BACKWEB TECHNOLOGIES LTD
10-Q, 2000-11-14
PREPACKAGED SOFTWARE
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<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------

                                   FORM 10-Q

                            ------------------------

     [X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934

               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000

                                       OR

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

         FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .

                         COMMISSION FILE NUMBER 0-26241

                           BACKWEB TECHNOLOGIES LTD.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                   ISRAEL
       (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NUMBER)

   3 ABBA HILLEL STREET, RAMAT-GAN, ISRAEL                         52136
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

                                (972) 3-6118800
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

     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 [X]  No [ ]

     The number of shares of the registrant's Ordinary Shares outstanding as of
October 31, 2000 was 37,762,205 shares.

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<PAGE>   2

                           BACKWEB TECHNOLOGIES LTD.

                         QUARTERLY REPORT ON FORM 10-Q
                   QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000

                               TABLE OF CONTENTS

                         PART I  FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                       PAGE
                                                                       ----
<S>      <C>                                                           <C>
Item 1.  Financial Statements (unaudited)............................    1
         Consolidated Balance Sheets as of September 30, 2000 and        1
         December 31, 1999...........................................
         Consolidated Statements of Operations for the Three Months      2
         and Nine Months Ended September 30, 2000 and 1999...........
         Consolidated Statements of Cash Flows for the Nine Months       3
         Ended September 30, 2000 and 1999...........................
         Notes to Consolidated Financial Statements..................    4
Item 2.  Management's Discussion and Analysis of Financial Condition     9
         and Results of Operations...................................
Item 3.  Quantitative and Qualitative Disclosures about Market          20
         Risk........................................................
                        PART II  OTHER INFORMATION
Item 1.  Legal Proceedings...........................................   21
Item 2.  Changes in Securities and Use of Proceeds...................   21
Item 3.  Defaults upon Senior Securities.............................   21
Item 4.  Submission of Matters to a Vote of Security Holders.........   21
Item 5.  Other Information...........................................   22
Item 6.  Exhibits and Reports on Form 8-K............................   22
</TABLE>

                                        i
<PAGE>   3

                         PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                           BACKWEB TECHNOLOGIES LTD.

                          CONSOLIDATED BALANCE SHEETS
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                                  (UNAUDITED)

                                     ASSETS

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,    DECEMBER 31,
                                                                  2000             1999
                                                              -------------    ------------
<S>                                                           <C>              <C>
Current assets:
  Cash and cash equivalents.................................    $ 28,917         $ 18,818
  Short-term investments....................................      41,608           56,789
  Trade accounts receivable, net, allowance for doubtful
     accounts of $451 and $919 at September 30, 2000 and
     December 31, 1999......................................      11,807            6,142
  Other current assets......................................       3,923            2,344
                                                                --------         --------
          Total current assets..............................      86,255           84,093
Property and equipment, net.................................       3,065            1,631
Goodwill and other intangible assets, net...................       7,245              181
Other assets................................................         256              144
                                                                --------         --------
          Total assets......................................    $ 96,821         $ 86,049
                                                                ========         ========

                           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities..................    $  8,591         $  8,576
  Deferred revenue..........................................       4,674            3,321
  Payable to related parties................................          --               50
  Current portion of shareholders' loans....................         372              823
                                                                --------         --------
          Total current liabilities.........................      13,637           12,770
Long-term deferred revenue..................................         113               --
Accrued severance pay, net..................................         292              150
Shareholders' equity:
  Series E preferred stock, nominal value $0.003 per share;
     one share authorized and outstanding at September 30,
     2000 and December 31, 1999.............................       3,454            3,454
  Ordinary shares, nominal value $0.01 per share;
     150,067,829 shares authorized; 37,706,350 shares
     outstanding at September 30, 2000 and 35,153,402 shares
     outstanding at December 31, 1999.......................     145,978          124,301
  Notes receivable from shareholders........................      (2,828)          (3,316)
  Deferred stock compensation...............................      (1,168)          (2,104)
  Accumulated other comprehensive loss......................        (236)            (226)
  Accumulated deficit.......................................     (62,421)         (48,980)
                                                                --------         --------
          Total shareholders' equity........................      82,779           73,129
                                                                --------         --------
          Total liabilities and shareholders' equity........    $ 96,821         $ 86,049
                                                                ========         ========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                        1
<PAGE>   4

                           BACKWEB TECHNOLOGIES LTD.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED                NINE MONTHS ENDED
                                         ------------------------------    ------------------------------
                                         SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,
                                             2000             1999             2000             1999
                                         -------------    -------------    -------------    -------------
<S>                                      <C>              <C>              <C>              <C>
Revenues:
  License..............................     $ 9,490          $ 4,875         $ 24,715         $ 12,415
  Service..............................       2,248            1,340            6,558            2,982
                                            -------          -------         --------         --------
          Total revenues...............      11,738            6,215           31,273           15,397
Cost of revenues:
  License..............................          57               59              137              177
  Service..............................       1,674            1,118            4,592            2,415
                                            -------          -------         --------         --------
          Total cost of revenues.......       1,731            1,177            4,729            2,592
                                            -------          -------         --------         --------
Gross profit...........................      10,007            5,038           26,544           12,805
Operating expenses:
  Research and development.............       2,481            1,584            6,472            3,992
  Sales and marketing..................       7,203            4,873           21,390           13,069
  General and administrative...........       1,690            1,223            5,142            3,231
  Amortization of intellectual
     property, goodwill, other
     intangibles, and deferred stock
     compensation......................       1,067              848           10,198            2,922
                                            -------          -------         --------         --------
          Total operating expenses.....      12,441            8,528           43,202           23,214
                                            -------          -------         --------         --------
Loss from operations...................      (2,434)          (3,490)         (16,658)         (10,409)
Finance and other income, net..........         903            1,074            3,217            1,003
                                            -------          -------         --------         --------
Net loss...............................     $(1,531)         $(2,416)        $(13,441)        $ (9,406)
                                            =======          =======         ========         ========
Basic and diluted net loss per share...     $ (0.04)         $ (0.07)        $  (0.37)        $  (0.34)
                                            =======          =======         ========         ========
Shares used in computing basic and
  diluted net loss per share...........      37,307           32,612           36,725           27,771
                                            =======          =======         ========         ========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                        2
<PAGE>   5

