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 June 30, ~~2006~~2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period from to

Commission File Number 000-26241

BackWeb Technologies Ltd.

(Exact Name of Registrant as Specified in its Charter)

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

(972) 3-6118800 (Registrant’s Telephone Number, Including Area Code)

(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 a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check One):

Large accelerated filer o Accelerated filer 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~~Yes ~~registrant~~o ~~had~~No ~~41,250,497 Ordinary Shares outstanding as of August 1, 2006.~~þ

The registrant had 41,313,704 Ordinary Shares outstanding as of August 1, 2007.

BACKWEB TECHNOLOGIES LTD.

REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, ~~2006~~2007

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)	3
Item 1. Condensed Consolidated Financial Statements (Unaudited)			3
Condensed Consolidated Balance Sheets as of June 30, 2007 (Unaudited) and December 31, 2006	3
Condensed Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005			3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006 (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 Six Months Ended June 30, 2007 and 2006 (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
Notes to Condensed Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures About Market Risk	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			24
Item 4. Controls and Procedures	23
Item 4. Controls and Procedures			24
PART II. OTHER INFORMATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	24
Item 1. Legal Proceedings			24
Item 1A. Risk Factors	25
Item 1A. Risk Factors			25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 2. Changes in Securities and Use of Proceeds			36
Item 3. Defaults Upon Senior Securities	35
Item 3. Defaults Upon Senior Securities			36
Item 4. Submission of Matters to a Vote of Security Holders	35
Item 4. Submission of Matters to a Vote of Security Holders			36
Item 5. Other Information	35
Item 5. Other Information			36
Item 6. Exhibits	35
Item 6. Exhibits			36
Signatures	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~~revenue ~~expected~~and ~~impact~~expense trend expectations, including our expectation of recognizing an additional $2.5 million in revenue from a source code license sale during periods through 2009 in the ~~restructuring~~event we ~~implemented~~are able to meet acceptance criteria later in ~~the~~2007, ~~second~~our ~~quarter~~ability ofto achieve ~~2006~~profitability and ~~regarding~~ our ~~revenue~~ability ~~and~~to ~~expense~~establish ~~trend~~partnerships ~~expectations~~with application vendors in our target markets 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.” 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. Except Weas required by law, 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.

Page 2 of 36

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

BACKWEB TECHNOLOGIES LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)

(in thousands)


	June 30,			December 31,
	2007			2006

ASSETS
Current assets:
Cash and cash equivalents	$	4,188		$	2,426
Short-term investments		—			2,068
Accounts receivable, net of allowance for doubtful accounts of $203 and $329, respectively		618			1,369
Other current assets		469			495

Total current assets		5,275			6,358
Property and equipment, net		137			127
Other long-term assets		64			42

Total assets	$	5,476		$	6,527


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	400		$	249
Accrued liabilities		1,349			1,499
Deferred revenue		595			948

Total current liabilities		2,344			2,696
Commitments and contingencies (Note 2)
Shareholders’ equity:
Ordinary Shares		152,339			152,258
Accumulated other comprehensive income		—			—
Accumulated deficit		(149,207	)		(148,427	)

Total shareholders’ equity		3,132			3,831

Total liabilities and shareholders’ equity	$	5,476		$	6,527

	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 balance sheet at December 31, 2006 has been derived from the audited financial statements at that date.

Note: The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date.

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

Page 3 of 36

BACKWEB TECHNOLOGIES LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)

(in thousands, except per share data)


	THREE MONTHS						SIX MONTHS
	ENDED JUNE 30,						ENDED JUNE 30,
	2007			2006			2007			2006

Revenue:
Licenses	$	187		$	462		$	655		$	1,253
Licenses subject to contract accounting		500			—			500			—
Services		690			680			1,395			1,545

Total revenue		1,377			1,142			2,550			2,798

Cost of revenue:
Licenses		31			19			62			40
Licenses subject to contract accounting		37			—			37			—
Services		214			182			393			422

Total cost of revenue		282			201			492			462

Gross profit		1,095			941			2,058			2,336


Operating expenses:
Research and development		457			619			930			1,201
Sales and marketing		618			979			1,235			2,054
General and administrative		325			479			702			1,084

Total operating expenses		1,400			2,077			2,867			4,339

Loss from operations		(305	)		(1,136	)		(809	)		(2,003	)
Interest and other income, net		4			40			29			65

Net loss	$	(301	)	$	(1,096	)	$	(780	)	$	(1,938	)

Basic and diluted net loss per share	$	(0.01	)	$	(0.03	)	$	(0.02	)	$	(0.05	)

Weighted-average number of shares used in computing basic and diluted net loss per share		41,314			41,250			41,311			41,181

	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

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

Page 4 of 36

BACKWEB TECHNOLOGIES LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)

(in thousands)


	Six Months Ended
	June 30,
	2007			2006

Operating Activities
Net loss	$	(780	)	$	(1,938	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		48			75
Stock-based compensation		79			217
Changes in operating assets and liabilities:
Accounts receivable		751			246
Other current and non-current assets		4			(111	)
Accounts payable and accrued liabilities		1			(134	)
Deferred revenue		(353	)		(86	)
Non-current liabilities		—			(8	)

Total adjustments		530			199

Net cash used in operating activities		(250	)		(1,739	)


Investing Activities
Proceeds from sales of short-term investments		2,068			2,154
Purchases of property and equipment		(58	)		(38	)

Net cash provided by investing activities		2,010			2,116


Financing Activities
Proceeds from issuance of Ordinary Shares		2			69

Net cash provided by financing activities		2			69


Net increase in cash and cash equivalents		1,762			446
Cash and cash equivalents at beginning of period		2,426			1,583

Cash and cash equivalents at end of period	$	4,188		$	2,029

	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

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

Page 5 of 36

BACKWEB TECHNOLOGIES LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization — BackWeb Technologies 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 enables companies to extend the reach of their Web assets to the mobile community of their customers, partners, and employees. The Company’s products address the need of mobile users who are disconnected from a network to access and transact with critical enterprise Web content, 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. The Company’s products are designed to reduce network costs and improve the productivity of increasingly mobile workforces. BackWeb sells its products primarily to end users in a variety of industries, including the telecommunications, financial and computer industries, through its direct sales force, resellers, OEMs and sales/marketing partners. The Company believes that its current cash, cash equivalents, and short-term investment balances will be sufficient to fund its operations for at least the next 12 months. However, since its inception, the Company has not achieved profitability and expects to continue to incur net losses for the foreseeable future. In addition, the Company’s business may not go as planned and it might need to raise additional funds prior to the expiration of this period. If the Company decides to raise additional funds, it could be difficult to obtain additional financing on favorable terms, or at all, due to the Company’s financial condition and because the Company’s Ordinary Shares have been delisted from he NASDAQ Capital Market. The Company may try to obtain additional financing by issuing Ordinary Shares or convertible debt securities, which would dilute its existing shareholders. If the Company cannot raise needed funds on acceptable terms, or at all, it may not be able to develop or enhance its products, respond to competitive pressures or grow its business, or the Company may be required to further reduce its expenditures, any of which could materially harm the Company’s business.

Basis of Presentation — The unaudited interim condensed consolidated financial 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 ~~upon~~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, ~~2005~~2006 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, ~~2005~~2006. 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, ~~2006~~2007 or any future interim period.

~~Net~~Revenue ~~Loss~~Recognition ~~Per~~— ~~Share~~The ~~—Basic~~Company ~~net~~derives ~~loss~~revenue ~~per~~primarily ~~share~~from issoftware ~~computed~~license ~~based~~fees, maintenance onservice fees, and consulting services paid to the ~~weighted~~Company ~~average~~directly ~~number~~by corporate ofcustomers ~~Ordinary~~and ~~Shares~~resellers ~~outstanding~~and, ~~during~~to ~~each~~a ~~period.~~lesser ~~Diluted~~extent, ~~net~~from ~~loss~~royalty ~~per~~fees ~~share~~from isOEMs. ~~computed~~Revenue ~~based~~derived onfrom ~~the~~resellers ~~weighted~~is ~~average~~not ~~number~~recognized ofuntil ~~Ordinary~~the ~~Shares~~software ~~outstanding~~is ~~during~~sold through to the ~~period~~end ~~plus~~user. ~~potentially dilutive~~Royalty ~~Ordinary~~revenue ~~Shares~~is recognized ~~considered~~when ~~outstanding~~reported ~~during~~to the ~~period~~Company inby ~~accordance~~the ~~with~~OEM ~~Statement~~after delivery of ~~Financial~~ ~~Accounting~~the ~~Standard~~applicable ~~(SFAS) No~~products. ~~128~~ In addition, ~~“Earnings~~royalty ~~per~~revenue ~~Share.”~~can ~~The~~arise ~~total~~from ~~number~~the right of ~~Ordinary Shares~~OEMs ~~subject~~and other distributors to ~~outstanding~~use ~~options~~the Company’s ~~excluded~~products. ~~from~~Royalties ~~the~~are ~~diluted~~classified ~~net~~by ~~loss~~product ~~per~~in ~~share~~the ~~calculation because~~applicable ~~they~~revenue ~~would~~category; belicense royalties ~~considered~~are ~~anti-dilutive~~classified ~~was~~in ~~6,067,211~~license revenue and ~~6,196,416~~royalties atfrom ~~June 30~~maintenance arrangements are classified as maintenance revenue. As described below, ~~2006~~management estimates must be made and used ~~2005,~~in ~~respectively~~connection with the revenue the Company recognizes in any accounting period.

The ~~following~~Company ~~table~~recognizes ~~presents~~software ~~the~~license ~~calculation~~revenue in accordance with Statement of ~~basic~~Position 97-2 “Software Revenue Recognition” (“SOP 97-2”), as amended, and ~~diluted~~SOP ~~net~~98-9, ~~loss~~“Modification ~~per~~of ~~share~~SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions” (in“SOP 98-9”). SOP 98-9 requires ~~thousands,~~that ~~except~~revenue ~~per~~be ~~share~~recognized ~~data~~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 elements.

	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	)

Page 6 of 36

~~Comprehensive~~When ~~Loss~~contracts —contain ~~The~~multiple ~~following~~elements ~~table~~wherein ~~presents~~VSOE of fair value exists for all undelivered elements, the ~~components~~Company accounts for the delivered elements in accordance with the “Residual Method” prescribed by SOP 98-9. Maintenance revenue included in these arrangements is deferred and recognized on a straight-line basis over the term of ~~comprehensive~~the ~~loss~~maintenance agreement. The VSOE of fair value of the undelivered elements (inmaintenance, ~~thousands~~training, and consulting services): is determined based on the price charged for the undelivered element when sold separately.

	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	)

If an arrangement to deliver software requires significant production, modification or customization of software, the Company accounts for the entire arrangement in conformity with Accounting Research Bulletin No. 45, “Long-Term Construction-Type Contracts,” using the relevant guidance in Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” In such an arrangement, BackWeb will recognize revenue and related costs of revenue using the percentage-of-completion method upon the completion of milestones.

~~Stock-Based~~ Revenue ~~Compensation~~from —software Inlicense ~~December 2004,~~agreements ~~the~~is ~~Financial~~recognized ~~Accounting~~when ~~Standards~~all ~~Board (FASB) issued Statement~~ of ~~Financial~~the ~~Accounting~~following ~~Standard~~criteria ~~123R, which revised~~are ~~FAS 123~~met —as ~~“Accounting~~set ~~for~~forth ~~stock~~in ~~based compensation,”~~SOP ~~(SFAS~~97-2: ~~123R~~(1). persuasive ~~SFAS~~evidence ~~123R~~of ~~requires~~an ~~all share-based~~arrangement ~~payments~~exists; to(2) delivery ~~employees, or to non-employee directors as compensation for service on the~~has ~~Board~~occurred; ~~of Directors, to be recognized as compensation expense in~~ (3) the ~~consolidated~~fee ~~financial statements~~is ~~based~~fixed onor ~~the~~determinable; ~~fair~~and ~~values~~(4) collectibility ofis ~~such payments~~probable. The Company ~~maintains shareholder approved~~ ~~stock-based~~does ~~compensation~~not ~~plans,~~generally ~~pursuant~~grant toa ~~which~~right itof ~~grants~~return ~~stock-based compensation~~ to its ~~employees,~~ ~~and to non-employee directors for Board service~~customers. ~~These~~When ~~grants are primarily in the form of options that allow~~ a ~~grantee~~right ~~to purchase a fixed number~~ of ~~shares~~return ofexists, the Company’s ~~common~~defers ~~stock at~~revenue auntil ~~fixed exercise price equal to~~ the ~~market~~right ~~price~~ of ~~the~~return ~~shares~~expires, at ~~the~~which ~~date~~time ofrevenue ~~the~~is ~~grant. The~~recognized ~~options~~provided ~~may~~that ~~vest~~all onother arevenue ~~single~~recognition ~~date~~criteria orhave inbeen ~~tranches~~met. ~~over~~If ~~a period of time, but normally they do not vest unless~~ the ~~grantee~~fee is ~~still~~not ~~employed~~fixed byor determinable, orrevenue is arecognized ~~director~~as ~~of,~~payments ~~the~~become ~~Company~~due onfrom the ~~vesting~~customer ~~date. The~~provided ~~compensation~~that ~~expense for these grants will be recognized over the requisite service period,~~all ~~which~~other isrevenue ~~typically~~recognition ~~the~~criteria ~~period~~have ~~over~~been ~~which the stock-based compensation awards vest~~met.

The Company ~~made~~licenses noits ~~modifications~~products toon ~~outstanding~~a ~~options~~perpetual ~~with~~and ~~respect~~on toa ~~vesting~~term ~~periods~~basis. ~~or exercise~~The ~~prices~~Company ~~prior~~recognizes license torevenue ~~adopting~~arising ~~SFAS~~from ~~123R.~~perpetual Inlicenses ~~March 2005,~~and ~~the~~multi-year ~~Securities~~term ~~and~~licenses ~~Exchange~~in ~~Commission~~the accounting ~~(SEC) issued~~period ~~Staff~~that ~~Accounting~~all ~~Bulletin~~revenue ~~No. 107~~recognition ~~(SAB~~criteria ~~107)~~have been met, which ~~provides~~is ~~guidance~~generally onupon delivery of the ~~implementation~~software ofto ~~SFAS~~the ~~123R~~end user. ~~The~~For ~~Company~~term ~~applied~~licenses ~~the~~with ~~principles~~a ofcontract ~~SAB~~period ~~107~~of inless ~~conjunction~~than ~~with~~two ~~its~~years, revenue ~~adoption~~is ofrecognized ~~SFAS~~on ~~123R~~a monthly basis.

