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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 0-26241

BACKWEB TECHNOLOGIES LTD.

(972) 3-6118800

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Ordinary Shares, NIS 0.03 par value

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

     Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

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

DOCUMENTS INCORPORATED BY REFERENCE

     None.

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BACKWEB TECHNOLOGIES LTD.

ANNUAL REPORT ON FORM 10-K

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

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

PART I

Item 1.     Business

General

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

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

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

      The Company was incorporated in the State of Israel in 1995. The principal executive offices of the Company are located at 3 Abba Hillel Street, Ramat Gan, Israel, 52136. In the United States, the Company’s principal offices are located at 2077 Gateway Place Suite 500, San Jose, California, 95110.

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Industry Background

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

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

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

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

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

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

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

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

Strategy

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

     Become the De-Facto Standard for Critical Portal Communications

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

     Expand Leadership Position through Strategic Partnerships

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

     Extend Technological Leadership Position

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

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     Leverage Infrastructure Platform to Introduce Multiple Internet Communication Applications

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

The BackWeb Solution

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

      Our products and technology provide the following benefits:

     Network Efficiency and Bandwidth Utilization

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

     Capture Immediate Attention to Critical Information

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

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     Close the Loop on the Communications Flow

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

Technology and Products

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

     Technology

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

      Polite Communications. Polite Communications enables the transmission of significant volumes of digital data from BackWeb Polite Communication Servers to BackWeb plug-ins on personal computers through existing networks without interfering with normal network applications and traffic. Polite Communications enables companies to provide any user with rapid communication of bandwidth-intensive data, regardless of whether they utilize high-speed or low-speed data access services. This bandwidth-sensitive delivery is accomplished through the use of various components including the following:

	•	Polite Agent monitors the network activity of the plug-in and communicates with BackWeb Polite Communication Servers only when the connection is idle. It is able to interrupt BackWeb communications when other applications request use of the user’s network connection.
	•	Polite Proxy allows communication between the BackWeb proxy server and BackWeb Polite Communication Servers only when WAN bandwidth utilization is below a specified threshold. It achieves this by monitoring the wide area network or WAN.
	•	Polite Neighborcast enables the automatic transmission of digital data from one BackWeb plug-in to others on the same local area network, or LAN, obviating the need for transmission of the data from the server to each BackWeb plug-in. The transmission from BackWeb plug-in to BackWeb plug-in on the same LAN is a fast, efficient and cost-effective means of disseminating the data.
	•	Polite Upstream® enables the automatic transmission of digital data from BackWeb plug-ins to the BackWeb Polite Communication Server when the network connection is idle.

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

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

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      Attention Management. BackWeb products are often used by customers for notification applications, where people need to be notified of time-sensitive or otherwise critical information. Attention Management is an automatic notification system supported by the BackWeb plug-in software on personal computers. When content items are pushed to the personal computer, the BackWeb attention management capability is able to alert users with the information if appropriate for that user and content item. It alerts users to the delivery of business-critical information through a variety of display techniques including Flash Alerts. These techniques enable companies to attract immediate attention to time-sensitive information. Flash Alerts are a particular display technique that can be customized to notify users and, if desired, can allow management to track the usage of the information. For example, the recipient can be required to acknowledge their receipt of the information, or to immediately launch and interact with a designated application. In addition, Attention Management displays can be programmed to play automatically according to specific scheduling and expiration parameters, after which the information and associated data can be automatically purged.

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

     Products

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

      BackWeb ProactivePortal Server is comprised of 3 major components:

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

           • Content Acquisition

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

           • Content Transformation and OTML Tags

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

           • Content Consolidation and Differencing

Although portals include both personalized and non-personalized content, ProactivePortal acquires content in the context of individual users and creates a single personalized information package for each user. Yet a large portion of the content is shared among many users. Since that content may be very large, it is necessary to consolidate shared information so that it can be retrieved and stored once for all targeted users. ProactivePortal stores content in separate information packages that are sent to more than one user. Consolidated content includes documents and web pages.

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           • Content Packaging

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

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

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

           • Content Targeting Manager

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

           • BackWeb Subscription Manager

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

           • Content Tracking Manager

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

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

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

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

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      BackWeb e-Accelerator. In December 1998, we introduced BackWeb Sales Accelerator (now BackWeb e-Accelerator), our first packaged application built on BackWeb Foundation. BackWeb e-Accelerator allows companies to keep their extended enterprise equipped with the most up-to-date documents, market information and management announcements by automating the collection and dissemination of business critical information. This application is targeted at companies that need to communicate to geographically dispersed employees, resellers, partners and customers to accelerate their business execution and response time to critical changes affecting their business. Components of the BackWeb e-Accelerator include:

           • Content

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

	•	Manual Publishing Server

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

	•	Automatic Publishing Tools

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

	•	Subscription & Targeting Server

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

	•	Delivery Server

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

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	•	BackWeb Plug-in

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

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

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

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

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

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

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

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	—	monitors the WAN connection and communicates only when the network connection is below a certain threshold.