                           BACKWEB TECHNOLOGIES LTD.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                    NINE MONTHS ENDED
                                                              ------------------------------
                                                              SEPTEMBER 30,    SEPTEMBER 30,
                                                                  2000             1999
                                                              -------------    -------------
<S>                                                           <C>              <C>
OPERATING ACTIVITIES
Net loss....................................................    $(13,441)        $ (9,406)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Amortization of intangibles, warrant and deferred stock
     compensation...........................................      10,172            2,922
  Depreciation..............................................         721              536
  Other.....................................................                         (328)
  Changes in operating assets and liabilities:
     Accounts receivable....................................      (5,665)          (2,996)
     Other assets...........................................      (1,691)          (1,277)
     Payable to related parties.............................         (50)             (64)
     Other liabilities and accrued expenses.................        (320)           1,173
     Accounts payable and accrued liabilities...............         335               79
     Accrued compensation...................................          --              303
     Deferred revenue.......................................       1,466            1,610
     Severance pay, net.....................................         142               56
                                                                --------         --------
          Net cash used in operating activities.............      (8,331)          (7,392)
                                                                --------         --------
INVESTING ACTIVITIES
Purchases of property and equipment.........................      (2,155)          (1,076)
Purchases of short-term investments.........................     (14,335)         (57,061)
Maturities of short term investment.........................      29,516               --
Purchase of Mobix intellectual property.....................     (12,300)              --
                                                                --------         --------
Net cash provided by (used in) investing activities.........         726          (58,137)
                                                                --------         --------
FINANCING ACTIVITIES
Repayment of bank line of credit............................          --           (2,000)
Proceeds from shareholders' notes receivable................         488              104
Repayment of shareholder loans..............................        (451)            (363)
Proceeds from issuance of preferred shares, net.............          --            9,915
Proceeds from issuance of ordinary shares, net..............      17,667           68,887
                                                                --------         --------
Net cash provided by financing activities...................      17,704           76,543
                                                                --------         --------
Net increase in cash and cash equivalents...................      10,099           11,014
Cash and cash equivalents at beginning of the period........      18,818            6,449
                                                                --------         --------
Cash and cash equivalents at end of the period..............    $ 28,917         $ 17,463
                                                                --------         --------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
  TRANSACTIONS
Issuance of ordinary shares for Mobix acquisition...........    $  4,000               --
                                                                ========
Issuance of ordinary shares for notes receivable............    $     --         $ (3,454)
                                                                ========         ========
Conversion of redeemable preferred stock to common stock....    $     --         $ 47,770
                                                                ========         ========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                        3
<PAGE>   6

                           BACKWEB TECHNOLOGIES LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 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 Internet communication infrastructure and
applications software that enables companies to communicate business-critical,
time-sensitive information throughout their enterprise of customers, partners
and employees. BackWeb sells its products primarily to end users from a variety
of industries, including the telecommunications, financial and the computer
industries.

     The BackWeb group of companies consist of wholly owned subsidiaries
registered as follows: BackWeb Technologies Inc., a U.S. corporation; BackWeb
Canada, Inc., a Canadian corporation; BackWeb Technologies B.V., a Netherlands
corporation; BackWeb Technologies (U.K.) Limited, a United Kingdom corporation;
BackWeb Technologies GmbH, a German corporation; BackWeb Technologies S.A.R.L.,
a French corporation, BackWeb Technologies A.B., a Swedish corporation and
BackWeb K.K. Ltd., a Japanese corporation.

     Basis of Presentation -- The unaudited consolidated financial statements
include the accounts of BackWeb Technologies Ltd. and its wholly owned
subsidiaries. They have been prepared in accordance with established guidelines
for interim financial reporting and with the instructions of form 10-Q and
Article 10 of Regulation S-X. All significant intercompany transactions have
been eliminated in consolidation. The balance sheet at December 31, 1999 has
been derived from audited financial statements at such date. In the opinion of
management, the consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments to fairly state the Company's
financial positions), results of operations and cash flows for the period
indicated. The 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, 1999.

     Revenue Recognition -- License revenues are comprised of perpetual or time
based license fees, which are primarily derived from contracts with corporate
customers and resellers, and royalty fees earned upon the shipment of products
which incorporate the Company's software. License revenue is recognized when a
license agreement has been executed and an definitive order has been received,
the product has been delivered to end customers, no significant BackWeb
obligations with regard to implementation remain, the fee is fixed and
determinable, and collectibility is probable. For electronic delivery, the
software is considered delivered when BackWeb has provided the customer with the
access codes (the "key") that allow for immediate possession of the software. If
the fee due from the customer is not fixed and determinable, revenue is
recognized as payments become due from the customer. If collectibility is not
considered probable, revenue is recognized when the fee is collected. Revenue on
arrangements with customers who are not the ultimate users (primarily resellers)
is not recognized until the product is delivered to the end user. Royalty
revenues are recognized when reported to the Company after shipment of the
related products.

     Service revenues are comprised of revenue from support arrangements,
consulting fees and training. BackWeb's policy is to recognize license revenue
when these services are not essential to the functionality of the product. To
date, these services have not been essential to the functionality of the
product. Support arrangements provide technical support and the right to
unspecified upgrades on an if-and-when-available basis. Revenue from support
arrangements is deferred and recognized on a straight-line basis as service
revenue over the life of the related service agreement, typically one year.
Consulting and training revenue is deferred and recognized when provided to the
customer. Customer advances and billed amounts due from customers in excess of
revenue recognized are recorded as deferred revenue. In instances where software
license agreements include a combination of consulting services, training and
support, these separate elements are unbundled from the arrangement based on the
elements' relative fair value.

                                        4
<PAGE>   7
                           BACKWEB TECHNOLOGIES LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     BackWeb adopted Statement of Position 97-2, "Software Revenue Recognition"
(SOP 97-2), as amended by Statement of Position 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2," and Statement of Position 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions."

     Net Loss Per Share -- The basic and diluted net loss per share is computed
using the weighted-average number of ordinary shares outstanding during the
period.

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

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED                NINE MONTHS ENDED
                                           ------------------------------    -----------------------------
                                           SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,   SEPTEMBER 30,
                                               2000             1999             2000            1999
                                           -------------    -------------    -------------   -------------
<S>                                        <C>              <C>              <C>             <C>
Net loss...............................       $(1,531)         $(2,416)        $(13,441)        $(9,406)
                                              =======          =======         ========         =======
Basic and diluted:
  Weighted-average shares..............        37,585           33,618           37,345          15,860
  Less weighted-average shares subject
     to repurchase.....................          (278)          (1,006)            (620)           (724)
                                              -------          -------         --------         -------
Shares used in computing basic and
  diluted net loss per share...........        37,307           32,612           36,725          15,136
                                              =======          =======         ========         =======
Basic and diluted net loss per share...       $ (0.04)         $ (0.07)        $  (0.37)        $ (0.62)
                                              =======          =======         ========         =======
</TABLE>

  Impact of Recently Issued Accounting Pronouncements

     The Financial Accounting Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" in June 1999 and its
amendments, Statements 137 and 138 in June 1999 and June 2000, respectively.
These statements establish methods of accounting for derivative financial
instruments and hedging activities. BackWeb currently holds no derivative
financial instruments as defined by these statements and does not currently
engage in hedging activities. The adoption of these statements is not expected
to have material impact on the Company's consolidated balance sheets or results
of operations.