~~The~~At ~~Company~~the ~~adopted~~time ~~SFAS~~of ~~123R~~each ~~effective January 1~~transaction, ~~2006, using~~ the ~~modified-prospective transition~~Company ~~method.~~assesses ~~Under~~whether ~~this transition method, compensation expense will be recognized based on~~ the ~~grant~~fee ~~date~~associated ~~fair value estimated in accordance~~ with ~~the provisions of SFAS 123R for all new~~our ~~grants~~license ~~effective~~sale ~~January 1,~~is ~~2006,~~fixed ~~and~~or ~~for~~determinable. ~~options~~If ~~granted~~the ~~prior~~fee tois ~~but~~ not ~~vested~~fixed asor ~~of December 31~~determinable, ~~2005.~~the ~~Prior~~Company recognizes ~~periods~~revenue ~~were~~as ~~not~~payments ~~restated~~become todue ~~reflect~~from the ~~impact~~customer ofprovided ~~adopting~~that ~~the~~all ~~new~~other ~~standard and~~revenue ~~therefore~~recognition docriteria ~~not~~have ~~include~~been ~~compensation~~met. ~~expense~~In ~~related~~determining towhether ~~stock~~the ~~option~~fee ~~grants~~is ~~for~~fixed ~~those~~or ~~periods. In accordance with SFAS 123R~~determinable, the Company ~~recognized~~compares ~~stock~~the ~~option~~payment ~~related~~terms ~~compensation expense~~ of ~~approximately~~ ~~$110,000 for~~ the ~~three-month~~transaction ~~period~~to ~~ended~~its ~~June 30,~~normal ~~2006~~payment ~~and~~terms. aThe ~~total of approximately~~Company ~~$217,000~~assesses ~~for~~ the ~~six-month~~likelihood ~~period~~of ~~ended~~collection ~~June 30,~~based ~~2006.~~on ~~All~~a ~~options~~number ~~granted~~of infactors, ~~the~~including ~~periods~~past ~~were~~transaction ~~stock~~history, ~~options and~~ the ~~related~~credit ~~compensation~~worthiness ~~expense~~of ~~will be recognized on a straight-line basis over~~ the ~~vesting~~customer ~~period~~and, ofin ~~each~~some ~~grant~~instances, ~~net~~a review of ~~estimated~~the ~~forfeitures~~customer’s financial statements. The Company’s ~~estimated~~does ~~forfeiture rates~~not ~~are~~request ~~based~~collateral onfrom its ~~historical experience~~customers. ~~The~~If ~~estimated~~credit worthiness ~~fair~~cannot ~~value~~be ofestablished, the ~~options~~Company ~~granted through~~defers the ~~first~~fee ~~half of 2006~~ and ~~prior~~recognizes ~~years~~revenue ~~was~~at ~~calculated~~the ~~using a Black Scholes Merton option~~time ~~pricing~~collection ~~model~~becomes ~~(Black~~reasonably ~~Scholes~~assured, ~~model).~~which ~~The~~is ~~following~~generally ~~summarizes~~upon the ~~assumptions~~receipt ~~used~~of ~~in the Black~~cash. ~~Scholes model as applied in the three and six-month periods ended June 30, 2006:~~

	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	%

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

	Six Months Ended
	June 30,
Stock Options	2006
Risk-free interest rates (1)		4.7% - 5.1	%
Expected lives (in years) (2)		6.25
Dividend yield (3)		0	%
Expected volatility (4)		83% - 113	%

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

7 Net Loss Per Share — Basic net loss per share is calculated using the weighted-average number of Ordinary Shares outstanding during each period. Diluted net loss per share is computed based on the weighted-average number of Ordinary Shares outstanding during the period plus potentially dilutive Ordinary Shares considered outstanding during the period in accordance with Statement of Financial Accounting Standard (“SFAS”) 128, “Earnings per Share.” The total number of Ordinary Shares subject to outstanding options excluded from the diluted net loss per share calculation because they would be considered anti-dilutive was 5,624,842 and 6,067,211 at June 30, 2007 and 2006, respectively.

Page 7 of 36

	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	%

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

	Six Months Ended
	Three Months Ended						Six Months Ended
	June 30,						June 30,
Stock Purchase Plan Shares	2006
	2007			2006			2007			2006
Risk-free interest rates (1)		4.8 – 5.2	%
				Unaudited
Expected lives (in years) (2)		.5
Net loss	$	(301	)	$	(1,096	)	$	(780	)	$	(1,938	)
Dividend yield (3)		0	%
Basic and diluted:
Expected volatility (4)		82% - 113	%
Weighted-average shares		41,314			41,250			41,311			41,181
Less weighted-average shares subject to forfeiture		—			—			—			—
Weighted-average number of shares used in computing basic and diluted net loss per share		41,314			41,250			41,311			41,181
Basic and diluted net loss per share	$	(0.01	)	$	(0.03	)	$	(0.02	)	$	(0.05	)

(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.

Comprehensive Loss

~~At June 30, 2006, approximately $300,000 of unrecognized compensation expense related to stock~~Comprehensive ~~options~~loss is ~~expected~~equal 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~~.

~~Prior~~Stock-Based toCompensation ~~January 1,~~— ~~2006,~~BackWeb ~~the~~has ~~Company~~equity ~~accounted~~incentive ~~for its stock-based compensation~~ plans ~~under Accounting~~that ~~Principles~~provide ~~Board Opinion No. 25 (APB 25), “Accounting~~ for ~~Stock Issued to Employees.” In accordance with APB 25,~~ the ~~Company~~grant ~~recognized no compensation expense for qualified~~ of stock ~~option grants. For~~ options ~~issued~~to 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 25employees. ~~Prior~~In ~~to January 1~~addition, ~~2006,~~ the ~~Company provided~~1998 ~~pro forma disclosure amounts in accordance with SFAS No~~U. ~~123 “Accounting for Stock-Based Compensation,” (SFAS 123) as amended by SFAS No~~S. ~~148~~ ~~“Accounting for~~ Stock~~-Based~~ ~~Compensation~~Option ~~— Transition~~Plan and ~~Disclosure”~~1996 ~~(SFAS~~Israel ~~148). As compensation expense was disclosed but not recognized in~~Stock ~~periods~~Option ~~prior~~Plan toprovide ~~January 1, 2006, no cumulative adjustment~~ for ~~forfeitures was recorded in any subsequent period. The following table illustrates~~ the ~~effect~~automatic ongrant ~~net~~of ~~loss~~stock ~~and~~options ~~net~~to ~~loss~~non-employee ~~per~~members ~~share~~of ifBackWeb’s ~~the~~board ~~Company~~of ~~had~~directors. ~~applied~~BackWeb ~~the~~also ~~fair~~has ~~value~~an ~~recognition~~employee ~~provisions~~stock ofpurchase ~~SFAS~~plan, ~~123~~or toESPP, ~~stock-based~~which ~~employee~~enables ~~compensation~~employees into ~~the~~purchase ~~prior~~BackWeb ~~three~~Ordinary ~~and six-month periods ended June 30, 2005:~~Shares.

	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	)

Stock-based compensation expense and the related income tax benefit recognized under Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”) and Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”) in the Condensed Consolidated Income Statements in connection with stock options and the ESPP for the three and six months ended June 30, 2007 and June 30, 2006 were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
			Unaudited

Stock options	$	41	$	110	$	67	$	217
ESPP		12		—		12		—

Total stock-based compensation expense	$	53	$	110	$	79	$	217

Income tax benefit	$	—	$	—	$	—	$	—

Stock Options

The exercise price of each stock option granted under BackWeb’s employee equity incentive plans is equal to or greater than the market price of BackWeb’s Ordinary Shares on the date of grant. Generally, option grants vest over four years, expire no later than ten years from the grant date and are subject to the employee’s continuing service to BackWeb. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average grant date fair value of options granted and the weighted-average assumptions used in the model for the three and six months ended June 30, 2007 and June 30, 2006 were as follows:

Page 8 of 36

	Six Months ended
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005
	2007			2006			2007		2006
Net loss as reported	$	(482	)
Dividend yield	NA*			None			NA*		None
Stock based compensation expense determined under the fair value method		(271	)
Expected volatility	NA*				113	%	NA*			113	%
Pro forma net loss	$	(753	)
Risk-free interest rate	NA*				5.10	%	NA*			4.85	%
Net loss per share:
Expected life (in years)	NA*				6.25		NA*			6.25
Basic and diluted — as reported	$	(0.01	)
Weighted-average fair value of options granted	$	—		$	0.72		$	—	$	0.57
Basic and diluted — pro forma	$	(0.02	)

~~The~~* ~~Company~~Not accounts for stock options granted to non-employees in accordance with SFAS 123 and Emerging Issues Task Force (EITF) 96-18 — “Accounting For Equity Instruments That Are Issued To Other Than Employees For Acquiringapplicable, ~~Or In Conjunction With Selling, Goods Or Services,” and, accordingly, recognizes~~ as ~~expense~~no ~~the~~stock ~~estimated fair value of such~~ options aswere ~~calculated~~granted ~~using the Black Scholes model. The fair value is remeasured~~ during the ~~service~~six ~~period~~months ~~and~~ended isJune ~~amortized over the vesting period of each option or the recipient’s contractual arrangement~~30, ~~if shorter~~2007. ~~No stock options were issued to non-employees other than options granted to non-employee members of the Board of Directors for service as Board members.~~

Historical volatility was used in estimating the fair value of our stock-based awards, and the expected life was estimated to be 6.25 years using the simplified method permitted under SAB 107. The risk-free interest rate for the period within the expected term of the option is based on the yield of United States Treasury notes in effect at the time of grant. BackWeb has not historically paid dividends, thus the expected dividends used in the calculation are zero.

Employee Stock Purchase Plan

Under the ESPP, substantially all employees may purchase BackWeb’s Ordinary Shares at a price equal to 85 percent of the lower of the fair market value at the beginning of the applicable offering period or at the end of each applicable purchase period, in an amount up to 15% of their annual compensation, subject to a limit in any six-month purchase period of 10,000 Ordinary Shares. The offering and purchase periods are six months in length, beginning March 1 and September 1, and run consecutively.

Ordinary Shares issued under the ESPP for the three and six months ended June 30, 2007 and June 30, 2006 were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
	(In thousands, except per share amounts)
BackWeb shares issued under the ESPP		—		—		10		85
Cash received from the exercise of purchase rights under the ESPP	$	—	$	—	$	2	$	40
Weighted-average purchase price per share	$	—	$	—	$	0.16	$	0.47

Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes option pricing model. The weighted-average grant date fair value of purchase rights granted under the ESPP and the weighted-average assumptions used in the model for the three and six months ended June 30, 2007 and June 30, 2006 were as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006

Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Expected volatility		116	%		215	%		116	%		111	%
Risk-free interest rate		5.12	%		5.11	%		5.12	%		4.84	%
Expected life (in years)		0.5			0.5			0.5			0.5
Weighted average fair value of purchase rights granted	$	0.08		$	0.43		$	0.08		$	0.26

Historical volatility was used in estimating the fair value of our ESPP purchase rights. The expected life assumption is based on the six-month offering period. The risk-free interest rate for the period within the expected life of the purchase right is based on the yield of United States Treasury notes in effect at the time of grant. There were no grants of purchase rights under the ESPP during the three months ended June 30, 2007.

Recent Accounting Pronouncements.

InPage ~~December 2004,~~9 ~~the FASB issued Staff Position SFAS No. 109-1, “Application~~ of ~~FASB~~36 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.

InTable 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 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. Contents

In ~~July~~February ~~2006~~2007, the Financial Accounting Standards Board (“FASB”) issued ~~Interpretation~~Statement ~~No. 48,~~of Financial “Accounting ~~for~~Standards ~~Uncertainty~~159, in“The ~~Income Taxes~~Fair —Value anOption ~~interpretation~~for ofFinancial ~~FASB~~Assets ~~Statement~~and ~~No. 109~~Financial Liabilities” (~~“FIN~~SFAS 48159”). ~~Under~~SFAS ~~FIN~~159 ~~48,~~permits companies ~~are required~~ to ~~apply~~choose ~~the “more likely than not” threshold~~ to ~~the~~measure ~~recognition~~many financial instruments and ~~derecognition~~certain ofother ~~tax positions.~~items ~~FIN~~at 48fair ~~also~~value ~~provides~~that ~~guidance~~are onnot ~~the~~currently ~~measurement~~required ofto ~~tax~~be ~~positions,~~measured ~~balance sheet~~at ~~classification,~~fair ~~interest~~value. ~~and~~SFAS ~~penalties,~~159 ~~accounting~~is ineffective ~~interim~~for ~~periods,~~fiscal ~~disclosure~~years ~~and~~that ~~transition. FIN~~begin 48after ~~will be effective beginning January~~November 115, 2007. The Company isdoes ~~currently~~not ~~evaluating~~plan ~~the provisions~~to inelect ~~FIN~~the ~~48;~~fair ~~however,~~value atoption ~~the~~that ~~present~~is ~~time~~permitted ~~the~~by ~~Company~~SFAS ~~does~~159, ~~not~~and ~~anticipate~~as a result, the Company’s adoption of ~~FIN~~ 48SFAS 159 on January 1, 2008 will have ano ~~material~~effect ~~impact~~ on its consolidated financial position, results of operations and cash flows.

In September 2006, the FASB issued Statement of Financial Accounting Standards 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies only to other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that the adoption of SFAS 157 will have on its consolidated financial position, results of operations and cash flows.

In July 2006, the FASB issued Financial Interpretation 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109” (“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured and derecognized in financial statements, requires certain disclosures of uncertain tax matters, specifies how reserves for uncertain tax positions should be classified on the balance sheet, and provides transition and interim-period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006 and, as a result, became effective for the Company on January 1, 2007. The Company also adopted FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation No.48” (“FSP FIN 48-1”) as of January 1, 2007. FSP FIN 48-1 provides that a company’s tax position will be considered settled if the taxing authority has completed its examination, the company does not plan to appeal, and it is remote that the taxing authority would reexamine the tax position in the future. The Company’s adoption of FIN 48 and FSP FIN 48-1 had no effect on its consolidated financial position, results of operations and cash flows.

Note 2. Contingencies

Litigation

On November 13, 2001, BackWeb, six of ~~our~~its officers and directors, and various underwriters for ~~our~~its initial public offering were named as defendants in a consolidated action captioned In re BackWeb Technologies Ltd. Initial Public Offering Securities Litigation, Case No. 01-CV-10000, a purported securities class action lawsuit filed in the United States District Court, Southern District of New York. Similar cases have been filed alleging violations of the federal securities laws in the initial public offerings of more than 300 other companies, and these cases have been coordinated for pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92. A consolidated amended complaint filed in the case asserts that the prospectus from ~~BackWeb~~the Company’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~~the ofCompany’s ~~our~~Ordinary ~~stock~~Shares. The ~~complaint~~ 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~~ 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.