	•	BackWeb Development Tools. BackWeb Development Tools are used to customize the BackWeb Foundation. Components of BackWeb Development Tools include:

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

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

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

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

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

Customers

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

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

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

Alliances with Business Partners

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

Marketing and Sales

     Marketing

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

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

     Sales

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

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

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

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

Customer Service and Support

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

Research and Development

      We believe that strong product development capabilities are essential to our strategy of enhancing our core technology, developing additional applications, incorporating that technology and maintaining the competitiveness of our product and service offerings. We have invested significant time and resources in creating a structured process for undertaking all product development projects.

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

Competitive Landscape

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

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

      Additional competition could come from operating system vendors, online service providers, plug-in/ server applications and tools vendors, document management companies and network management vendors. If any of our competitors were to become the industry standard or were to enter into or expand relationships with significantly larger companies through mergers, acquisitions or otherwise, our business and operating results could be seriously harmed. In addition, potential competitors may bundle their products or incorporate functionality into existing products in a manner that discourages users from purchasing our products.

      We expect that competition will increase in the near term and that our primary long-term competitors may not have entered the market yet. Increased competition could result in price reductions, fewer customer orders, reduced gross margin and loss of market share, any of which could cause our business to suffer. We may not be able to compete successfully, and competitive pressure may harm our business. In addition, our

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Intellectual Property and Proprietary Rights

      Our products and services operate in part by making copies of material available on the Internet and other networks and making this material available to end-users from a central location. This creates the potential for claims to be made against us, either directly or through contractual indemnification provisions with customers, including defamation, negligence, copyright or trademark infringement, personal injury, invasion of privacy or other legal theories based on the nature, content or copying of such materials. These claims have been brought and sometimes successfully pressed against online service providers in the past. It is also possible that if any such information, or information that is copied and stored by customers that have deployed our products, contains errors, third parties could make claims against us for losses incurred in reliance on such information. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed.

      Our success and ability to compete are substantially dependent upon our internally developed technology. We rely on patent, copyright, trade secret and trademark law to protect our technology. However, we believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements and reliable product maintenance are more essential to establishing and maintaining a technology leadership position. Others may develop technologies that are similar or superior to our technology.

      We generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and generally control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Policing unauthorized use of our products is difficult, and the steps we have taken might not prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as do the laws of the United States of America.

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

      Substantial litigation regarding intellectual property rights exists in the software industry. We expect that software products may be increasingly subject to third-party infringement claims as the number of competitors in our industry segments grows and the functionality of products in different industry segments overlaps. We believe that many of our competitors have filed or intend to file patent applications covering aspects of their technology that they may claim our technology infringes. Third parties may claim infringement by us with respect to our products and technology. Any such claims, with or without merit, could:

	•	be time-consuming to defend;
	•	result in costly litigation;
	•	divert management’s attention and resources;
	•	cause product shipment delays; or
	•	require us to enter into royalty or licensing agreements.

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      Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. A successful claim of product infringement against us and our failure or inability to license the infringed or similar technology could harm our business.

Employees

      As of December 31, 2001, we had a total of 180 employees, 177 of whom were full-time employees and 3 of whom were temporary employees. Of the total number of employees, 66 were engaged in research and development, 52 in sales, marketing and business development including 1 temporary employee, 25 in professional services and technical support and 37 in finance, administration and operations, including 2 temporary employees. Our future performance depends in part upon the continued service of our key technical, sales and senior management personnel, none of whom is bound by an employment agreement requiring service for any defined period of time. The loss of the services of one or more of our key employees could have a material adverse effect on our business, financial condition and results of operations. Our future success also depends on our continuing ability to attract, train and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, and we may not be able to retain our key personnel in the future. None of our employees is represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.

      In addition, 78 of our employees are located in Israel. Israeli law and certain provisions of the nationwide collective bargaining agreements between the Histadrut, which is the General Federation of Labor in Israel, and the Coordinating Bureau of Economic Organization, which is the Israeli federation of employers’ organizations, apply to our Israeli employees. These provisions principally concern the maximum length of the work day and the work week, minimum wages, contributions to a pension fund, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment. Furthermore, pursuant to such provisions, the wages of most of our employees are subject to cost of living adjustments, based on changes in the Israeli Consumer Price Index. The amounts and frequency of such adjustments are modified from time to time. Israeli law generally requires the payment of severance pay upon the retirement or death of an employee or upon termination of employment by the employer or, in certain circumstances, by the employee. We currently fund our ongoing severance obligations for our Israeli employees by making monthly payments for insurance policies to cover these obligations.