     In March 2000, The Financial Accounting Statement Board issued FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation" an interpretation of APB Opinion No. 25 ( FIN 44). The
Interpretation clarifies guidance for certain issues that arose in the
application of APB Opinion No. 25 "Accounting to Stock Issued to Employees". The
Interpretation will apply to all fiscal quarters on all fiscal years beginning
after July 1 2000. The company does not expect an impact of this new FIN on the
Company's consolidated balance sheets or results of operations.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain of the SEC Staff's interpretations in applying
generally accepted accounting principles to revenue recognition in financial
statements. In June 2000, the SEC issued SAB No. 101B to defer the effective
date of implementation of SAB 101 until the fourth quarter of fiscal 2000. The
Company does not expect the adoption of SAB 101 to have a material effect on the
company's consolidated balance sheets or results of operations.

NOTE 2. SELECTIVE BALANCE SHEET DETAIL

     Cash Equivalents and Short-Term Investments -- Cash equivalents consist of
money market instruments, bank time deposits and debt securities with original
maturities of 90 days or less. Short-term investments consist of debt securities
with original maturities between three months and two years.

                                        5
<PAGE>   8
                           BACKWEB TECHNOLOGIES LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Management determines the appropriate classification of debt and equity
securities at the time of purchase and evaluates such designation as of each
balance sheet date. To date, all debt securities have been classified as
"available-for-sale" and are carried at fair market value, based on quoted
market prices with material unrealized gains and losses, if any, included as a
separate component of shareholders' equity. Realized gains and losses and
declines in value of securities judged to be other than temporary are included
in interest income and have not been material to date. The cost of securities
sold is based on the specific identification method.

     The following is a summary of the Company's investment portfolio as of
September 30, 2000 (in thousands):

<TABLE>
<CAPTION>
                                                                 UNREALIZED    ESTIMATED
                                                       COST        LOSSES      FAIR VALUE
                                                      -------    ----------    ----------
<S>                                                   <C>        <C>           <C>
Money market funds................................    $13,824      $  --        $13,824
Corporate debt securities.........................     28,020       (236)        27,784
                                                      -------      -----        -------
          Totals..................................    $41,844      $(236)       $41,608
                                                      =======      =====        =======
</TABLE>

     Property and Equipment -- Property and equipment are stated at cost, net of
accumulated depreciation. Property and equipment are depreciated on a
straight-line basis over the estimated useful lives of the assets, generally two
to three years.

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

<TABLE>
<CAPTION>
                                                       SEPTEMBER 30,   DECEMBER 31,
                                                           2000            1999
                                                       -------------   ------------
<S>                                                    <C>             <C>
Computer equipment and peripheral..................       $ 3,057        $ 2,145
Office equipment, furniture, fixtures, and other...         2,360          1,117
                                                          -------        -------
                                                            5,417          3,262
Less accumulated depreciation......................        (2,352)        (1,631)
                                                          -------        -------
Property and equipment, net........................       $ 3,065        $ 1,631
                                                          =======        =======
</TABLE>

Accounts Payable and Accrued Liabilities

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

<TABLE>
<CAPTION>
                                                       SEPTEMBER 30,   DECEMBER 31,
                                                           2000            1999
                                                       -------------   ------------
<S>                                                    <C>             <C>
Accounts payable...................................       $1,142          $  807
Accrued compensation and related expense...........        3,750           2,519
Sales events.......................................          464             950
Other..............................................        3,235           4,300
                                                          ------          ------
                                                          $8,591          $8,576
                                                          ======          ======
</TABLE>

     Shareholders' Loans -- In 1995, BackWeb signed an agreement with its early
investors (the "Early Investors"), according to which the Early Investors
provided BackWeb with loan financing in the amount of $500,000. The loan is
denominated in NIS and linked to the Israel consumer price index. The loan is
payable at a rate of 2.5% of cumulative consolidated revenues in excess of
$5,000,000. In addition, effective September 30, 1996, $748,000 of accounts
payable to the Early Investors were converted into a shareholders' loan on the
same terms as the $500,000 loan. As of September 30, 2000, the overall loan
balance was $372,000, re-stated for the Israeli consumer price index and
reflecting currency conversion adjustment and repayments.

                                        6
<PAGE>   9
                           BACKWEB TECHNOLOGIES LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Accumulated Other Comprehensive Loss -- The accumulated and other
comprehensive loss consists entirely of unrealized losses on short-term
investments. As at September 30, 2000 and December 31, 1999, the amount was
$236,000 and $226,000 respectively.

NOTE 3. CREDIT FACILITIES

     Bank Line of Credit -- In December 1998, BackWeb entered into a line of
credit agreement with TransAmerica Business Credit Corporation, which provides
for formula and nonformula revolving credit loans aggregating up to $6,500,000.
The line of credit is secured by substantially all of BackWeb's assets.
Borrowings under the line of credit bear interest at the bank's prime rate plus
2% - 4%. The borrowing under the line of credit at December 31, 1998 was
$2,000,000, with interest at prime plus 4%. No amounts were outstanding at
September 30, 2000.

     The amount available under the formula loans is limited to the lower of
$3,000,000 or an amount equal to 85% of eligible accounts receivable. The amount
available under the nonformula loans and term loans are $2,000,000 and
$1,500,000, respectively. As of September 30, 2000, BackWeb had $5,000,000 in
unused availability under the formula and nonformula line of credit.

     Credit Risk -- Financial instruments, which potentially subject BackWeb to
concentrations of credit risk, consist of cash equivalents, short-term
investments, trade receivables and accounts payable. BackWeb's cash equivalents
and short-term investments generally consist of money market funds with high
credit quality financial institutions and corporate debt securities. The Company
has established guidelines relative to credit ratings, diversification and
maturity that seek to maintain safety and liquidity.

     BackWeb sells its products to customers primarily in the United States.
BackWeb performs ongoing credit reviews of its customers' financial condition
and generally does not require collateral.