9 In 2003, the Company decided to participate in a proposed settlement negotiated by representatives of a coalition of issuers named as defendants in similar actions and their insurers. Although the Company believes that it has meritorious defenses, it decided to participate in the proposed settlement to avoid the cost and distraction of continued litigation. The proposed settlement agreement would dispose of all claims against the Company without any admission of wrongdoing. In February 2005, the proposed settlement was preliminarily approved by the district court overseeing these litigations. In December 2006, the United States Court of Appeals for the Second Circuit issued a decision reversing the district court’s finding that six focus cases could be certified as class actions. In April 2007, the Second Circuit denied plaintiffs’ petition for rehearing, but allowed that plaintiffs might ask the district court to certify a more limited class. It is not clear yet what impact, if any, the Second Circuit’s decision will have on the proposed settlement agreement. There is no guarantee that the parties or the court will finalize the proposed settlement.

Page 10 of 36

AIf ~~proposal has been made for~~ the settlement ~~and~~does ~~release~~not ofoccur, ~~claims~~and litigation against the ~~issuer defendants~~Company continues, ~~including~~the ~~BackWeb.~~Company believes ~~BackWeb~~it has ~~agreed~~meritorious defenses and intends to defend the ~~proposal~~case vigorously. ~~The~~However, ~~settlement~~the results isof ~~subject~~any tolitigation aare ~~number~~inherently ofuncertain ~~conditions~~and can require significant management attention, ~~including~~and the Company could be forced to incur substantial expenditures, even if it ultimately ~~approval~~prevails. ofIn the ~~proposed~~event ~~settling~~there ~~parties~~were ~~and~~an adverse outcome, the ~~court~~Company’s business could be harmed. InThus, the ~~September 2004~~Company cannot be assured that this lawsuit will not materially and adversely affect its business, anresults ~~agreement~~of operations, or the price of its Ordinary Shares. The Company has not accrued ~~settlement~~any ~~was~~loss ~~submitted~~related to this litigation as it cannot reasonably estimate the ~~court~~probability ~~for~~or ~~preliminary~~the ~~approval~~amount of loss that could result from this action.

IfAdditionally, the ~~settlement~~Company ~~does~~was ~~not~~named ~~occur,~~in ~~and~~a ~~litigation~~judgment ~~against~~during ~~BackWeb~~September 2005 ~~continues,~~for ~~BackWeb believes~~approximately it$550,000, ~~has~~based ~~meritorious~~on ~~defenses~~an ~~and~~exchange ~~intends~~rate toof ~~defend~~1 ~~the~~Euro ~~case~~= ~~vigorously~~1.3475 ~~However,~~U.S. ~~the~~dollars ~~results~~at ofJune 30, ~~any litigation~~2007, ~~are~~in ~~inherently~~connection with ~~uncertain~~a ~~and~~claim ~~can~~against ~~require~~its ~~significant~~dormant ~~management~~French ~~attention,~~subsidiary. ~~and~~The ~~BackWeb could~~judgment beis ~~forced~~related to ~~incur~~a ~~substantial~~dispute ~~expenditures,~~between one ~~even~~of ifthe itCompany’s ~~ultimately~~former ~~prevails.~~French Indistributors ~~the~~and ~~event there~~one ~~were~~of anthe ~~adverse outcome, BackWeb~~distributor’s ~~business~~end ~~could~~user ~~be harmed~~customers. While ~~Thus,~~the ~~BackWeb~~Company ~~cannot~~believes ~~assure~~it ~~you that~~has ~~this~~additional ~~lawsuit~~defenses against the claim and will ultimately not ~~materially~~be responsible ~~and~~for ~~adversely~~payments ~~affect~~under ~~its~~the ~~business~~judgment, ~~results~~it ofaccrued ~~operations~~approximately $300,000, or approximately one-half of the ~~price~~total ofjudgment ~~its~~against ~~Ordinary~~the ~~Shares~~Company and the former distributor, in the third quarter of 2005.

~~Additionally,~~From ~~BackWeb~~time ~~was~~to ~~jointly named in a judgment during September 2005 for approximately $500~~time,~~000~~ ~~related~~the toCompany ais ~~claim~~involved ~~against~~in ~~its~~litigation ~~dormant~~incidental ~~French subsidiary. The judgment is related~~ to ~~a dispute~~the ~~between~~conduct ~~a former French distributor~~ of ~~BackWeb and one of the distributor’s end user~~its ~~customers~~business. ~~While~~Apart ~~BackWeb~~from ~~believes~~the itlitigation ~~has~~described ~~additional~~above, ~~defenses against~~ the ~~claim~~Company ~~and~~is ~~will ultimately~~ not beparty ~~responsible~~to ~~for~~any ~~payments~~lawsuit ~~under~~or proceeding ~~the judgment~~that, ~~BackWeb~~in ~~accrued~~its ~~approximately $250~~opinion,~~000,~~ ~~or approximately~~is ~~one-half~~likely ofto ~~the~~seriously ~~total~~harm ~~judgment~~its ~~against the distributor and BackWeb, in the third quarter of 2005~~business.

From time to time we are involved in litigation incidental to the conduct of 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.

Significant Risks

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.

Letter of Credit

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

Line of Credit

AsIn ~~of June~~April 302007, ~~2006,~~ the Company ~~had~~renewed aits bank line of credit. The amended line of credit provides for borrowings of up to $1.5 million, compared to $500,000 under the previous line of credit ~~with a lender~~agreement. 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 January 31, 2007 and~~ 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, requires ~~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 ~~the~~line ~~third quarter~~ of ~~2004,~~credit ~~the Company moved the $500,000 deposit related to its~~will ~~lease~~expire ~~space~~on ~~in San Jose~~June 30, ~~California~~2008. ~~under~~There ~~the~~was ~~line~~no ofamount ~~credit.~~outstanding Atat June 30, ~~2006, the Company had no unused borrowing capacity~~2007.

~~Note~~Related 3to its leased office space in San Jose, California, the Company has an outstanding $225,000 letter of credit, which is included under the line of credit. ~~Restructuring~~This ~~Liabilities~~lease deposit is not a draw down of the line of credit and therefore does not bear interest. Any draw down of the line of credit would include interest at the Prime rate. The Company renewed the letter of credit in June 2007. The original letter of credit, which was established in October 2003, was in the amount of $500,000. An April 2006 facilities lease amendment permitted the reduction from $500,000 to $225,000.

~~During~~Note 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 Officer3. ~~All~~Short-Term ~~amounts related to this action were expensed in~~Investments 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.

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


	June 30, 2007						December 31, 2006
			Unrealized						Unrealized
			Gains		Estimated				Gains		Estimated
	Cost		(Losses)		Fair Value		Cost		(Losses)		Fair Value
	Unaudited

Money market	$	—	$	—	$	—	$	2,068	$	—	$	2,068

Page 11 of 36

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	$	—		$	—

Note 4. Segments and Geographic Information

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):

	Three Months Ended				Six Months Ended
	June 30,		~~June 30,~~		June 30,		~~June 30,~~
	2005		2005		2005		2005
	2007		2006		2007		2006
	Unaudited				~~Unaudited~~
Revenue:
North America	$	~~972~~1,243	$	~~1,193~~972	$	2,~~216~~232	$	2,~~703~~216
Israel		—		1		—		2
Europe		134		170		318		582
Europe		170		524		582		670
	$	1,377	$	1,142	$	2,550	$	2,798
	$	1,142	$	1,718	$	2,798	$	3,375

	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

In the three and six months ended June 30, 2007 and June 30, 2006, significant customers accounted for the following revenues:

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 $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.


	Three Months Ended June 30,										Six Months Ended June 30,
	2007					2006					2007					2006
			% of					% of					% of					% of
	$		Total			$		Total			$		Total			$		Total

Customer A	$	593		43	%	$	54		5	%	$	639		25	%	$	72		3	%
Customer B		—		0	%		188		16	%		—		0	%		244		9	%
Customer C		17		1	%		150		13	%		34		1	%		150		5	%
Customer D		8		1	%		—		0	%		276		11	%		—		0	%
Customer E		19		1	%		—		0	%		42		2	%		315		11	%
All other customers		740		54	%		750		66	%		1,559		61	%		2,017		72	%

	$	1,377		100	%	$	1,142		100	%	$	2,550		100	%	$	2,798		100	%

Note 5. Guarantees

Under the terms of the Company’s standard contract with its customers, the Company agrees to indemnify the customer against certain liabilities and damages to the extent such liabilities and damages arise from claims that such customer’s use of the Company’s software or services infringes intellectual property rights of a third party. The Company believes that these terms are common in the high technology industry. The Company does not record a liability for potential litigation claims related to indemnification obligations with its customers as it ~~cannot~~has benot ~~estimated accurately.~~had ~~The~~any ~~Company~~claims and does not believe ~~the~~any ~~likelihood~~are ~~of a material obligation is probable~~likely.

~~Note~~Page 6.12 ~~Short-Term~~of ~~Investments~~36

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

	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

At June 30, 2006, the total amounts of investments due within one year and due after one year were approximately $4.1 million and $65,000, respectively.

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

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

Overview

We compete in the mobility and mobile applications market and offer a solution allowing users of of enterprise Web applications to synchronize those Web applications to their ~~PCs~~personal computers for use while disconnected from the network. Our enabling software is designed to integrate with Web applications in a loosely-coupled way that requires no changes in a company’s enterprise ~~web~~ Web architecture and applications. This approach has the potential to bring mobile functionality to enterprise ~~web~~ Web applications quickly and with low total cost of ownership. Our products address the need of mobile users who spend important parts of their work time in situations in which fixed or wireless network connectivity is not practical. ~~his~~This includes mobile workers engaged in field sales, services, consulting and operational roles. Many of these people must frequently disconnect from and reconnect to the network but require consistent access to their important ~~web~~Web-based ~~business~~ business applications. Examples of such critical business applications include customer ~~relationship~~ relationship management, or CRM, systems, service management systems, service document repositories, training and e-learning applications, human resources, or HR, applications, service repair guides, expense report updates, pricing data, time sheets, work orders, and other essential documents and information. Our products are designed to capitalize on the potential business 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.

~~Our~~The BackWeb Offline Access Server (OAS) ~~product~~ is designed to integrate with ~~web~~Web applications in any ~~web~~ Web-based architecture , including portal frameworks, intranets, and ~~websites~~Websites, so the ~~applications~~ applications may be used by users who are frequently disconnected from the network. Its two-way ~~synchronization~~ synchronization capability enables people to access content from, publish to and conduct transactions on ~~web~~ 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.

12 Using HTML-type 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.

We derive revenue from licensing our products and from maintenance, consulting and training services. Our products are marketed worldwide primarily through our direct sales force. We also have generated revenue through business partners via our reseller, OEM and co-sales/marketing partners. Since 2002, our direct sales force has accounted for a significant majority of our revenue. However, the revenue from partner activities increased in 2006 and we believe it could continue to increase in absolute dollars and in percentage of overall revenue in future periods.

Enterprise applications have migrated almost entirely to Web-based architectures, and with the advancement of Service Oriented Architectures, Web services and composite applications, we believe that the Web-based enterprise architecture is becoming the foundation upon which the majority of business processes will be enabled or automated. Concurrently, professional workers are becoming increasingly mobile, accomplishing their work on laptops while they work with customers, partners and in remote work environments. In their mobile work, they are occasionally connected via wireless networking but require their key applications to be always available, even between wireless connections.

Our ability to increase our revenue and achieve profitability in this market will depend on our ability to identify and penetrate the application and industry market segments for which the need for mobile Web application usage is most acute. Key applications include e-learning, human resources talent management/performance management, CRM, knowledge

Page 13 of 36

~~Using HTML-type tags (called Offline Tagging Markup Language~~management, orclinical ~~OTML),~~trials ~~our customers can offline-enable their websites~~ and ~~portals without rewriting code, creating an offline end-user~~ ~~experience~~content ~~that is essentially the same as the online user experience~~portals. ~~The~~Key ~~BackWeb~~industry ~~Polite~~segments ~~Sync Server,~~include ~~formerly known as BackWeb Foundation~~pharmaceuticals, ~~uses~~manufacturing ~~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~~consulting. ~~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.~~

WeAnother ~~derive~~important ~~revenue~~business ~~from~~objective ~~licensing~~is ~~our~~establishing ~~products~~strategic ~~and~~relationships ~~from~~with ~~maintenance,~~application vendors ~~consulting~~in these market segments. To this end we have worked with Oracle/Peoplesoft and ~~training~~with ~~services~~Salesforce.com ~~Our~~to ~~products~~provide ~~are~~offline ~~marketed~~web ~~worldwide~~solutions ~~primarily~~to ~~through~~customers ~~our~~of ~~direct~~their ~~sales~~respective ~~force~~applications. We ~~also~~ have ~~generated~~closed ~~revenue~~sales ~~through~~with ~~our~~multiple ~~reseller,~~Oracle/Peoplesoft ~~OEM~~customers over the last year and ~~co-sales/marketing~~we closed our ~~relationships~~first sale with a Salesforce.com ~~Since~~related ~~2002,~~customer ~~our~~during ~~direct~~the ~~sales~~three ~~force~~months ~~has~~ended ~~accounted~~March 31, ~~for~~2007. However, awe may not derive significant ~~majority~~revenue offrom our relationships with Oracle and with ~~revenue~~Salesforce.com and we may not be successful in establishing strategic relationships with application vendors in our target markets.

~~Second~~ In ~~Quarter~~the ~~2006~~last ~~Business~~12 months, ~~Overview~~our management has focused on cutting costs to better align our expenses with our recent revenue levels. However, our primary strategic objective is to find opportunities for revenue growth. We have focused so far on finding revenue growth opportunities in our current mobile web application market, selling solutions for custom enterprise applications and for our industry application partners as discussed above. To date, we have not achieved revenue growth in our current market, and we may never succeed in doing so. If management concludes that revenue growth opportunities are not available in our current market, management may decide to use our existing assets to develop new solutions and enter new markets, either alone or with partners.

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.

As anticipated, the second quarter of 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 view strategic 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.

We remain focused on the market to mobilize enterprise Web applications. Enterprise applications have migrated almost entirely to web-based architectures, and with the advancement of Service Oriented Architectures (SOA), web services and composite applications, we believe that the web-based enterprise architecture is becoming the foundation upon which all business processes will be enabled or automated. Concurrently, professional workers are becoming increasingly mobile, accomplishing their work on laptops while they work with customers, partners and in remote work environments. In their mobile work, they are occasionally connected via wireless networking but require their key applications to be always available, even between wireless connections.

Our ability to increase our revenue and achieve profitability will depend on our ability to identify the key market segments and execute in those segments with cost-effective partnerships. We believe that our key market segments include e-learning, human resources talent management/performance management, customer relationship management, knowledge management, clinical trials and content portals. Key industry segments include pharmaceuticals, manufacturing and consulting. We intend to manage our expenses carefully while executing in productive market segments to pursue revenue growth.

Critical Accounting Policies

Our critical accounting policies are as follows:

	•		Revenue recognition; and

	•		Estimating valuation allowances and accrued liabilities, including the allowance for doubtful accounts.