RISK FACTORS

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

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

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Risks Relating to Our Business

      Current predictions for the general economy indicate uncertain economic conditions. Weak economic conditions may cause a reduction in information technology spending generally. Consequently, there may be an adverse impact on the demand for our products, which would adversely affect our results of operations. In addition, predictions regarding economic conditions have a low degree of certainty, and further predicting the effects of the changing economy is even more difficult. We may not accurately gauge the effect of the general economy on our business. As a result, we may not react to such changing conditions in a timely manner that may result in an adverse impact on our results of operations. Any such adverse impacts to our results of operations from a changing economy may cause the price of our Ordinary Shares to decline.

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

We have a history of losses and we expect future losses

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

Our quarterly operating results are subject to fluctuations and seasonality

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

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

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	•	costs related to acquisitions of technology or businesses; and
	•	economic conditions generally, as well as those specific to the Internet and related industries.

      Due to the foregoing factors, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is likely that in some future quarter, our operating results may be below the expectation of public market analysts and investors.

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

      We may derive a significant portion of our product license revenues in each quarter from a small number of relatively large orders. Our operating results for a particular fiscal quarter could be materially adversely affected if we are unable to complete one or more substantial license sales forecasted for that quarter. Additionally, we also offer volume-based pricing, which may affect operating margins.

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

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

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

      Our business model generally depends on the sale of our products to new customers as well as on expanded use of our products within our existing customers’ organizations. If we fail to grow our customer base or generate repeat and expanded business from our current and future customers, our business and operating results will be seriously harmed. In some cases, our customers initially make a limited purchase of our products and services for trials, pilot or proof of concept programs. These customers may not acquire additional licenses to expand their use of our products.

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

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

      Our future revenues and profits, if any, depend upon the widespread acceptance and use of the Internet as an effective medium of business and communication by our customers. Rapid growth in the use of and interest in the Internet has occurred only recently. As a result, acceptance and use may not continue to develop at historical rates, and a sufficiently broad base of consumers may not adopt, and continue to use, the Internet and other online services as a medium of commerce and communication. Our success will depend, in large part, on the acceptance of the Internet in the commercial marketplace and on the ability of third parties to provide reliable Internet infrastructure network with the speed, data capacity, security and hardware necessary for reliable Internet access and services. To the extent that the Internet continues to experience increased numbers of users, increased frequency of use or increased bandwidth requirements of users, the Internet infrastructure may not be able to support the demands placed on it and the performance or reliability of the Internet could suffer.

Rapid technological changes could cause our products to become obsolete

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

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

      Our market is susceptible to rapid changes due to technology innovation, evolving industry standards, and frequent new service and product introductions. New services and products based on new technologies or new industry standards expose us to risks of technical or product obsolescence. We will need to use leading technologies effectively, continue to develop our technical expertise and enhance our existing products on a timely basis to compete successfully in this industry. We cannot be certain that we will be successful in using new technologies effectively, developing new products or enhancing existing products on a timely basis or that any new technologies or acceptance.

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

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

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

      Many of our products run on the Microsoft Windows NT, Microsoft Windows 2000 or certain versions of the Sun Solaris Unix operating systems, and some require the use of third party software. Any change to our customers’ operating systems could require us to modify our products and could cause us to delay product releases. In addition, any decline in the market acceptance of these operating systems we support may force us to ensure that all of our products and services are compatible with other operating systems to meet the demands of our customers. If potential customers do not want to use the Microsoft or Sun Solaris operating systems we support, we will need to develop more products that run on other operating systems adopted by our customers. If we cannot successfully develop these products in response to customer demands, our business could be adversely impacted. The development of new products in response to these risks would require us to

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

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

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

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

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

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

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

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

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

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

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

      To date, our customers have taken a long time to evaluate our products before making their purchase decisions. The long, and often unpredictable, sales and implementation cycles for our products may cause license revenues and operating results to vary significantly from period to period. Sales of licenses and implementation schedules are subject to a number of risks over which we have little or no control, including customer budgetary constraints, customer internal acceptance reviews, the success and continued internal support of customers’ own development efforts, the efforts of business with which we have relationships, the nature, size and specific needs of a customer and the possibility of cancellation of projects by customers. Along with our distribution partners, we spend a lot of time educating and providing information to our prospective customers regarding the use and benefits of our products. In addition, our customers often begin by purchasing our products on a pilot basis before they decide whether or not to purchase additional licenses for full deployment. For example, even after purchase, our customers tend to deploy BackWeb Foundation slowly, depending upon the skill set of the customer, the size of the deployment, the complexity of the customer’s network environment and the quantity o