NOTE 4. COMMITMENTS AND CONTINGENCIES

     Contingencies -- From time to time, the Company may have certain contingent
liabilities that arise in the ordinary course of its business activities. The
Company accounts for contingent liabilities when it is probable that future
expenditures will be made and such expenditures can be reasonably estimated. In
the opinion of management, there are no pending claims of which the outcome is
expected to result in a material adverse effect on the financial position or the
results of operations or cash flows of the Company.

NOTE 5. SEGMENTS AND GEOGRAPHIC INFORMATION

     BackWeb operates in one industry segment, the development and marketing of
network application software. Operations in Israel and Canada include research
and development and local sales. Operations in the U.S. include marketing and
sales. The following is a summary of operations within geographic areas based on
the location of the entity making that sale (in thousands):

<TABLE>
<CAPTION>
                                                           NINE MONTHS ENDED
                                                             SEPTEMBER 30,
                                                           ------------------
                                                            2000       1999
                                                           -------    -------
<S>                                                        <C>        <C>
Revenues from sales to unaffiliated customers:
  Israel.................................................  $ 7,828    $ 2,759
  United States..........................................   22,459     12,360
  Canada.................................................      986        278
                                                           -------    -------
                                                           $31,273    $15,397
                                                           =======    =======
</TABLE>

                                        7
<PAGE>   10
                           BACKWEB TECHNOLOGIES LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                     SEPTEMBER 30,    DECEMBER 31,
                                                         2000             1999
                                                     -------------    ------------
<S>                                                  <C>              <C>
Long-lived assets:
  Israel...........................................     $  7870          $  388
  Europe...........................................         172             129
  United States....................................       1,391           1,013
  Canada...........................................         860             264
  Other............................................          17              18
                                                        -------          ------
                                                        $10,310          $1,812
                                                        =======          ======
</TABLE>

     Revenues generated in the U.S. and Canada (collectively, North America) are
all to customers located in those geographic regions. Revenues generated in
Israel consist of export sales to customers located in Europe and the Far East.

NOTE 6. SHELF REGISTRATION

     On September 20, 2000, BackWeb's Registration Statement on Form S-3 was
declared effective by the Securities and Exchange Commission. Under such
Registration Statement, BackWeb registered 704,408 ordinary shares held by
selling shareholders. The selling shareholders are composed of former
shareholders of Lanacom Inc., a Canadian company acquired by BackWeb in August
1997. The offering is not underwritten and BackWeb will not receive any proceeds
from the offering.

NOTE 7. SUBSEQUENT EVENTS

     On October 3, 2000, BackWeb acquired 1,197,679 shares of Series B Preferred
Stock of 3Path, Inc. (formerly DeliverEx, Inc.) in exchange for payment of
$2,500,000 under the Stock Purchase Agreement for Series B Convertible Preferred
Stock dated February 2, 2000 between 3Path, Inc., BackWeb and various other
investors.

     On November 1, 2000, BackWeb acquired 483,600 shares of Series B Preferred
Shares of Emony Ltd. in exchange for payment of $500,000 under the Share
Purchase and Shareholders Agreement dated October 10, 2000 between Emony Ltd.,
BackWeb and various other investors. Further, under such Share Purchase and
Shareholders Agreement, BackWeb acquired (a) a warrant to purchase Series B
Preferred Shares in an amount as may be purchased in exchange for $500,000,
based on a pre-exercise valuation of Emony of $10,000,000 on a fully diluted and
as-converted basis; and (b) a warrant to purchase Series B Preferred Shares in
an amount as may be purchased in exchange for $930,233, based on a pre-exercise
valuation of Emony of $15,000,000 on a fully diluted and as-converted basis.

                                        8
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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
       OF OPERATIONS

     We have made forward-looking statements in this Report on Form 10-Q that
are subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future results of the operations of
BackWeb. Also, when we use such words as "believes," "expects," "anticipates" or
similar expressions, we are making forward-looking statements. You should note
that an investment in our securities involves risks and uncertainties that could
affect future financial results. Our actual results could differ materially from
those anticipated in these forward looking statements as a result of a number of
factors, including those set forth in the section entitled "Risk Factors" and
elsewhere in this quarterly report, as well as the risk factors included in
BackWeb's periodic reports and registration statements filed with the U.S.
Securities and Exchange Commission. BackWeb undertakes no obligation to publicly
update or revise any forward-looking statements.

OVERVIEW

     BackWeb is a leading provider of Internet communication infrastructure
software and application-specific software that enables companies to communicate
business-critical, time-sensitive information to their customers, partners and
employees. We were incorporated on August 31, 1995 and commenced our operations
in November 1995. During the period from commencement of operations through
December 31, 1996, we were in a development stage and had insignificant
revenues. Operating activities during this period related primarily to
developing our products, building our corporate infrastructure and raising
capital. In December 1996, we shipped the first commercial version of our
software.

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

     On June 27, 2000, BackWeb completed its acquisition of the software and
intellectual property owned, licensed or developed by Mobix Communications Ltd.
("Mobix") for an aggregate amount of $16.44 million pursuant to a Software and
Asset Purchase Agreement among the Company, Mobix and the principal shareholder
of Mobix. BackWeb allocated the excess purchase price over the fair value of net
tangible assets acquired to the following identifiable intangible assets: $8.4
million to in-process research and development ("IPR&D"), $5.3 million to
goodwill and $2.7 million to assembled work force and to other intangibles. As
of the date of acquisition, technological feasibility of the in-process
technology had not been established and the technology had no alternative future
use; therefore, BackWeb expensed the amount of the purchase price allocated to
IPR&D of approximately $8.4 million as of the date of acquisition in accordance
with Generally Accepted Accounting Principles. The capitalized intangible assets
are being amortized on a straight-line basis over their extended useful lives of
two to three years.

     In early 1998, we engaged in a comprehensive re-examination of our business
strategy and changed our strategic focus from a consumer-oriented to an
enterprise-oriented Internet communication company. In connection with this
change in strategy, we undertook a fundamental repositioning and reorganization
of our work force, particularly in our sales organization. During 1998, we
continued to enhance our infrastructure software, BackWeb Foundation Version
5.0, and in December 1998 released our first packaged application, BackWeb Sales
Accelerator. In August 2000, we updated our base platform software and released
version 6.0 of the BackWeb Foundation software and a new software program named
BackWeb Push Application Server.