Revenue Recognition

We derive revenue primarily from software license fees, maintenance service fees, and consulting services paid to us directly by corporate customers and resellers and, to a lesser extent, from royalty fees from ~~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. AsRoyalties are classified by product in the applicable revenue category; license royalties are classified in license revenue and royalties from maintenance arrangements are classified as maintenance revenue. As described below, management estimates must be made and used in connection with the revenue we recognize in any accounting period.

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

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

~~Revenue~~If ~~from~~an ~~software~~arrangement ~~license~~to ~~agreements~~deliver issoftware ~~recognized~~requires ~~when~~significant ~~all~~production, ofmodification, ~~the following criteria are~~or ~~met~~customization ~~as set forth in SOP 97-2: (1) persuasive evidence~~ of ansoftware, ~~arrangement~~we ~~exists;~~account ~~(2) delivery~~for ~~has occurred; (3)~~ the ~~fee~~entire isarrangement ~~fixed~~in orconformity ~~determinable;~~with ~~and (4) collectibility is probable. We do not~~Accounting ~~generally~~Research ~~grant~~Bulletin ~~a right of return to our customers~~No. 45, ~~When~~“Long-Term aConstruction-Type ~~right~~Contracts” of(“ARB ~~return exists~~45”), weusing ~~defer~~the ~~revenue~~relevant ~~until~~guidance ~~the~~in ~~right~~Statement of ~~return~~Position ~~expires~~81-1, at“Accounting ~~which~~for ~~time~~Performance ~~revenue~~of isConstruction-Type ~~recognized provided that all other~~and ~~revenue~~Certain ~~recognition~~Production-Type ~~criteria~~Contracts” ~~have~~(“SOP ~~been met~~81-1”). IfIn ~~the~~such ~~fee~~an isarrangement, ~~not~~we ~~fixed~~will orrecognize ~~determinable,~~ revenue is ~~recognized~~and asrelated ~~payments~~costs ~~become~~of ~~due~~revenue ~~from~~using the ~~customer~~percentage-of-completion ~~provided~~method ~~that~~upon ~~all~~the ~~other~~completion ~~revenue recognition~~of ~~criteria have been met~~milestones.

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

Page 14 of 36

(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.

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

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

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

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

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

Management continually reviews the collectibility of trade accounts receivable and the adequacy of the allowance for doubtful accounts against ~~the~~ trade accounts receivable. Management specifically analyzes customer accounts, 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,~~During wethe ~~make a~~three ~~provision~~months ~~for~~ended ~~doubtful accounts when a trade receivable becomes 90~~June ~~days~~30, ~~past due. In exceptional cases~~2007, we ~~will~~began ~~waive~~measuring aour ~~provision~~allowance ~~after~~our adoubtful ~~trade~~accounts ~~receivable~~by isassessing ~~90 days or more past due when, in~~ the ~~judgment~~collectibility of ~~management,~~each ~~after~~invoice ~~conducting~~receivable. ~~due~~Previously, ~~diligence~~we ~~with~~had measured the ~~management~~allowance ofas ~~the~~100% ~~customer, the~~of ~~receivable~~invoices iswhich ~~still~~were ~~collectible~~aged ~~and~~120 days ~~the~~or ~~customer~~more, ~~has~~less ~~demonstrated~~known ~~that~~collectible ~~payment is imminent~~invoices.

Management believes ~~that~~ it is able to make reasonably objective judgments on the adequacy of ~~other~~ other provisions relating to trade accruals. We have not made any provision for contingent ~~liabilities~~ 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~~ discussion of our outstanding material litigation is contained in Part II, Item 1 “Legal Proceedings” of this Form 10-Q.

Page 15 of 36

Results of Operations

The following table sets forth our results of operations for the three and six months ended June 30, ~~2006~~2007 and ~~2005~~2006 expressed as a percentage of total revenue.:

	Three Months Ended						Six Months Ended
	June 30,			~~June 30,~~			June 30,			~~June 30,~~
	2006			2005			2006			2005
	2007			2006			2007			2006
	Unaudited						Unaudited
Revenue:
License		40	%		50	%		45	%		48	%
Licenses		14	%		40	%		26	%		45	%
Service		60			50			55			52
Licenses subject to contract accounting		36	%		0	%		20	%		0	%
Total revenue		100			100			100			100
Services		50	%		60	%		55	%		55	%
Total revenue		100	%		100	%		100	%		100	%
Cost of revenue:
Licenses		2	%		12	%		12	%		1	%
Service		16			11			15			10
Licenses subject to contract accounting		3	%		0	%		1	%		0	%
Total cost of revenue		18			12			16			11
Services		16	%		16	%		15	%		15	%
Gross profit		82			88			84			89
Total cost of revenue		20	%		18	%		19	%		17	%
Gross profit		80	%		82	%		81	%		83	%
Operating expenses:
Research and development		5433	%		3254	%		4336	%		3443	%
Sales and marketing		8645	%		4786	%		7348	%		4573	%
General and administrative		4224	%		2642	%		3928	%		2539	%
Total operating expenses		~~182~~102	%		~~105~~182	%		~~155~~112	%		~~104~~155	%
Loss from operations		~~(100~~-22	)%		~~(17~~-99	)%		~~(71~~-32	)%		~~(15~~-72	)%
Interest and other income, net		40	%		34	%		21	%		12	%
Net loss		~~(96~~-22	%)		~~(14~~-96	%)		~~(69~~-31	)%		~~(14~~-69	)%

Revenue

~~Total~~ We derive revenue from licensing and providing maintenance and consulting services for our BackWeb Offline Access Server (OAS), BackWeb Polite Sync Server, and BackWeb e-Accelerator suite of products.

	Three months ended,
	June 30,		Change						June 30,
	2006		$			%			2005
	(in thousands, except percentages)
Total revenue	$	1,142		($576	)		(33.5	%)	$	1,718

We recognized revenue as follows in the three and six months ended June 30, 2007 and June 30, 2006:

	Six months ended,
	Three Months Ended June 30,											Six Months Ended June 30,
	June 30,		Change						June 30,
	2007		2006			Change			% Change			2007		2006		Change			% Change
	2006		$			%			2005
	(In thousands, except percentages)
	(in thousands, except percentages)
Revenue
Total revenue	$	2,798		($577	)		(17.1	%)	$	3,375
Licenses	$	187	$	462		$	(275	)		-60	%	$	655	$	1,253	$	(598	)		-48	%
Licenses subject to contract accounting		500		—			500			—			500		—		500			—
Services		690		680			10			1	%		1,395		1,545		(150	)		-10	%
Total revenue	$	1,377	$	1,142		$	235			21	%	$	2,550	$	2,798	$	(248	)		-9	%

16License Revenue, and License Revenue Subject to Contract Accounting

For the three months ended June 30, 2007, license revenue combined with license revenue subject to contract accounting increased by 49% in comparison to the prior year period. For the six months ended June 30, 2007, license revenue combined with license revenue subject to contract accounting declined by 8% in comparison to the prior year period.

During the three months ended June 30, 2007, we recognized $500,000 of revenue in connection with a source code license sale, which in the statement of operations is captioned as license revenue subject to contract accounting. We anticipate recognizing an additional $2.5 million of revenue from this sale during periods through 2009 if we are able to meet acceptance criteria later in 2007. Aside from that, we have limited visibility to forecast revenue, particularly our license revenue, and are therefore unable to quantify future overall trends in our total revenue.

Page 16 of 36

WeServices ~~derive revenue from license sales, maintenance, and consulting services for BackWeb Offline~~Revenue Access Server, BackWeb Polite Sync Server, and BackWeb e-Accelerator Suite. The decrease in total revenue in the three and six months ended June 30, 2006 compared to the same periods in 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 revenue. We have limited visibility to forecast revenue for the second half of 2006 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.

~~One~~Services ~~customer accounted for approximately $200~~revenue,~~000,~~ orwhich ~~16%~~includes ofmaintenance ~~our~~and ~~total~~consulting ~~revenue~~services, ~~and~~increased ~~another customer~~slightly ~~accounted~~ for the ~~approximately~~three ~~$150,000,~~months orand ~~13%~~decreased offor ~~our total revenue, in~~ the ~~three~~six months ended June 30, ~~2006.~~2007 ~~One~~when ~~customer~~compared ~~accounted~~to ~~for~~the ~~approximately~~same periods ~~$330,000,~~in or2006. ~~12%~~The ofservices ~~our total~~ revenue, ~~and~~decrease ~~another customer accounted~~ for ~~approximately $325,000, or 12% of our total revenue, in~~ the six months ended June 30, ~~2006.~~2007 Wewas ~~expect~~due ~~that a small number of customers will continue~~ to ~~account~~reduced ~~for~~professional aservices ~~substantial~~demand ~~portion~~after ofMarch 31, ~~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~~2006.

~~License~~ 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 remainder of 2007, this too is dependent on increased license sales of our BackWeb OAS.

	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	%

One customer accounted for 43% of our total revenue in the three months ended June 30, 2007 and 25% of our total revenue in the six months ended June 30, 2007, while another customer accounted for 11% of our total revenue for the six months ended June 30, 2007. Two customers accounted for 16% and 13% of our total revenue for the three months ended June 30, 2006, while another customer accounted for 11% of our total revenue for 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.

	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	%

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 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.

Service revenue

	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	%

	Six months ended,
	June 30,			Change						June 30,
	2006			$			%			2005
	(in thousands, except percentages)
Service revenue	$	1,545			($204	)		(11.7	%)	$	1,749
As a percentage of total revenue		55.2	%		—			3.4	%		51.8	%

Service revenue, which includes maintenance and consulting services, decreased for the three and six months ended June 30, 2006 compared to the same periods in 2005 due to a decrease in consulting projects that our services personnel worked on during the periods, as we continued to migrate our service work to strategic resellers. Maintenance services fees in both periods remained relatively constant. The substantial majority of our consulting revenue during the period was associated with our BackWeb Offline Access Server product.

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.

Cost of Revenue

	Three months ended,
	Three Months Ended June 30,												Six Months Ended June 30,
	June 30,			Change						June 30,
	2007			2006			Change			% Change			2007			2006			Change			% Change
	2006			$			%			2005
	(In thousands, except percentages)
	(in thousands, except percentages)
Cost of revenue
Cost of revenue	$	201		$	1			0.5	%	$	200
Licenses	$	31		$	19		$	12			63	%	$	62		$	40		$	22			55	%
As a percentage of total revenue		17.6	%		—			6.0	%		11.6	%
Licenses subject to contract accounting		37			—			37			—			37			—			37			—
Services		214			182			32			18	%		393			422			(29	)		-7	%
Total cost of revenue	$	282		$	201		$	81			40	%	$	492		$	462		$	30			6	%
% of revenue		20	%		18	%								19	%		17	%

	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	%

Cost of License Revenue, and Cost of License Revenue Subject to Contract Accounting

Cost of license revenue ~~increased~~consists ~~both~~primarily inof ~~absolute~~expenses ~~dollars~~related to media duplication, packaging of products and asroyalty apayables ~~percentage~~to OEM vendors. Cost of license revenue ~~during~~increased for the ~~three~~ ~~and six~~ three months ended June 30, ~~2006~~2007 asin ~~compared~~comparison to the ~~same~~corresponding ~~periods~~period in ~~2005.~~2006 ~~This~~due ~~increase~~to ~~was~~increased ~~due~~license torevenue during the ~~use~~2007 period. Cost of ~~more~~license ~~senior~~revenue ~~resources~~increased onfor ~~customer~~the ~~projects~~six ~~than~~months ended June 30, 2007 in comparison to the ~~comparable~~corresponding period in 2006 due to costs incurred in 2007 in connection with a strategic reseller relationship for which we have recognized minimal revenue.

Cost of ~~License~~license ~~Revenue~~revenue subject to contract accounting consists of expenses related to significantly modifying our software products to a customer’s specifications under contract with the customer. In such an arrangement, the expenses are charged to cost of revenue in the periods when the associated revenue is recognized. Cost of license revenue subject to contract accounting during the three months ended June 30, 2007 was in connection with a source code license agreement that we entered into in March 2007.

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

	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	%

	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	%

Cost of license revenue increased as a percentage of revenue during the three and six months ended June 30, 2006 as compared to the same period in 2005 due to the addition of certain additional functionality to our products provided by third parties and the related royalty payments associated with the increased functionality.

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

Cost of Service Revenue

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

				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	%

Cost of service revenue increased for the three months ended June 30, 2007 in comparison to the same period in 2006 primarily due to increased professional services costs in relation to revenue. Cost of service revenue decreased for the six months ended June 30, 2007 in comparison to the same period in 2006 primarily due to a reduction in the number of our professional services employees as a result of the expense reduction measures that we have implemented.

				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	%

Page 17 of 36

CostTable of 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. Contents

We expect the cost of service revenue to increase marginally and remain relatively constant as a percentage of service revenue during the second half of 2006.

Operating Expenses

Research and Development

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

	Three months ended,
	Three Months Ended June 30,												Six Months Ended June 30,
	June 30,			Change						June 30,
	2007			2006			Change			% Change			2007			2006			Change			% Change
	2006			$			%			2005
	(In thousands, except percentages)
	(in thousands, except percentages)
Research and development expense	$	457		$	619		$	(162	)		-26	%	$	930		$	1,201		$	(271	)		-23	%
Research and development	$	619		$	72			13.2	%	$	547
% of revenue		33	%		54	%								36	%		43	%
As a percentage of total revenue		54.2	%		—			22.4	%		31.8	%

19 Research and development expense for the three and six months ended June 30, 2007 decreased in comparison to the prior year periods primarily due to reductions in facilities rent, stock-based compensation and employee compensation. Facilities rent declined as the result of a renegotiated facilities lease. Stock-based compensation declined as the result of older stock option grants becoming fully expensed. Employee compensation declined as the result of a 12% reduction in research and development headcount for the three months ended June 30, 2007 in comparison to the prior year period, and an 18% reduction for the six months ended June 30, 2007 in comparison to the prior year period.

~~Table~~ We ofbelieve ~~Contents~~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.

	Six months ended,
	June 30,			Change					June 30,
	2006			$		%			2005
	(in thousands, except percentages)
Research and development	$	1,201		$	61		5.4	%	$	1,140
As a percentage of total revenue		42.9	%		—		9.1	%		33.8	%

The increase in research and development expenses during the three and six months ended June 30, 2006 as compared to the same periods in 2005 was primarily due to the expiration of an Israeli research and 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 the three 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.

