BackWeb’s Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of BackWeb’s Vice President, Finance, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certifications, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of BackWeb’s Chief Executive Officer and Vice President, Finance

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