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

     We recognize software license revenue in accordance with Statement of
Position 97-2 (SOP 97-2), "Software Revenue Recognition," as amended by
Statement of Position 98-4 (SOP 98-4), "Deferral of the Effective Date of a
Provision of SOP 97-2," and Statement of Position 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions." These
statements are effective for our transactions entered into after January 1,
1998. The application of SOP 97-2 has not had a material impact on the results
of our operations. License revenues are comprised of perpetual or time based
license fees that are primarily derived from contracts with corporate customers
and resellers, and royalty fees earned upon shipment of products which
incorporate the Company's software. We generally recognize license revenues when
a license agreement has been executed and a definitive order has been signed and
received and the product has been delivered to end-user customers, with no
significant obligations remaining with regard to implementation, the fee is
fixed and determinable and collectibility is probable. Revenues on contracts
with resellers are not recognized until software is sold through to the
end-user. Royalty revenues are recognized when reported to the Company after
shipment of the related products.

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

     We have expended significant sums since inception on product development
and enhancement of sales and marketing capabilities, and expect that these
expenditures will continue to increase as we pursue the emerging opportunities
in our markets.

RESULTS OF OPERATIONS

  Revenues

     Our revenues are derived primarily from licensing of BackWeb Foundation and
BackWeb e-Accelerator products and to a lesser extent from maintenance,
consulting and training services. Total revenues for the three months ended
September 30, 2000 were $11.7 million, an increase of approximately $5.5 million
or 89% from $6.2 million in the three months ended September 30, 1999. Total
revenues for the nine months ended September 30, 2000 were $31.3 million, an
increase of approximately $15.9 million or 103% from $15.4 million in the nine
months ended September 30, 1999. The increases were due both to growth in
license and service revenues. Customers outside of the United States accounted
for 38.4% of revenues in the three months ended September 30, 2000 compared to
22% of revenues in the three months ended September 30, 1999. For the nine
months ended September 30, 2000, customers outside of the United States
accounted for 28% of revenues compared to 19.7% for the nine months ended
September 30, 1999.

     License revenues were $9.5 million or 80.8% of revenues for the three
months ended September 30, 2000 compared to $4.9 million or 78.4% of revenues
for the same period of the prior year. License revenues were $24.7 million or
79% of revenues for the nine months ended September 30, 2000 compared to $12.4
million or 80.6% of revenues for the same period of the prior year. The decrease
in license revenue as a percentage of total revenue was primarily due to
increased service revenue from maintenance and consulting services. Service
revenues were $2.2 million or 19.2% of revenues for the three months ended
September 30, 2000 compared to $1.3 million or 21.6% of revenues for the same
period of the prior year. Service revenues were

                                       10
<PAGE>   13

$6.6 million or 21% of revenues for the nine months ended September 30, 2000
compared to $3 million or 19.4% of revenues for the same period of the prior
year.

  Cost of Revenues

     Cost of license revenues consists primarily of expenses related to media
duplication, packaging of products and amortization of capitalized developed
technology (i.e., Lanacom related). Cost of license revenues were $57,000 or
0.6% of license revenues for the three-months ended September 30, 2000 compared
to $59,000 or 1.2% of license revenues for the same period of the prior year.
Cost of license revenues were $137,000 or 0.6% of license revenues for the nine
months ended September 30, 2000 compared to $177,000 or 1.4% of license revenues
for the same period of the prior year. Cost of service revenues consists
primarily of expenses related to salaries and expenses of the customer support
and professional service organizations, including related expenses of BackWeb
consultants and third party consultants. Cost of service revenues was $1.7
million, or 74.5% of service revenues, for the three months ended September 30,
2000 compared to $1.1 million, or 83.4% of service revenues, for the same period
of the prior year. Cost of service revenues was $4.6 million, or 70% of service
revenues, for the nine months ended September 30, 2000 compared to $2.4 million,
or 81.0% of service revenues, for the same period of the prior year. The
increase in cost of service revenues was due to growth of the service
organization. We expect the cost of service revenues to increase on an absolute
basis but decrease as a percentage of net revenues, primarily as a result of the
increase in service revenues in addition to the continued expansion of the
customer support and professional service organizations.

OPERATING EXPENSES

  Research and Development

     Research and development expenses consist of personnel and related costs of
our research and development employees, equipment and supply costs for our
development efforts. These expenses are charged to operations as incurred. We
have research and development facilities in Israel and Canada. Research and
development expenses were $2.5 million for the three months ended September 30,
2000 compared to $1.6 million for the same period of the prior year. Research
and development expenses were $6.5 million for the nine months ended September
30, 2000 compared to $4.0 million for the same period of the prior year.
Research and development expenses were 21.1% and 25.5% of total revenues in the
third quarter of fiscal 2000 and 1999, respectively, and were 20.7% and 25.9%
for the nine month periods ended September 30, 2000 and 1999, respectively. We
expect our research and development expenses will increase on an absolute basis
over the next year as we continue to invest in developing our technology and
products, but such expenses are expected to decrease as a percentage of
revenues.

  Sales and Marketing

     Sales and marketing expenses consist of personnel and related costs for our
direct sales force and marketing employees, and marketing programs, including
trade shows, advertising, collateral, sales materials, seminars and public
relations. We have sales personnel in offices located in the United States,
Canada, Europe and Japan. Sales and marketing expenses were $7.2 million for the
three months ended September 30, 2000 compared to $4.9 million for the same
period of the prior year. Sales and marketing expenses were $21.4 million for
the nine months ended September 30, 2000 compared to $13.1 million for the same
period of the prior year. Sales and marketing expenses were 61.4% and 78.4% of
total revenue in the third quarter of fiscal 2000 and 1999, respectively, and
were 68.4% and 84.9% for the nine-month periods ended September 30, 2000 and
1999, respectively. We expect that sales and marketing expenses will increase on
an absolute basis over the next year, as we hire additional sales and marketing
personnel, continue to promote our brand and establish sales offices in
additional domestic and international locations, but are expected to decrease as
a percentage of revenues.

                                       11
<PAGE>   14

  General and Administrative

     General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
general management, human resources, information services and legal. General and
administrative expenses were $1.7 million for the three months ended September
30, 2000 compared to $1.2 million for the same period of the prior year. General
and administrative expenses were $5.1 million for the nine months ended
September 30, 2000 compared to $3.2 million for the same period of the prior
year. General and administrative expenses were 14.4% and 19.7% of total revenue
in the third quarter of fiscal 2000 and 1999, respectively, and were 16.4% and
21.0% for the nine-month periods ended September 30, 2000 and 1999,
respectively. We expect general and administrative expenses to increase on an
absolute basis in future periods but continue to decrease as a percentage of
revenues.