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

Sales and Marketing

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

	Three months ended,
	Three Months Ended June 30,												Six Months Ended June 30,
	June 30,			Change						June 30,
	2007			2006			Change			% Change			2007			2006			Change			% Change
	2006			$			%			2005
	(In thousands, except percentages)
	(in thousands, except percentages)
Sales and marketing expense	$	618		$	979		$	(361	)		-37	%	$	1,235		$	2,054		$	(819	)		-40	%
Sales and marketing	$	979		$	174			21.6	%	$	805
% of revenue		45	%		86	%								48	%		73	%
As a percentage of total revenue		85.7	%		—			38.8	%		46.9	%

	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	%

Sales and marketing expense during the three and six months ended June 30, 2007, decreased in comparison to the prior year periods primarily due to reductions in facilities rent, employee compensation, consultant fees, travel and recruiting. Facilities rent declined as the result of a renegotiated facilities lease. Employee compensation declined as the result of a 29% reduction in sales and marketing headcount for the three months ended June 30, 2007 in comparison to the prior year period, and a 30% reduction for the six months ended June 30, 2007 in comparison to the prior year period. Additionally in the first quarter of 2006, we recognized approximately $100,000 of one-time separation costs related to the termination of employees; we did not incur such costs for the same period in 2007.

~~The~~We ~~increase~~consider inmaintaining ~~sales~~a ~~and~~ marketing ~~expenses~~presence ~~during~~and ~~the~~an ~~three~~effective ~~and~~sales ~~six~~organization ~~months~~to ~~ended June 30,~~be ~~2006~~important ~~compared~~ to the ~~same~~achievement ~~periods~~of inour ~~2005~~strategic ~~resulted~~objectives. ~~primarily~~Though ~~from~~we anintend ~~increase~~to incontinually ~~personnel related~~monitor ~~costs~~expenses ~~related~~across to the ~~addition~~organization ofand ~~two~~continually ~~vice~~strive ~~presidents~~for ascost ~~well~~reductions, aswe ~~additional~~will ~~field level staff. We~~consider ~~also~~selective ~~recognized~~investments ~~approximately $50,000 and $100,000~~ in ~~the~~sales ~~three~~ and ~~six~~marketing ~~months~~where ~~ended June 30~~appropriate, ~~2006, respectively,~~particularly in ~~expenses in~~ connection with ~~the implementation of SFAS 123R. Additionally, in the~~our ~~first~~realigned ~~quarter~~sales ofstrategy ~~2006,~~and wepersonnel ~~recognized~~towards ~~approximately~~our ~~$100,000~~focus ofon ~~one-time~~selling ~~separation costs related~~ to ~~the~~ ~~termination~~line of ~~certain~~business ~~employees. Sales and marketing expenses~~ executives as aopposed ~~percentage~~to ofour ~~total revenue~~previous ~~increased~~focus ~~during~~on ~~the~~information ~~three~~technology, ~~and~~or ~~six months ended June 30~~IT, ~~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~~organizations.

WePage ~~consider~~18 ~~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~~36 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.

General and Administrative

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

	Three months ended,
	Three Months Ended June 30,												Six Months Ended June 30,
	June 30,			Change						June 30,
	2007			2006			Change			% Change			2007			2006			Change			% Change
	2006			$			%			2005
	(In thousands, except percentages)
	(in thousands, except percentages)
General and administrative expense	$	325		$	479		$	(154	)		-32	%	$	702		$	1,084		$	(382	)		-35	%
General and administrative	$	479		$	33			7.4	%	$	446
% of revenue		24	%		42	%								28	%		39	%
As a percentage of total revenue		41.9	%		—			15.9	%		26.0	%

	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	%

General and administrative expense during the three and six months ended June 30, 2007 decreased in comparison to the prior year periods primarily due to reductions in facilities rent, bad debt expense and employee compensation, partially offset by an increase in outside services expenses. Facilities rent declined as the result of a renegotiated facilities lease. Bad debt expense consisted of credits of $82,000 and $123,000, respectively, for the three and six months ended June 30, 2007, compared to expense of $51,000 and $67,000, respectively, for the three and six months ended June 30, 2006. Bad debt expense was favorable in 2007 due to our improved collections experienced, which reduced our aged accounts receivable balances substantially during the three months ended June 30, 2007. In addition, we revised our method of measuring the allowance for doubtful accounts to specifically identify uncollectible invoices, whereas previously we had reserved all accounts receivable invoiced that were aged 120 days or more. Employee compensation declined as the result of 28% and 22% reductions in general and administrative headcount for the three and six month periods, respectively. Outside services expense increased due to an increase in financial printing and auditors’ fees and the incurrence of consultant fees for our Interim Chief Financial Officer.

~~The~~Interest ~~increase in general~~ and ~~administrative~~Other ~~expenses~~Income ~~during the three and six months ended June 30~~(Expense), ~~2006 as compared to the same period in 2005 was primarily due to the reclassification of our~~Net ~~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.

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.

Interest and Other Income, Net

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

	Three months ended,
	Three Months Ended June 30,												Six Months Ended June 30,
	June 30,			Change						June 30,
	2007			2006			Change			% Change			2007			2006			Change			% Change
	2006			$			%			2005
	(In thousands, except percentages)
	(in thousands, except percentages)
Interest and other income, net	$	4		$	40		$	(36	)		-90	%	$	29		$	65		$	(36	)		-55	%
Interest and other income, net	$	40			($7	)		(14.9	%)	$	47
% of revenue		0	%		4	%								1	%		2	%
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	%

Interest and other income during the three and six months ended June 30, 2007 decreased in comparison to prior year periods, primarily due to 31% and 36% decreases, respectively, in our average balances of cash short-term investments. In addition, during the three months ended June 30, 2007, we realized a $23,000 foreign exchange loss, compared to a $7,000 foreign exchange loss for the year-earlier period, due to the impact of a decline in the value of the U.S. dollar on a foreign liability.

The decrease in interest and other income, net during the three months ended June 30, 2006 as compared to the same period in 2005 was primarily due to the use of cash for operations, which decreases the amount of interest income our cash generates. This same decrease in the six months 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 second half of 2006 as we expect we will continue to use cash during 2006 and, as a result, earn less investment and interest income.

Income Taxes

~~There~~We ~~was~~adopted nothe ~~provision~~provisions ~~for~~of ~~income~~FIN ~~taxes~~48 ~~because~~and weFSP ~~incurred~~FIN ~~operating~~48-1 ~~losses~~effective ~~during~~January 1, ~~the~~2007. ~~three~~We apply FIN ~~and~~48 ~~six~~to ~~months~~each ~~ended~~income ~~June 30~~tax position accounted for under SFAS 109, ~~2006~~“Accounting for Income Taxes” at each financial statement reporting date. AsThis process involves the assessment of ~~June 30,~~whether ~~2006~~each income tax position is more likely than not of being sustained based on its technical merits. In making this assessment, we ~~had~~must ~~approximately~~assume ~~$100 million~~that the taxing authority will examine the income tax position and have full knowledge of all relevant information. For each income tax position that meets the more likely ~~Israeli~~than ~~net~~not ~~operating~~recognition ~~loss~~threshold, ~~carry~~we ~~forwards~~then ~~and~~assess $7the largest amount of tax benefit that is greater than 50 ~~million~~percent likely of Ubeing realized upon ultimate settlement with the taxing authority.S. ~~federal~~Any difference ~~net~~between ~~operating~~the ~~loss~~tax ~~carry~~benefit recorded for financial statement purposes and the amount ~~forwards~~reflected ~~available~~in tothe ~~offset~~tax ~~future~~return ~~taxable~~within income tax receivable, income tax payable, deferred tax assets or deferred tax liabilities would then be reported. ~~The~~All tax years are currently open for the U.S. operating entity until net operating ~~loss~~losses ~~carry~~are ~~forwards~~ utilized or expire inunused. ~~varying~~The ~~amounts~~open ~~between~~tax year for the ~~years~~Israeli ~~2011~~operating ~~and~~unit ~~2022~~is 2005. The ~~Israeli~~open ~~net~~tax year for the German operating ~~loss~~unit ~~carry~~is 2005. The ~~forwards~~cumulative effect of applying the provisions of FIN 48 and the adoption of FIN 48 and FSP FIN 48-1 did not have noa ~~expiration~~material ~~date~~impact on our financial position, results of operations and cash flows.

~~Off-Balance~~Page ~~Sheet~~19 ~~Financings~~of ~~And Liabilities~~36

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

Our policy is to record any interest and/or penalties related to income tax matters in income tax expense. At June 30, 2007, we did not accrue any interest or penalties.

There was no provision for income taxes because we have incurred operating losses. As of June 30, 2007, we had approximately $100 million of Israeli net operating loss carry forwards and $5 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 Sheet Financings and Liabilities

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. We will not incur any income tax obligations as a result of adopting FIN 48.

Liquidity and Capital Resources

As of June 30, ~~2006~~2007, we had approximately $64.12 million of cash, cash equivalents and short-term investments, compared to approximately $74.95 million as of December 31, ~~2005~~2006.

Net cash used in operating activities ~~was approximately $2.0 million and $1.2 million~~ for the six months ended June 30, ~~2006~~2007 ~~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 made in the sales and marketing efforts of the business in late 2005 and a reduction in our total revenue. Cash provided by investing activities was approximately $~~2.1 million for the six months ended June 30~~250, ~~2006~~000, ~~and cash used by investing~~ ~~activities~~compared ~~was~~to ~~approximately~~ $1.27 million for the six months ended June 30, ~~2005~~2006. The ~~cash~~2007 ~~provided~~amount byincluded ~~investing in six months ended June 30, 2006 consisted of~~ the ~~net proceeds from the purchases and sales of short-term investments~~ toreceipt ~~fund operational needs, and the cash used by investing activities in six months ended June 30, 2005 consisted~~ of an ~~increase~~initial ~~in our invested funds during the second quarter of 2005. Cash provided by financing activities was approximately~~ $~~286~~500,000 ~~and~~payment ~~$65,000~~from ~~for~~a ~~the six months ended June~~March ~~30,~~2007 ~~2006~~multi-year ~~and~~license ~~2005,~~sale 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 Planagreement.

AsCash ofprovided ~~June 30,~~by ~~2006,~~investing weactivities ~~had no material commitments~~ for ~~capital expenditures. Our capital requirements depend on numerous factors, including market acceptance of our products,~~ the ~~resources we~~six ~~devote~~months toended ~~developing~~June 30, ~~marketing,~~2007 ~~selling~~ and ~~supporting~~2006 ~~our~~was ~~products and the timing and extent~~$2.0 ofmillion ~~establishing additional operations. We believe that our current cash, cash equivalent~~ and ~~short-term~~ ~~investment balances will be sufficient to fund our operations for at least the next 12 months~~$2. ~~However~~1 million, ~~our business may not go as planned~~respectively, and weprimarily ~~may~~represented ~~need to raise additional funds prior to~~ the ~~expiration~~net ofproceeds ~~this~~from ~~period,~~sales ~~or we may elect to raise additional funds prior to the expiration~~ of ~~this period if we believe such funds will help achieve strategic goals. If we decide~~ toshort-term ~~raise~~investments ~~additional funds, it could be difficult~~ to ~~obtain~~fund ~~additional financing on favorable terms, if at all. We may try to obtain additional financing by issuing Ordinary Shares or convertible debt securities, which could dilute~~ our ~~existing~~operational ~~shareholders~~needs. ~~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, and we may be required to undertake further expense reduction measures.

22 Cash provided by financing activities for the six months ended June 30, 2007 and 2006 was $2,000 and $69,000, respectively. These amounts consisted of proceeds from the issuance of Ordinary Shares under our 1999 Employee Stock Purchase Plan and under our 1998 Employee Stock Option Plan.

In April 2007, we renewed our bank line of credit. The amended line of credit provides for up to $1.5 million, compared to $500,000 under the previous line of credit agreement. The amount of borrowings available under the line of credit is based on a formula using accounts receivable. The line 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, requires payment penalties for noncompliance and prepayment, limits the amount of other debt we can incur, and limits the amount of spending on fixed assets. The line of credit will expire on June 30, 2008. There was no amount outstanding at June 30, 2007.

Related to our lease space in San Jose, California, we have an outstanding $225,000 letter of credit, which is included under the line of credit. This lease deposit is not a draw down of the line of credit and therefore does not bear interest. Any draw down of the line of credit would include interest at the Prime rate.

As of June 30, 2007, we had no material commitments for capital expenditures. Our capital requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing, marketing, selling and supporting our products and the timing and extent of establishing additional operations.

We believe that our current cash, cash equivalents, and short-term investment balances will be sufficient to fund our operations for at least the next 12 months. However, since our inception we have not achieved profitability and we expect to continue to incur net losses for the foreseeable future. In addition, our business may not go as planned and we might need to raise additional funds prior to the expiration of this period. If we decide to raise additional funds, it could be difficult to obtain additional financing on favorable terms, or at all, due to our financial condition and because our Ordinary Shares have been delisted from the NASDAQ Capital Market. We may try to obtain additional financing by issuing Ordinary Shares or convertible debt securities, which would dilute our existing shareholders. If we cannot raise needed funds on acceptable

Page 20 of 36

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 materially harm our business.

Contractual Obligations

The following summarizes our contractual obligations, which consisted solely of operating leases, at June 30, ~~2006~~2007 (in thousands):

Payments Due by Period


Payments due by period:
2007	$	269,000
2008		528,000
2009		473,000
2010		33,000

	$	1,303,000

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

We are currently in negotiations with the landlord of our San Jose office space negotiating an extension to the existing lease space that we expect will reduce our ongoing rent expense, as current lease rates are more favorable than the terms when the lease was originally negotiated.

Effective Corporate Tax Rates

Our tax rate reflects a mix of the U.S. statutory tax rate on our U.S. income, European country tax rates on our individual European country income and the Israeli tax rate discussed below. We expect that most of our future taxable income will be generated in Israel. Israeli companies were generally subject to corporate tax at the rate of 3431% of their taxable income in ~~2005~~2006. Pursuant to tax reform legislation that came into effect in 2003, the corporate tax rate is to undergo further staged reductions to 25% by the year 2010. In order to implement these reductions, the corporate tax rate is scheduled to decline to 3129% in ~~2006~~2007, 2927% in ~~2007~~2008, 2726% in ~~2008,~~ 2009 and 2625% in ~~2009~~2010. However, 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 for the Encouragement of Capital Investments, and is eligible therefore for tax benefits. As a result of these benefits, we expect to have a tax exemption on income derived during the first two years in which this investment program produces taxable income, provided that we do not distribute such income as a dividend, and a reduced tax rate of 10% to 25% for the following five to eight years, depending upon the proportion of foreign ownership of BackWeb.

On April 1, 2005, an amendment to the Law for the Encouragement of Capital Investments in Israel came into effect, which revised the criteria for investments qualified to receive tax benefits. An eligible investment program under the amendment will 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.

As a result of the amendment, tax-exempt income generated under the provisions of the new law will subject us to taxes upon distribution or liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income. We are currently evaluating the impact the amendment will have on us. Based on our preliminary analysis, it will not adversely affect our ~~2006~~2007 financial statements.

All of these tax benefits are subject to various conditions and restrictions. See “Note 1210 — Income Taxes — Israeli Income Taxes — Tax Benefits under the Law for the Encouragement of Capital Investments, 1959,” of Notes to the Consolidated Financial Statements reporting our Annual Report on Form 10-K for the year ended December 31, ~~2005~~2006. We cannot assure you that we will obtain approval for additional Approved Enterprise Programs, or that the provisions of the law will not change.

Impact of Inflation and Currency Fluctuations

Most of our sales are denominated in U.S. dollars. However, we incur a large portion of our costs from our operations in Israel. A substantial portion of our operating expenses, primarily our research and development costs, are denominated in NIS. Costs not denominated in U.S. dollars are translated to U.S. dollars when recorded, at prevailing rates of exchange. This is done for the purposes of our financial statements and reporting. Costs not denominated in U.S. dollars will increase if the rate of inflation exceeds the devaluation of the foreign currency asin ~~compared~~comparison 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.

23Page 21 of 36

~~Item~~ ITEM 3. ~~Quantitative~~QUANTITATIVE ~~and~~AND ~~Qualitative~~QUALITATIVE ~~Disclosures~~DISCLOSURES ~~About~~ABOUT ~~Market~~MARKET ~~Risk~~RISK

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

Foreign Currency Exchange Rate Risk

We conduct our business and sell our products directly to customers primarily in North America and Europe. In the normal course of business, our financial position is routinely subject to market risks associated with foreign currency rate fluctuations due to balance sheet positions in other local foreign currencies. Our policy is to ensure that business exposures to foreign exchange risks are identified, measured and minimized using foreign currency forward contracts to reduce such risks, should the risks of such exposure outweigh the cost of forward contracts. The foreign currency forward contracts, when placed, generally expire within 90 days. The change in fair value of these forward contracts is recorded as income/loss in our Consolidated Statements of Operations as a component of interest and other income, net. There were no forward contracts placed in ~~2005~~the first six months of 2007 or 2006.

~~Item 4.~~Page ~~Controls~~22 ~~and~~of ~~Procedures~~36

EvaluationTable of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Vice President, Finance, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Contents

~~Based~~ITEM on4. ~~their~~CONTROLS ~~evaluation~~AND ~~as of the end of the period covered by this Quarterly Report on Form~~PROCEDURES 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.

~~Changes~~Evaluation inof ~~internal~~disclosure ~~control~~controls ~~over~~and ~~financial reporting~~procedures. ~~There~~We ~~was~~maintain no“disclosure ~~change~~controls and procedures,” as such term is defined in ~~our~~Rule 13a-15(e) ~~internal~~under the Securities Exchange Act of 1934 ~~control~~(the ~~over~~“Exchange ~~financial~~Act”), ~~reporting~~that are designed to ensure that ~~occurred~~information ~~during~~required ~~the~~to ~~period~~be ~~covered~~disclosed by ~~this~~us in ~~Quarterly~~reports ~~Report~~that we file or submit under the Exchange Act is recorded, processed, summarized, and onreported ~~Form~~within ~~10-Q~~the ~~that~~time ~~has~~periods ~~materially~~specified ~~affected~~in Securities and Exchange Commission rules and forms, and orthat such information is ~~reasonably~~accumulated ~~likely~~and communicated to ~~materially~~our ~~affect~~management, including our Chief ~~internal~~Executive ~~control~~Officer ~~over~~and ~~financial~~Interim ~~reporting~~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 controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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 Interim Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls and procedures were not 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, due to the existence of two material weaknesses in our internal control over financial reporting identified by our independent registered public accounting firm in connection with its audit of our consolidated financial statements for the year ended and as of December 31, 2006 and review of our September 30, 2006 interim financial statements. We did not maintain effective controls over the completeness and accuracy of our accounting for nonstandard transactions. These material weaknesses in our internal control over financial reporting related to adjustments proposed by our independent registered public accounting firm related to (1) the accounting for deferred rent on a new facilities operating lease agreement entered into during 2006 and (2) recognition of revenue on two term license agreements entered into during the quarter ended September 30, 2006 for which we did not have vendor-specific objective evidence of fair value for the bundled post-contract support.

Changes in internal control over financial reporting. In connection with the material weaknesses described above, we have:

	•		implemented a more detailed review of material agreements with our Board of Directors; and

	•		instituted a review of material agreements with external industry professionals familiar with our business and market.

We believe that these corrective actions, taken as a whole, will mitigate the control deficiencies identified above. However, we will continue to monitor the effectiveness of these actions and will make any changes that management determines appropriate.

Page 23 of 36

PART II — OTHER INFORMATION

~~Item~~ ITEM 1. ~~Legal~~LEGAL ~~Proceedings~~PROCEEDINGS

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

24 In 2003, we decided to participate in a proposed settlement negotiated by representatives of a coalition of issuers named as defendants in similar actions and their insurers. Although we believe that we have meritorious defenses, we decided to participate in the proposed settlement to avoid the cost and distraction of continued litigation. The proposed settlement agreement would dispose of all claims against us without any admission of wrongdoing. In February 2005, the proposed settlement was preliminarily approved by the district court overseeing these litigations. In December 2006, the United States Court of Appeals for the Second Circuit issued a decision reversing the district court’s finding that six focus cases could be certified as class actions. In April 2007, the Second Circuit denied plaintiffs’ petition for rehearing, but allowed that plaintiffs might ask the district court to certify a more limited class. It is not clear yet what impact, if any, the Second Circuit’s decision will have on the proposed settlement agreement. There is no guarantee that the parties or the court will finalize the proposed settlement.

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

Additionally, we were named in a judgment during September 2005 for approximately $550,000, based on an exchange rate of 1 Euro = 1.3475 U.S. dollars at June 30, 2007, in connection with a claim against our dormant French subsidiary. The judgment is related to a dispute between a former French distributor of ours and one of the distributor’s end user customers. While we believe we have additional defenses against the claim and will ultimately not be responsible for payments under the judgment, we accrued approximately $300,000, or approximately one-half of the total judgment against us and the former distributor, in the third quarter of 2005.

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.

Page 24 of 36

~~commissions~~ITEM ~~and agreements with customers regarding aftermarket purchases of shares of our stock~~1A. ~~The~~RISK ~~complaint alleges violations of Sections 11 and 15 of the Securities Act of 1933,~~FACTORS 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 us. No trial date has yet been set.

A proposal has been made for the settlement and release of claims against the issuer defendants, including BackWeb. We have agreed to the proposal. The settlement is subject to a number of conditions, including approval of the proposed settling parties and the court. In September 2004, an agreement of settlement was submitted to the court for preliminary approval.

If the settlement does not occur, and litigation against us continues, we believes 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.

Additionally, BackWeb was jointly named in a judgment during September 2005 for approximately $500,000 related to a claim against its dormant French subsidiary. The judgment is related to a dispute between a former French distributor of BackWeb and one of the distributor’s end user customers. While we believe we have additional defenses against the claim and will ultimately not be responsible for payments under the judgment, we accrued approximately $250,000, or approximately one-half of the total judgment against the distributor and us, in the third quarter of 2005.

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

Item 1A. Risk Factors

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 10-Q, in connection with any investment in our Ordinary Shares. If any of the risks described below occurs, our business, results of operations and financial condition could be adversely affected. In such cases, the price of our Ordinary Shares could decline, and you could lose part or all of your investment.

Risks Relating to Our Business

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

Since our inception, we have not achieved profitability and we expect to continue to incur net losses ~~for the foreseeable future~~. ~~In addition, our net loss significantly increased during the first six months of 2006 as compared to our net loss for the first six months of 2005.~~ We incurred net losses of ~~approximately~~ $~~1.9 million~~780,000 for the six months ended June 30, ~~2006~~2007, $13.07 million for the year ended December 31, ~~2005,~~2006 ~~$5.1 million in the year ended December 31, 2004~~ and $101.7 0 million infor the year ended December 31, ~~2003~~2005. As of June 30, ~~2006~~2007, we had an accumulated deficit of ~~approximately~~ $~~147~~149.2 million. We expect to continue to incur significant sales and marketing, research and development, and general and administrative expenses through the remainder of ~~2006~~2007 and into 2008. 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~~Ordinary ~~stock~~Shares.

Wireless networking technology and geographic coverage could limit our market.

Emerging wireless technologies, such as wireless fidelity, or WiFi, and cellular data networks, may pose a competitive challenge as an alternative to BackWeb’s capabilities ~~or they may be a source of growth to BackWeb as they raise awareness of the benefits of mobility and potentially highlight increased needs for solutions like BackWeb~~. ~~While we believe that many of our~~The ~~potential mobile business customers’ needs will not be met by wireless networking for the foreseeable future, the~~ reality and promise of wireless connectivity will make it necessary for BackWeb to target and educate its prospects intelligently. If we fail to successfully target those market segments which are not served by wireless networking, then our operating results could suffer.

25Our business strategy requires that we derive a significant amount of license revenue from our OAS product. If demand for OAS does not increase, our total revenue will not increase and we may seek to develop new solutions and enter new markets.

Our current business 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 for OAS by future customers. While our OAS revenue accounted for the majority of our license revenue for the first time in 2006, which continued in the first half of 2007, we need to realize additional growth during the remainder of 2007 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, management may decide to use our existing assets to develop new solutions and enter new markets, either alone or with partners. We cannot assure you that we would succeed in any such efforts to develop new solutions or enter new markets.

A lack of effective internal control over financial reporting could result in an inability to accurately report our financial results that could lead to a loss of investor confidence in our financial reports and have an adverse effect on our share price.

Effective internal control over financial reporting is essential for us to produce reliable financial reports. If we cannot provide reliable financial information or prevent fraud, our business and operating results could be harmed. We have in the past discovered, and may in the future discover, deficiencies in our internal control over financial reporting. In connection with our audit of our consolidated financial statements for the year ended and as of December 31, 2006 and review of our September 30, 2006 interim financial statements, our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting. As more fully described in Item 4 of Part I of this Quarterly Report on Form 10-Q, these material weaknesses in our internal control over financial reporting related to adjustments proposed by our independent registered public accounting firm related to (1) the accounting for deferred rent on a new facilities operating lease agreement entered into during 2006 and (2) our incorrect recognition of revenue on two term license agreements entered into during the quarter ended September 30, 2006 for which we did not have vendor-specific objective evidence of fair value for the bundled post-contract support.

Page 25 of 36

~~Our~~ As ~~business~~a ~~strategy~~result ~~requires~~of ~~that~~these wematerial ~~derive~~weaknesses, awe ~~significant~~concluded ~~amount~~that ofour ~~license~~disclosure ~~revenue~~controls ~~from~~and procedures ~~our~~were ~~OAS product.~~not Ifeffective ~~demand~~as ~~for~~of ~~OAS~~each ~~does~~of ~~not~~September 30, ~~increase~~2006, ~~our~~December 31, ~~total~~2006, ~~revenue~~March 31, ~~will not increase~~ 2007 and ~~our~~June 30, ~~business will suffer~~2007.

~~Our~~ We ~~business~~cannot ~~strategy~~assure ~~requires~~you that the measures we ~~derive~~have ataken ~~significant~~and ~~amount~~intend ofto ~~license~~take ~~revenue~~to ~~from~~remediate these ~~licensing~~material ~~our~~weaknesses, ~~OAS~~as ~~product~~more ~~and~~fully ~~derive~~described ~~additional~~in ~~related~~Item 4 ~~revenue~~of ~~through~~Part I ~~providing~~of ~~related consulting~~this ~~and~~Quarterly ~~maintenance~~Report ~~services.~~on ~~Accordingly~~Form 10-Q, ~~our~~will ~~future~~be ~~operating~~effective ~~results~~or that we will ~~depend~~be onsuccessful ~~the~~in implementing them. Moreover, we cannot ~~demand~~assure ~~for~~you ~~OAS~~that bywe ~~future~~have ~~customers.~~identified ~~While~~all, ~~our~~or ~~OAS~~that ~~revenue~~we ~~accounted~~will ~~for~~not in the ~~majority~~future ofhave ~~our~~additional, ~~license~~material ~~revenue~~weaknesses. ~~for~~Our ~~the~~independent ~~first~~registered ~~time~~public inaccounting ~~2005,~~firm ~~which~~has ~~continued~~not inevaluated ~~the~~any ~~first~~of ~~half~~the ofmeasures we ~~2006~~have taken, ~~our~~or ~~overall~~that ~~license sales~~we propose to ~~new~~take, ~~customers~~to ~~declined~~address in the ~~first~~material ~~six~~weaknesses. ~~months~~In ofaddition, ~~2006~~our former ~~compared~~Chief toFinancial ~~the~~Officer, ~~first~~Ken ~~six~~Holmes ~~months~~left ofBackWeb in May 2007, and, although we have hired an ~~2005.~~interim AsChief aFinancial ~~result~~Officer, we ~~need~~are toconducting ~~realize~~a ~~additional~~search ~~growth~~for ~~during~~his ~~the~~long-term ~~remainder~~replacement. The departure of ~~2006~~Mr. Holmes and ~~beyond~~the ~~or our~~uncertainty ~~operating~~regarding ~~results~~his long-term replacement will belikely ~~negatively~~make ~~impacted.~~it even Ifmore ~~our~~difficult ~~competitors~~for ~~release~~us ~~products~~to ~~that~~remediate ~~are superior~~the tomaterial ~~OAS~~weaknesses inand ~~performance~~implement orand ~~price,~~maintain effective ~~OAS~~internal ~~does~~control ~~not~~over ~~become~~financial ~~widely~~reporting. ~~accepted~~Our byfailure ~~the~~to ~~market,~~remediate orthe wematerial ~~fail~~weaknesses toand ~~enhance~~successfully ~~OAS~~implement and ~~introduce~~maintain ~~new~~effective ~~versions~~internal control over financial reporting could result in aerrors ~~timely~~in ~~manner,~~our wefinancial ~~may~~statements ~~never~~that ~~generate~~could result in a restatement of ~~significant~~our ~~license~~financial ~~revenue~~statements ~~from~~or ~~this~~otherwise ~~product.~~cause Ifus ~~demand~~to ~~for~~fail ~~our~~to ~~OAS~~meet ~~product~~our ~~does~~financial ~~not~~reporting ~~significantly~~obligations. ~~increase~~This, asin aturn, could result in a loss of ~~competition,~~investor ~~technological~~confidence ~~change~~in orthe ~~other~~accuracy ~~factors~~and completeness of our financial reports, itwhich ~~would~~could ~~significantly and~~have ~~adversely~~an ~~affect~~adverse effect on our stock ~~business~~price, ~~financial~~and ~~condition,~~our business and operating results could be harmed.