  Amortization of Goodwill, Other Intangible Assets and Deferred Stock
Compensation

     Amortization of goodwill, intellectual property, other intangible assets
and deferred stock compensation consists of amortization of goodwill and other
intangibles associated with our acquisition of Lanacom in August 1997, deferred
stock compensation for 1999, the initial write-off of the acquisition of
intellectual property from Mobix Communications Ltd. in June 2000 and
amortization of goodwill, intellectual property and other intangibles associated
with the acquisition of intellectual property from Mobix Communications Ltd., in
June 2000. Deferred stock compensation represents the aggregate differences
between the respective exercise price of options at their dates of grant and the
deemed fair market value of our ordinary shares for accounting purposes.
Goodwill, intellectual property and other intangibles are being amortized on a
straight-line basis over the estimated useful life, generally two to three
years. Deferred stock compensation is presented as a reduction of shareholders'
equity and is amortized over the vesting period of the underlying options based
on an accelerated vesting method. Amortization expense was $1.1 million for the
three months ended September 30, 2000 compared to $848,000 for the same period
of the prior year. Amortization expense was $10.2 million for the nine months
ended September 30, 2000 compared to $2.9 million for the same period of the
prior year. The total amortization expense related to a one-time write-off of
in-process research and development was $8.4 million in June 2000.

  Finance and Other Income (Expense), (net)

     Finance and other income and expenses (net) includes interest income earned
on our cash, cash equivalents and short-term investments offset by interest
expense. In addition, the amortization of the fair value of the warrants issued
in connection with borrowings from financial institutions is also charged to
finance and other income and expense. Finance and other income and expense (net)
also includes the effects of exchange gains and losses arising from the
re-measurement of transactions in foreign currencies. For the three months ended
September 30, 2000, finance and other income (net) was $903,000 compared to $1.1
million for the same period of the prior year. For the nine months ended
September 30, 2000, finance and other income (net) was $3.2 million compared to
$1.0 million for the same period of the prior year. The increase was primarily
due to increased interest income earned from cash equivalents and short-term
investments.

  Liquidity and Capital Resources

     As of September 30, 2000, the Company had $70.5 million of cash, cash
equivalents and short-term investments, which represents a decrease of $5.1
million as compared to December 31, 1999.

     Net cash used in operating activities was $8.9 million and $7.4 million for
the nine months ended September 30, 2000 and 1999, respectively. Cash provided
by investing activities was $1.3 million for the nine months ended September 30,
2000 and cash used for investing activities was $58.1 million for the same
period of the prior year and was primarily for capital expenditures, purchase of
intellectual property and short-term investments. Cash provided by financing
activities was $17.7 million and $76.5 million for the nine months ended
September 30, 2000 and 1999, respectively, and consists primarily of proceeds
from the issuance of common stock.

                                       12
<PAGE>   15

     Our capital requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to developing, marketing,
selling and supporting our products, the timing and extent of establishing
additional international operations and other factors. We expect to devote
substantial capital resources to hire and expand our sales, support, marketing
and product development organizations, to expand marketing programs, to
establish additional facilities worldwide and for other general corporate
activities. We believe that our current cash balances along with the proceeds
raised from the initial public offering will be sufficient to fund our
operations for at least the next 24 months.

  Effective Corporate Tax Rates

     Our tax rate will reflect a mix of the U.S. statutory tax rate on our U.S.
income and the Israeli tax rate discussed below. We expect that most of our
taxable income will be generated in Israel. Israeli companies are generally
subject to income tax at the rate of 36% of taxable income. The majority of our
income, however, is derived from our Company's capital investment program with
"Approved Enterprise" status under the Law for the Encouragement of Capital
Investments, and is eligible therefore for tax benefits. As a result of these
benefits, we will have a tax exemption on income derived during the first two
years in which this investment program produces taxable income, provided that we
do not distribute such income as a dividend, and a reduced tax rate of 15 - 25%
for the next 5 to 8 years (depending on the rate of foreign investment in
BackWeb). All of these tax benefits are subject to various conditions and
restrictions. See "Israeli Taxation and Investment Programs -- Law for the
Encouragement of Capital Investments Act 1959." There can be no assurance that
we will obtain approval for additional Approved Enterprise Programs, or that the
provisions of the law will not change.

     Since we have incurred tax losses through December 31, 1999, we have not
yet used the tax benefits for which we are eligible. See "Risk Factors".

  Impact of Inflation and Currency Fluctuations

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

  Recent Accounting Pronouncements

     The Financial Accounting Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" in June 1999 and its
amendments, Statements 137 and 138 in June 1999 and June 2000, respectively.
These statements establish methods of accounting for derivative financial
instruments and hedging activities. BackWeb currently holds no derivative
financial instruments as defined by these statements and does not currently
engage in hedging activities. The adoption of these statements is not expected
to have a material impact on the Company's consolidated balance sheets or
results of operations.

     In March 2000, The Financial Accounting Statement Board issued FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation" an interpretation of APB Opinion No. 25 ( FIN No. 44). The
Interpretation clarifies guidance for certain issues that arose in the
application of APB Opinion No. 25 "Accounting to Stock Issued to Employees". The
Interpretation will apply to all fiscal quarters on all fiscal years beginning
after July 1, 2000. The company does not expect an impact of this new FIN No. 44
on the Company's consolidated balance sheets or results of operations.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain of the SEC
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<PAGE>   16

staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. In June 2000, the SEC issued SAB No. 101B
to defer the effective date of implementation of SAB 101 until the fourth
quarter of fiscal 2000. The Company does not expect the adoption of SAB 101 to
have a material effect on the company's consolidated balance sheets or results
of operations.

RISK FACTORS

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

  Our business is difficult to evaluate because our operating history is limited
  and we have recently changed our strategic focus

     We have a limited operating history 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. This change required us to adjust our business
processes and make a number of significant personnel changes.

  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 2000. We incurred net losses of
approximately $13.4 million for the nine months ended September 30, 2000, $11.5
million for the year ended December 31, 1999, $14.6 million for the year ended
December 31, 1998 and $15.0 million for the year ended December 31, 1997. As of
September 30, 2000, we had an accumulated deficit of approximately $62.4
million. We expect to continue to incur significant sales and marketing, product
development and administrative expenses and expect such expenses to increase in
2000.

  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, including, among others:

     - demand for our products and services;

     - the timing and mix of sales of our products and services;

     - 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;

     - 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.

  We anticipate increased operating expenses, which could cause our business to
  suffer if we do not correspondingly increase revenues

     We plan to significantly increase our operating expenses to expand our
sales and marketing operations, broaden our customer support capabilities,
improve operational and financial systems, develop new distribu-

                                       14
<PAGE>   17

tion channels and fund greater levels of research and development. If we do not
significantly increase our revenues to meet these increased expenses, our
business will suffer.

  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.

  Our BackWeb Foundation platform and applications are new and it is unclear if
  they will achieve market acceptance

     We do not know if our products will be successful. The market for Internet
communications solutions is in its infancy, and we are not certain that our
target customers will widely adopt and deploy our technology throughout their
networks. Even if our products are effective, our target customers may not
choose them for technical, cost, support or other reasons. Our future growth
depends on the commercial success of BackWeb Foundation and applications
developed upon BackWeb Foundation, such as the BackWeb e-Accelerator products.

  Our software platform enables third parties to develop applications which may
  compete with applications developed by us

     Because of BackWeb Foundation's open architecture, third parties have the
ability to develop their own applications on top of our platform. Such third
parties could compete with applications developed by BackWeb. If our target
customers do not widely adopt and purchase our products, or if third parties
were to compete with applications developed by us, our business would suffer.

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

     The use of our products by our customers 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.

  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 1997, revenues from two
customers represented 19% and 11%, respectively, of our total revenues. In 1998,
no customer accounted for more than 10% of our revenues. In 1999, revenues from
one customer represented 13% of our revenues. We expect that a small number of
customers will continue to account for a substantial portion of revenues for the
foreseeable future and revenues from one or more of these customers may
represent more than 10% of our revenues in future years.

                                       15
<PAGE>   18

  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. 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. 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, the quantity
of hardware and the degree of hardware configuration necessary to deploy our
products.

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

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

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

     If we fail to substantially expand our direct and indirect sales and
marketing operations in our existing markets, our growth will be limited. We
have recently expanded our direct sales force in North America and Europe and
plan to hire additional sales personnel to meet market demand. Currently, we
believe we will need to significantly expand our sales and marketing
organization. We might not be able to hire or retain the kind and number of
sales and marketing personnel we are targeting because competition for qualified
sales and marketing personnel in the Internet communications market is intense.

  Failure to develop key strategic relationships could limit our growth

     We believe that our success in penetrating our target markets depends in
part on our ability to develop and maintain strategic relationships with key
independent software vendors (ISVs), resellers, systems integrators,
distribution partners and customers. If we fail to develop these strategic
partnerships, our growth could be limited.

  We may experience difficulties managing our expected growth and geographic
  dispersion

     Our ability to successfully offer products and services and to implement
our business plan in the rapidly evolving Internet communications market
requires an effective planning and management process. We continue to increase
the scope of our operations domestically and internationally and expect to grow
our headcount substantially depending on market conditions.

     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.

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<PAGE>   19

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

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

  Our products may be used in an unintended and negative manner

     Our products are used to transmit information through the Internet. Our
products could be used to transmit harmful applications, negative messages,
unauthorized reproduction of copyrighted material, inaccurate data, or computer
viruses to end-users in the course of delivery. Any such transmission could
damage our reputation or could give rise to legal claims against us. We could
spend a significant amount of time and money defending against these legal
claims.

  Our proprietary technology may be subject to infringement claims

     Substantial litigation regarding intellectual property rights exists in the
software industry. A successful claim of product infringement against us and our
failure or inability to license the infringed or similar technology could harm
our business. 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. Third parties may make a claim of infringement against us with respect
to our products and technology. Any 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. Royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all.

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

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

  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 business could suffer if we lose the services of key personnel

     We will need to hire a significant number of additional sales, support,
marketing, and research and development personnel in fiscal 2000 and beyond to
increase our revenues. If we fail to attract qualified personnel or retain
current employees, including our executive officers and other key employees, our
revenues may not increase and could decline. None of our officers or key
employees is bound by an employment agreement for any specific term. Our
relationships with these officers and key employees are at will. Moreover, we do
not have "key person" life insurance policies covering any of our employees.

                                       17
<PAGE>   20

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

     We are incorporated under the laws of the State of Israel. Our principal
research and development facilities as well as significant executive offices are
located in Israel. Any major hostilities involving Israel or the interruption or
curtailment of trade between Israel and its present trading partners could
significantly harm our business. Inflation in Israel and any devaluation of the
NIS against the U.S. dollar could have an impact on our financial results. Since
a significant portion of our research and development expenses are incurred in
NIS, we may be negatively affected by fluctuations in the exchange rate between
the U.S. dollar and the NIS. If Israel's economy is hurt by a high inflation
rate, our operations and financial condition could suffer.

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

     Pursuant to the Law for the Encouragement of Capital Investments, the
Israeli government has granted "Approved Enterprise" status to our existing
capital investment programs. Consequently, we are eligible for tax benefits for
the first several years in which we generate taxable income. Our future
profitability may be diminished if all or a portion of these tax benefits are
reduced. These tax benefits may be cancelled in the event of changes in Israeli
government policies or if we fail to comply with requisite conditions and
criteria. Currently the most significant conditions which we must continue to
meet include making specified investments in fixed assets, maintaining the
development and production nature of our facilities, and financing of at least
30% of these investments through the issuance of capital stock.

  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.

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

     Under Israeli law we are required to obtain an Israeli government license
to engage in research and development of and export of the encryption technology
incorporated in our products. Our current government license to engage in these
activities expires May 31, 2001. Our research and development activities in
Israel together with our ability to export our products out of Israel would be
limited if the Israeli government revokes our current license, our current
license is not renewed, our license fails to cover the scope of the technology
in our products, or Israeli law regarding research and development or export of
encryption technologies were to change.

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

     We are incorporated in Israel. Some of our directors and executive officers
and the Israeli experts named herein are not residents of the United States and
some of their assets and our assets are located outside the United States.
Service of process upon our non-U.S. resident directors and executive officers
or the Israeli experts named herein and enforcement of judgments obtained in the
United States against us, and our directors and executive officers, or the
Israeli experts named herein, 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, a subsequent 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.

                                       18
<PAGE>   21

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

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

     - the judgment is no longer appealable;

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

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

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

     - the judgment was obtained by fraud;

     - there was no due process;

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

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

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

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

     Our executive officers, directors and entities affiliated with them, in the
aggregate, beneficially own approximately 22% of our outstanding ordinary shares
as of October 31, 2000. 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.

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

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

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

  The new Israel Companies Law may cause uncertainties regarding corporate
governance

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

                                       19
<PAGE>   22

and these uncertainties could inhibit takeover attempts or other transactions
and inhibit other corporate decisions.