We In ~~restructured~~addition, ~~our~~pursuant ~~company~~to ~~in October~~Section ~~2004~~404 ~~and~~of ~~further~~the ~~reduced~~Sarbanes-Oxley ~~headcount~~Act inof ~~2006~~2002, ~~which~~beginning ~~could~~with ~~make~~our itAnnual ~~more~~Report ~~difficult~~on Form 10-K for usthe fiscal year ending December 31, 2007, we will be required to furnish ~~achieve~~a report by our ~~business~~management ~~objectives~~on our internal control over financial reporting. Such report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or ~~could~~not ~~result~~our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in ~~further~~our internal control over ~~restructurings~~financial ifreporting weidentified ~~don’t~~by ~~meet~~management. PCAOB Auditing Standard No. 5 provides the professional ~~goals~~standards and related performance guidance for independent registered public accounting firms to attest to, and report on, management’s assessment of the ~~restructuring~~effectiveness of internal control over financial reporting under Section 404.

InWe ~~October 2004,~~are ~~we restructured our company~~ in ~~order~~the toprocess ~~reduce~~of ~~management~~developing ~~and~~system ~~administrative costs~~ and ~~bring~~process ~~our~~documentation ~~sales~~ and ~~marketing~~evaluation ~~operations~~needed into comply ~~line~~ with ~~our then current sales level. In July~~Section ~~2006~~404, wewhich ~~again~~is ~~reduced~~both ~~headcount~~costly inand anchallenging. ~~effort~~During tothis ~~reduce~~process, if our management ~~cash~~identifies ~~burn.~~one ~~While~~or ~~the restructurings~~more ~~have~~material ~~reduced~~weaknesses ~~cash~~in ~~operating expenses,~~ our ~~ability~~internal tocontrol ~~adequately~~over ~~reduce cash used in~~financial ~~operations~~reporting, and ~~ultimately~~those ~~generate~~weaknesses ~~profitable~~are ~~results~~not ~~from~~appropriately ~~operations,~~remediated ~~will~~prior ~~depend~~to ~~upon~~December 31, ~~successful~~2007, we ~~execution~~will ofbe ~~our~~unable ~~business~~to ~~plan~~assert ~~and~~such ~~obtaining~~internal ~~new~~control ~~customers~~is effective. If we doare ~~not~~unable ~~meet our restructuring objectives, we may have~~ to ~~implement~~assert ~~additional~~that ~~restructuring~~our internal ~~plans,~~control ~~which~~over ~~could~~financial ~~impact~~reporting ~~the long-term~~is ~~viability~~effective as of ~~our~~December 31, ~~company. Further~~2007, ~~these~~we ~~plans~~could ~~may not achieve our desired goals due to~~lose ~~such~~investor ~~factors~~confidence asin ~~significant~~the ~~costs~~accuracy orand ~~restrictions~~completeness ~~that~~of ~~may~~our befinancial ~~imposed~~reports, inwhich ~~some~~would ~~international~~have ~~locales~~an ~~on workforce reductions and a potential~~ adverse ~~affect~~effect on ~~employee~~our ~~morale~~stock ~~that~~price, ~~could harm our efficiency~~ and our ~~ability~~business ~~to act quickly~~ and ~~effectively~~operating inresults ~~the~~could ~~rapidly~~be ~~changing technology markets in which we sell our products~~harmed.

While we currently anticipate being able to satisfy the requirements of Section 404 in a timely fashion, we cannot be certain as to the timing of completion of our evaluation, testing and any required remediation due in large part to the fact that there is no precedent available by which to measure compliance with the new PCAOB Auditing Standard No. 5. If we are not able to comply with the requirements of Section 404 in a timely manner, we would likely lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price, and our business and operating results could be harmed.

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

In connection with the evolution of 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 Ordinary Shares have decreased the value of many of the stock options granted to employees pursuant to our stock option plan. Furthermore, the economic environment in Israel and the U.S. has improved, making it more challenging to retain our employees. As a result of these and other factors, we have experienced an increased level of employee departures and our remaining personnel may seek employment with larger, more established companies or companies they perceive to have better prospects. For example, our former Chief Financial Officer, Ken Holmes, left BackWeb in May 2007 to join another software company. If we continue to experience employee departures, our revenue could decline and our operations in general could be impacted. None of our officers or other 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.

We have restructured our company in October 2004 and further reduced headcount in 2006, which could make it more difficult for us to achieve our business objectives or could result in further restructurings if we don’t meet the goals of the restructuring.

In October 2004, we restructured in order to reduce management and administrative costs and bring our sales and marketing operations in line with our current sales level. In July and October 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. As a result of the reduction in personnel, however, we may not have sufficient resources to execute our refocused sales strategy, particularly with respect to our OAS product, which could adversely affect our revenues and operating results. 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.

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

~~Our~~ We ~~cash,~~may ~~cash~~desire ~~equivalents and short-term investments balances have declined from $10.3 million as of December 31, 2004~~ to ~~$7.9 million~~increase asour ofproduct ~~December 31,~~line ~~2005~~or ~~and~~seek toadditional ~~$6.1 million~~markets ~~as of June 30, 2006, and we expect~~ to ~~continue~~sell ~~to use cash in~~ our ~~operations~~technology. 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 and because our Ordinary Shares have been delisted from the NASDAQ Capital Market. In the event that we obtain additional financing by issuing Ordinary Shares or 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.

~~Our~~Page ~~quarterly~~26 ~~license revenue typically depends on a small number~~ of ~~large orders, and any failure~~36 ~~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 June 30, 2006, we derived approximately 73% of our license revenue from sales to two existing customers. Our operating results for a particular fiscal quarter could be materially and adversely affected if we are unable to complete one or more substantial license sales forecasted for that quarter. Additionally, we also offer volume-based pricing, which may adversely affect our operating margins. We typically have very little backlog and, accordingly, generate substantially all of our revenue for a given quarter in that quarter.

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.

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

To date, our average engagement with our customers has typically ~~taken~~required between 3 and 12 ~~months~~ months for ~~them~~the customer to evaluate our products before making ~~their~~a purchasing ~~decisions~~decision. The long, and ~~often~~ often unpredictable, sales and implementation cycles for our products have caused, and may continue to to cause, our license revenue and operating results to vary significantly from period to period. For ~~Sales~~example, our license revenue for the third quarter of 2006 was significantly lower than the third quarter of 2005 in part due to the fact that certain larger opportunities with customers were initiated via pilot projects in which the customers made smaller initial investments in order to evaluate whether or not to purchase additional licenses ~~and~~for full deployment. Sales of licenses and implementation schedules are subject to a number of risks over which we have little or no control, including customer budgetary constraints, customer internal acceptance reviews, the success and continued internal support of customers’ own development efforts, the sales and ~~implementation~~ implementation efforts of businesses with which we have relationships, the nature, size and specific needs of a customer and the possibility of cancellation of projects by customers. Along with our distributors, we spend significant time educating and providing information to our prospective customers regarding the use and benefits of our products with no guarantee that such investment will result in a sale. InEven ~~addition, our customers often begin by purchasing our products on a pilot basis before they decide whether or not to purchase additional licenses for full deployment. For example, even~~ after purchase, our customers tend to deploy our OAS solution slowly, ~~depending~~ depending upon the skill set of the customer, the size of the deployment, the stage of the customer’s deployment of a portal, the complexity of the customer’s network environment and the quantity of hardware and the degree of hardware configuration necessary to deploy the products.

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

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

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

We have a limited operating history generally and an even more limited history operating our business in our current markets. We cannot be certain that our business strategy will be successful. We were incorporated on August 31, 1995, and did not begin generating revenue until December 1996. In early 1998, we changed our strategic focus from a consumer-oriented to an enterprise-oriented Internet communications company. In 2001, we again re-positioned our products to focus on the portal market. During 2003, we expanded our market focus to include corporate intranets and other Web-based applications. During 2004, we realigned our sales strategy to focus on selling to the line of business owner as opposed to the IT department. These changes required us to adjust our business processes and make a number of significant personnel changes. To the extent we do not succeed in generating significant revenue from licensing our new products, particularly our OAS product, our business, operating results and financial conditions will suffer.

Our quarterly operating results are subject to fluctuations.

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

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

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

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

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 June 30, 2007, we derived approximately 43% of our license revenue from sales to one customer. Our operating results for a particular fiscal quarter could be materially and adversely affected if we are unable to complete one or more substantial license sales forecasted for that quarter. Additionally, we also offer volume-based pricing, which may adversely affect our operating margins. We typically have very little backlog and, accordingly, generate substantially all of our revenue for a given quarter in that quarter.

Page 27 of 36

•If ~~new~~we ~~product~~lose ~~introductions~~a ormajor ~~internal~~customer, ~~development efforts by competitors~~ or ~~strategic~~if ~~allies;~~we •fail ~~costs related~~ to ~~acquisitions~~meet ofthe ~~technology~~acceptance orcriteria ~~businesses;~~under ~~and~~a •source ~~economic~~code license ~~conditions~~that ~~generally,~~we asentered ~~well~~into asduring ~~those~~the ~~specific~~first toquarter ~~the~~of ~~Internet~~2007, ~~and~~our ~~related~~revenue ~~industries~~would suffer.

~~Due~~ We tohave ~~the~~historically ~~foregoing~~generated ~~factors~~a substantial portion of our revenue from a limited number of customers, and we ~~believe~~expect ~~that~~this ~~quarter-~~to~~-quarter~~ ~~comparisons~~continue offor ~~our~~the ~~operating~~foreseeable future. For example, for the year ~~results~~ended ~~are~~December 31, ~~not~~2006, ~~necessarily~~our atwo ~~good~~largest ~~indication~~customers accounted for 21% of our ~~future~~total ~~performance.~~revenue, Weand during ~~incur~~the ~~expenses~~three ~~based predominantly~~months onended ~~operating~~June 30, ~~plans~~2007, ~~and~~one ~~estimates~~customer accounted for $593,000, or 43% of ~~future~~our total revenue., ~~Our~~$500,000 ~~expenses~~of ~~are~~which towe recognized in connection with a ~~large extent~~source ~~fixed~~code ~~and~~license sale that we ~~may~~entered ~~not~~into beduring ~~able~~the tofirst ~~adjust~~quarter ~~them~~of ~~quickly~~2007. toWe ~~meet~~expect ato ~~shortfall~~recognize inan ~~revenue~~additional ~~during~~$2.5 ~~any~~million ~~particular~~from ~~quarter.~~this ~~Any~~sale ~~significant~~during ~~shortfall~~periods inthrough ~~revenue~~2009 in ~~relation~~the toevent ~~our~~we ~~expenses~~are ~~would~~able to meet acceptance ~~decrease~~criteria ~~our~~later ~~net~~in ~~income~~2007. orHowever, ~~increase~~we ~~our~~might ~~operating~~fail ~~losses~~to ~~and~~meet ~~would~~the ~~also~~acceptance ~~harm~~criteria ~~our~~under ~~financial~~the source ~~condition.~~code Inlicense ~~some~~in ~~recent~~a ~~quarters~~timely ~~our~~manner ~~operating~~or ~~results~~at ~~have~~all, ~~been~~which ~~below~~would ~~the~~result ~~expectations~~in ofus ~~public~~not being able to recognize any ~~market~~additional ~~analysts~~revenue ~~and~~from ~~investors~~this license sale. ItIn isaddition, ~~likely~~if ~~that~~we inlose ~~some~~a ~~future~~major ~~quarters~~customer, ~~our~~or ~~operating~~if ~~results may~~there ~~also~~is bea ~~below~~decline ~~such~~in ~~expectations,~~the ~~which~~use ~~would~~of ~~likely~~our ~~cause~~products within our ~~stock~~existing ~~price~~customers’ toorganizations, ~~decline~~our revenue would suffer.

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

We have historically generated a substantial portion of our revenue from a limited number of customers, and we expect this to continue for the foreseeable future. As a result, if we lose a major customer, or if there is a decline in the use of our products within our existing customers’ organizations, our revenue would be adversely affected. In the six months ended June 30, 2006, two customers accounted for 24% of our total revenue. In 2005, our two largest 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.

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

In connection with the evolution of 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.

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

Our business model generally depends on the sale of our products to new customers as well as expanded use of our products within our existing customers’ organizations. If we fail to grow our customer base or to generate repeat and expanded business from our current and future customers, our business and operating results will be seriously harmed. For example, we experienced a reduction in license sales to new customers during ~~the second quarter of~~ 2006 compared with ~~the second quarter of~~ 2005 which contributed to the overall decline in our license revenue during that period. In some cases, our customers initially make a limited purchase of our products and services for trials, pilot or proof of concept programs. These customers might not choose to acquire additional licenses to expand their use of our products.

28 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. 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 share price.

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

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

For example, Adobe and Google have recently introduced products that enable offline web application functionality, and these products will likely be competitive to our products in certain markets. Both Adobe and Google have significantly greater brand and name recognition, larger and broader customer bases and greater financial, research and development and distribution resources than we do. Consequently, we may not be able to compete successfully against their new product offerings. In addition, IBM previously announced product plans addressing segments of the offline Web application market segment served by our OAS product. If such companies enter our market segments, we may not be able to compete successfully, and competitive pressures may harm our business.

Failure to develop key strategic relationships could limit our growth

We are seeking to grow our business by establishing strategic relationships with application vendors in our target markets. However, we have not generated significant revenues to date from these efforts and we cannot assure you that we will ever derive significant revenue from our current strategic relationships or that we will succeed in establishing new strategic relationships. If we fail to develop successful strategic relationships with application vendors in our target markets,

Page 28 of 36

~~customers~~our ~~are~~growth ~~telecommunications~~could orbe ~~information~~limited. ~~technology~~In ~~companies~~addition, ~~which~~even ~~have~~if ~~been~~we ~~forced to~~are ~~significantly~~successful ~~reduce their operations~~ in establishing ~~light~~such ofstrategic ~~limited~~relationships, ~~access~~one toor ~~sources~~more of ~~financing~~these ~~and~~companies ~~the national~~may ~~and~~develop ~~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~~market ~~materially~~competing ~~and adversely affect our revenue, operating results and stock price~~products.

Rapid technological changes could cause our products to become obsolete.

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

Our market is susceptible to rapid changes due to technology innovation, evolving industry standards, and frequent new service and product introductions. New services and products based on new technologies or new industry standards expose us to risks of technical or product obsolescence. For example, emerging technologies, such as wireless, that take a different approach to the challenge of offline Web access by, for example, re-engineering platforms and applications, pose a competitive challenge. In addition, other companies, including some of our strategic resellers, also approach the issue of offline Web architecture differently than we do in some cases, and such approaches may achieve a greater degree of market acceptance. If we do not use leading technologies effectively, meet the challenges posed by emerging technologies or other architectures, continue to develop our technical expertise and enhance our existing products on a timely basis, we may be unable to compete successfully in this industry, which would adversely affect our business and results of operations.

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

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

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

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

~~Competition~~ In inaddition, ~~the~~our ~~Internet~~products ~~communications market~~ may ~~reduce~~face ~~the~~competition ~~demand~~from ~~for,~~operating orsystem ~~price~~software ofproviders, ~~our~~which may elect to incorporate similar technology into their own products.

announced product plans addressing the offline Web application market segment served by our OAS product. If such companies enter this market segment, we may not be able to compete successfully, and competitive pressures may harm our business.

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

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

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

The use of our products by our customers often requires implementation services, and our growth will be limited in the event we are unable to expand our implementation services personnel or subcontract these services to qualified third parties. In addition, customers could delay product implementations. In ~~2003,~~the second half of 2004, 2005, 2006 and the first ~~six~~half ~~months~~ of ~~2006~~2007, 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.

~~Our~~Page ~~business~~29 ~~will~~of ~~suffer if the Internet infrastructure cannot support the demands placed on it.~~36

OurTable future revenue and profits, if any, depend upon the widespread acceptance and use of the Internet as an effective medium of business and communication by our customers. Rapid growth in the use of, and interest in, the Internet has placed increased demands on its infrastructure. Our success will depend, in large part, on the acceptance of the Internet in the commercial marketplace and on the ability of third parties to provide a reliable Internet infrastructure network with the speed, data capacity, security and hardware necessary for reliable Internet access and services. To the extent that the Internet continues to experience increased numbers of users, increased frequency of use or increased bandwidth requirements, the Internet infrastructure may not be able to support the demands placed on it and the performance or reliability of the Internet could suffer. Contents

actual commercial use and implementation. Initial implementation typically involves working with sophisticated software, computers and communications systems. If we experience difficulties with implementation or do not meet project milestones in a timely manner, we could be obligated to devote more customer support, engineering and other resources to a particular project at the expense of other projects.

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

We recognize license revenue when persuasive evidence of an arrangement exists, the product has been delivered, the license fee is fixed or determinable, and collection of the fee is probable. If an arrangement requires acceptance testing or specialized professional services, recognition of the associated license and service revenue would be delayed. The timing of the commencement and completion of these services is subject to factors that may be beyond our control, such as access to the customer’s facilities and coordination with the customer’s personnel after delivery of the software. If new or existing customers have difficulty deploying our products or require significant amounts of our professional services support for specialized features, our revenue recognition could be further delayed and our costs could increase, causing increased variability in our operating results. In connection with a source code license sale to one of our customers, we are currently working to obtain the customer’s acceptance, which we expect to result in $2.5 million of revenue through 2009. If such acceptance were not to occur, we would forego the anticipated revenue.

We may experience difficulties managing our operations and geographic dispersion.

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

Our international operations are subject to additional risks.

Revenue from customers outside the United States represented ~~approximately~~ $~~575~~318,000, or 2112% of our total revenue, for the six months ended June 30, ~~2006~~2007, and $21.91 million, or 4123% of our total revenue, for the year ended December 31, ~~2005~~2006. ~~Our~~Even though we have decreased our international presence, our international operations will continue to be subject to a number of risks, including, but not limited to:

30 • laws and business practices favoring local competition;

~~Table~~• ofcompliance ~~Contents~~with multiple, conflicting and changing laws and regulations;

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

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

•

import and export restrictions and tariffs;

•

difficulties in staffing and managing foreign operations;

•

difficulties in investing in foreign operations at appropriate levels to compete effectively; and

•

political and economic instability.

Our efforts to protect our proprietary rights may be inadequate.

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

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

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

~~Our~~Page ~~products~~30 ~~may~~of ~~be used in an unintended and negative manner.~~36

~~engaged~~number of competitors in ~~challenging~~our ~~such~~industry ~~accusations~~segment grows and the functionality of products in different industry segments overlaps. InAlthough we believe that our products do not infringe the ~~event~~proprietary rights ~~such~~of ~~allegations~~any ~~result~~third parties, third parties could assert infringement claims against us in ~~litigation~~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 ~~spend~~be aliable ~~significant~~for substantial ~~amount~~damages, ofas ~~time~~well as injunctive or equitable relief that could effectively block our ability to sell our products and ~~money~~services. ~~pursuing~~Royalty or ~~defending~~licensing ~~legal~~agreements, ~~claims~~if required, ~~which~~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 share price.

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

As a result of the restructuring plans we announced on July 1, 2001 and September 30, 2002, we ceased commercial operations of the following subsidiaries: BackWeb Technologies B.V., BackWeb Technologies (U.K.) Ltd., BackWeb Technologies S.a.r.l., BackWeb Technologies A.B., BackWeb Canada Inc., and BackWeb K.K. Ltd. We decided to liquidate these companies in order to further streamline our operations and to simplify our legal entity structure. We cannot assure you that we will not have any termination liability issues with the appropriate tax authorities in each jurisdiction. If such termination liability issues were to arise and we did not prevail, we might be required to pay significant taxes and penalties, which could adversely affect our cash balances and results of operations.

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

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

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

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

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

Changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted by the SEC and ~~Nasdaq~~The NASDAQ Stock Market, have required changes in some of our corporate governance and accounting practices and caused our Ordinary Shares to be delisted from the NASDAQ Capital Market. We expect these laws, rules, and regulations to continue to increase our legal and financial compliance costs and to make some activities more difficult, time 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.

Risks Relating to Our Location in Israel

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

We are incorporated under the laws of the State of Israel. Our research and development facilities, as well as one of our executive offices, are located in Israel. Although substantial portions of our sales are currently made to customers outside of Israel, any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could significantly harm our business. Since September 2000, a continuous armed conflict with the Palestinian ~~Authority has been taking place with increased~~ ~~hostilities since the beginning of 2006. 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.~~

Page 31 of 36

Authority has been taking place, with increased hostilities since the beginning of 2006. 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.

Because our revenues are generated in U.S. dollars but a large portion of our expenses is incurred in New Israeli Shekels (NIS), our results of operations may be seriously harmed by currency fluctuations.

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.

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

Pursuant to the Law for the Encouragement of Capital Investments, 1959, the Israeli Government ~~has~~ has granted “Approved Enterprise” status to our existing capital investment programs. Consequently, we we are eligible for tax benefits for the first several years in which we generate taxable income. ~~Our~~ Our future profitability may be diminished if all or portions of these tax benefits are reduced or eliminated. These tax benefits may be cancelled if we fail to comply with requisite conditions and criteria. Currently the most significant conditions that we must continue to meet include making specified investments in fixed assets, financing at least 30% of these investments through the issuance of capital stock, and maintaining the development and production nature of our facilities. We cannot assure you that the benefits will be continued in the future at their current levels or at any level.

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

32 Under Israeli law, we are required to obtain an Israeli government license to engage in research and development and the export of the encryption technology incorporated in our products. Our current government license to engage in these activities expires in May 2008. Our research and development activities in Israel, together with our ability to export our products out of Israel, would be limited if the Israeli government revokes our current license, our current license is not renewed, our license fails to cover the scope of the technology in our products, or Israeli law regarding research and development or export of encryption technologies were to change.

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

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

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

We have been informed by our legal counsel in Israel, Naschitz, Brandes & Co., that ~~there~~it ismay be ~~doubt~~difficult asto assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to ~~the~~hear ~~enforceability~~a ofclaim ~~civil~~based ~~liabilities~~on ~~under~~a violation of U.S. securities laws inbecause ~~original~~Israel ~~actions~~is ~~instituted~~not the most appropriate forum in ~~Israel~~which to bring such a claim. ~~However~~In addition, ~~subject~~even if an Israeli court agrees to ~~certain~~hear ~~time~~a ~~limitations~~claim, anit may determine that Israeli ~~court~~law ~~may~~and ~~declare~~not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the substance of the applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure ~~foreign~~will ~~civil~~also ~~judgment~~be ~~enforceable~~governed ifby itIsraeli ~~finds~~law. ~~that:~~Furthermore, there is little binding case law in Israel addressing these matters.

• Israeli ~~the~~courts ~~judgment~~might ~~was~~not enforce judgments rendered byoutside aIsrael, ~~court~~which ~~that~~may ~~was,~~make ~~according~~it difficult to ~~the~~collect ~~laws~~on ofjudgments ~~the~~rendered ~~state~~against ofus. ~~the court~~However, ~~competent~~subject to ~~render~~certain ~~the~~time limitations, ~~judgment;~~an •Israeli ~~the~~court ~~judgment~~may isdeclare noa ~~longer~~foreign ~~able~~civil ~~to be appealed; • the obligation imposed by the~~ judgment is enforceable ~~according~~if ~~to the rules relating to the enforceability of judgments in Israel and the substance of the judgment is not contrary to public policy; and • the judgment is executory in the state in which~~ it ~~was~~finds ~~given.~~that:

	•		the judgment was rendered by a court that was, according to the laws of the state of the court, competent to render the judgment;

	•		the judgment may no longer be appealed;

	•		the obligation imposed by the judgment is enforceable according to the rules relating to the enforceability of judgments in Israel and the substance of the judgment is not contrary to public policy; and

Page 32 of 36

•

the judgment is executory in the state in which it was given.

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

	•		the judgment was obtained by fraud;

	•		there was no due process;

	•		the judgment was rendered by a court not competent to render it according to the laws of private international law in Israel;

	•		the judgment is at variance with another judgment that was given in the same matter between the same parties and which is still valid; or

	•		at the time the action was brought in the foreign court a suit in the same matter and between the same parties was pending before a court or tribunal in Israel.

If a foreign judgment is 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 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 currency. 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.

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

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

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

Tax reform in Israel may reduce our tax benefit, which might adversely affect our profitability.

On January 1, 2003, a comprehensive tax reform took effect in Israel. We performed an analysis of the likely implications of the tax reform legislation on our results of operations. Our evaluation concluded that the impact of the tax reform on both our corporate and income tax framework would not have a material effect on our results and operations. This evaluation was based, in part, on the assumptions that we would not expand beyond the countries in which we already operate and that we would remain in a net operating loss for tax purposes for at least the next three years. We cannot assure you that these assumptions will be met, and the tax reform will not materially and adversely affect our results of operations.

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

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

~~Risks~~Page ~~Relating~~33 toof ~~Our Ordinary Shares~~36

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

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

• in response to quarterly variations in operating results; • in response to announcements of technological innovations or new products by us or our competitors or 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.

In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We are currently subject to a securities class action described in Part II, Item 1 “Legal Proceedings” of this Quarterly 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.

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.

In May 2006, Nasdaq implemented a change in its continued listing requirements to stipulate that non-U.S. companies 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

~~$1.00~~Risks ~~per~~Relating ~~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~~Our The Nasdaq Capital Market initial listing criteria as set forth in Marketplace Rule 4320(e), except for the bid price requirement. If we meet the initial listing criteria, Nasdaq staff will notify us that we have been granted an additional 180 calendar-day compliance period. If we are not eligible 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 Nasdaq staff’s determination to delist our Ordinary~~ Shares ~~to a Nasdaq Listing Qualifications Panel. We cannot assure you that we will be~~ able to maintain the initial or continued listing requirements or that we would succeed in any appeal to the Nasdaq Listing Qualification Panel, and, as a 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.

Our share price has been volatile and could fluctuate in the future.

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

	•		in response to quarterly variations in operating results;

	•		in response to announcements of technological innovations or new products by us or our competitors or partners;

	•		because of market conditions in the enterprise software or portal industry;

	•		our failure to meet or exceed the expectations of investors;

	•		in response to our announcements of strategic relationships or joint ventures; and

	•		in response to sales of our Ordinary Shares.

In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We are currently subject to a securities class action described in Part II, Item 1 “Legal Proceedings” of this Quarterly Report, and the volatility of our share 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.

In January 2007, our Ordinary Shares were 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 have been significantly impaired and the market price of our Ordinary Shares may continue to decline significantly.

In May 2006, The NASDAQ Stock Market implemented a change in its continued listing requirements to stipulate that non-U.S. companies must now comply with NASDAQ Marketplace Rule 4320(e)(2)(E)(i), which states that the closing per share bid price of NASDAQ listed companies must be at or above at $1.00. Because we did not regain compliance with this minimum per share bid price requirement by the deadline imposed by NASDAQ, we were delisted from the NASDAQ Capital Market in January 2007. Our Ordinary Shares are now listed and traded on the OTC Bulletin Board, and the trading market for our Ordinary Shares, and the ability of our shareholders to trade our shares and obtain liquidity for their shares, may have been significantly impaired. As a result, the market price of our Ordinary Shares may continue to decline significantly.

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

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

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

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

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

~~Our~~Page ~~officers,~~34 ~~directors and affiliated entities own a large percentage~~ of ~~BackWeb and could~~36 ~~significantly influence the outcome of actions.~~

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.

~~Item 2.~~Our ~~Unregistered~~officers, ~~Sales~~directors ofand ~~Equity~~affiliated ~~Securities~~entities own a large percentage of BackWeb and ~~Use~~could significantly influence the outcome of ~~Proceeds~~actions.

Our executive officers, directors and entities affiliated with them, in the aggregate, beneficially owned approximately 26% of our outstanding Ordinary Shares as of June 30, 2007. These shareholders, if acting together, would be able to significantly influence all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

~~Item~~ ITEM 3. ~~Defaults~~DEFAULTS ~~Upon~~UPON ~~Changes~~CHANGES ofOF ~~Senior~~SENIOR ~~Securities~~SECURITIES

None.

~~Item~~ ITEM 4. ~~Submission~~SUBMISSION ofOF ~~Matters~~MATTERS toTO aA ~~Vote~~VOTE ofOF ~~Security~~SECURITY ~~Holders~~HOLDERS

None.

~~Item~~ ITEM 5. ~~Other~~OTHER ~~Information~~INFORMATION

None.

~~Item~~ ITEM 6. ~~Exhibits~~EXHIBITS

The ~~following~~exhibits filed as part of this quarterly report on Form 10-Q are listed in the Exhibit Index immediately preceding the exhibits and are ~~filed~~incorporated ~~herewith~~herein.

Exhibit
No.		Description
No			Description
~~31.1~~	31.1	~~Certification of BackWeb’s Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~	Certification of BackWeb’s Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
~~31.2~~	31.2	~~Certification of BackWeb’s Vice President, Finance, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~	Certification of BackWeb’s Interim Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
~~32.1~~	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~~	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 Interim Chief Financial Officer

Page 35 of 36

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.~~	BACKWEB TECHNOLOGIES LTD.
	~~By:~~	~~/s/ KEN HOLMES~~By:		/s/ MICHAEL HERRINTON
		Ken Holmes
				Michael Herrinton
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.)
Date: August 14, 2007				Interim Chief Financial Officer
				(Mr. Herrinton is the Principal Financial
				Officer and has been duly authorized to
				sign on behalf of Registrant.)

37Page 36 of 36

EXHIBIT INDEX

Exhibit
No.		Description
No			Description
~~31.1~~	31.1	~~Certification of BackWeb’s Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~	Certification of BackWeb’s Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
~~31.2~~	31.2	~~Certification of BackWeb’s Vice President, Finance, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~	Certification of BackWeb’s Interim Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
~~32.1~~	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~~	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 Interim Chief Financial Officer

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

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