  Our Board of Directors can authorize and expand the number of shares granted
  under Our 1996 Israeli Employee Stock Option Plan

     Under Israeli law, our Board of Directors may authorize additional shares
to be issued under our 1996 Israeli Employee Stock Option Plan. Such action does
not require an amendment to such plan or shareholder approval under Israeli law
(but may in certain cases, require approval under the rules applicable to
companies listed on the Nasdaq Stock Market). The Board's ability to expand the
number of shares to be granted under such plan is governed by and limited by the
fiduciary duties of each Board member under Israeli corporate law and the
remaining number of our authorized shares which are not outstanding. Any such
Board actions may result in dilution to the ownership interests of existing
shareholders.

  Our Board of Directors has limited the number of options that it may grant
  under our Amended and Restated 1998 U.S. Stock Option Plan, but it can remove
  that limitation without obtaining shareholder approval

     Our shareholders have approved the issuance, under our Amended and Restated
1998 U.S. Stock Option Plan, of options to purchase up to approximately 12.9
million shares. Our Board of Directors has adopted a resolution to limit the
issuances under that plan to approximately 10.6 million shares. Our Board of
Directors has the authority, without obtaining shareholder approval, to remove
or reduce that limitation, which could cause dilution to our existing
shareholders.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

                                       20
<PAGE>   23

                           PART II  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     We are not currently a party to any material legal proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     On September 20, 2000, BackWeb's Registration Statement on Form S-3 was
declared effective by the Securities and Exchange Commission. Under such
Registration Statement, BackWeb registered 704,408 ordinary shares held by
selling shareholders. The selling shareholders are composed of former
shareholders of Lanacom Inc., a Canadian company acquired by BackWeb in August
1997. The offering is not underwritten and BackWeb will not receive any proceeds
from the offering.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     At BackWeb's Annual Meeting of Shareholders on August 24, 2000, our
shareholders voted on the following proposals:

          1. Proposal to increase the number of directors to six members:

<TABLE>
<S>                    <C>          <C>
For:                   26,965,433
Against:                   47,166
Abstain:                    6,992
Not Voted:                      0
</TABLE>

          2. Proposal to elect the following directors:

<TABLE>
<CAPTION>
                                 FOR        WITHHELD
                              ----------    --------
<S>                           <C>           <C>        <C>
Joseph Gleberman............  26,957,798     61,793
Gil Shwed...................  26,957,798     61,793
Leora Rubin Meridor.........  26,957,798     61,793
</TABLE>

          3. Proposal to ratify the appointment of Ernst & Young LLP as
     BackWeb's independent auditors for the fiscal year ending December 31,
     2000:

<TABLE>
<S>                    <C>          <C>
For:                   27,002,820
Against:                   11,859
Abstain:                    4,912
Not Voted:                      0
</TABLE>

          4. Proposal for certain license and investment transactions with
     DeliverEx, Inc., which has renamed itself as 3Path, Inc.:

<TABLE>
<S>                    <C>          <C>
For:                   13,625,738
Against:                3,460,378
Abstain:                1,247,303
Not Voted:              8,686,172
</TABLE>

                                       21
<PAGE>   24

          5. Proposal to increase the number shares available under BackWeb's
     1998 U.S. Employee Stock Option Plan and 1996 Israeli Employee Stock Option
     Plan by 1,894,622 shares effective as of June 30, 2000:

<TABLE>
<S>                    <C>          <C>
For:                   13,272,976
Against:                4,937,931
Abstain:                  122,512
Not Voted:              8,686,172
</TABLE>

          6. Proposal to adopt evergreen provisions for BackWeb's 1998 U.S.
     Employee Stock Option Plan and 1996 Israeli Employee Stock Option Plan:

<TABLE>
<S>                    <C>          <C>
For:                   13,265,475
Against:                5,013,020
Abstain:                   54,924
Not Voted:              8,686,172
</TABLE>

          7. Proposal to authorize Mr. Eli Barkat to serve as both BackWeb's
     Chief Executive Officer and as the Chairman of the Board:

<TABLE>
<S>                    <C>          <C>
For:                   26,792,158
Against:                  214,460
Abstain:                   12,973
Not Voted:                      0
</TABLE>

          8. Proposal to approve grants of stock options to members of the Board
     of Directors:

<TABLE>
<S>                    <C>          <C>
For:                   13,471,836
Against:                4,811,919
Abstain:                   49,664
Not Voted:              8,686,172
</TABLE>

ITEM 5. OTHER INFORMATION

     None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a) EXHIBITS

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

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION
-------                            -----------
<C>        <S>
 3.1       Articles of Association of Registrant*
 3.2       Memorandum of Association of Registrant (English
           translation)*
 4.1       Specimen of Ordinary Share Certificate*
 4.2       Fourth Amended and Restated Rights Agreement*
 4.3       Form of Liquidity Proposal between BackWeb Technologies,
           Ltd. and the Exchangeable shareholders*
10.16      1998 U.S. Stock Option Plan (amended and restated effective
           as of July 1, 2000)
27.1       Financial Data Schedule
</TABLE>

---------------
* Incorporated herein by reference to the corresponding Exhibit from the
  Company's Registration Statement on Form F-1 (File No. 333-10358).

                                       22
<PAGE>   25

     (b) REPORTS ON FORM 8-K

     The company filed a report on Form 8-K/A on September 7, 2000 to provide
its response under Item 7 (regarding pro forma financial information that the
Company was not required to provide) of the Report on Form 8-K filed on July 10,
2000 with respect to the acquisition of certain assets from Mobix
Communications, Ltd.

                                       23
<PAGE>   26

                                   SIGNATURES

     Pursuant to the requirements of the Securities and 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.

Date: November 10, 2000                   By:        /s/ HANAN MIRON
                                            ------------------------------------
                                                        Hanan Miron,
                                                  Chief Financial Officer

                                       24
<PAGE>   27

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 3.1      Articles of Association of Registrant*
 3.2      Memorandum of Association of Registrant (English
          translation)*
 4.1      Specimen of Ordinary Share Certificate*
 4.2      Fourth Amended and Restated Rights Agreement*
 4.3      Form of Liquidity Proposal between BackWeb Technologies,
          Ltd. and the Exchangeable shareholders*
10.16     1998 U.S. Stock Option Plan (amended and restated effective
          as of July 1, 2000)
27.1      Financial Data Schedule
</TABLE>

---------------
* Incorporated herein by reference to the corresponding Exhibit from the
  Company's Registration Statement on Form F-1 (File No. 333-10358).

                                       25


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