UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

ý Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2005

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-31151

RADVIEW SOFTWARE LTD.

(Exact name of registrant as specified in its charter)

Israel		Not applicable
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7 New England Executive Park

Burlington, MA 01803

(Address of principal executive offices)

Telephone Number (781) 238-1111

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Exchange Act): Yes o No. ý.

As of April 30, 2005, there were 20,525,682 shares of the Registrant’s Ordinary Shares outstanding, excluding 134,000 Ordinary Shares held by the registrant as treasury shares that are “dormant” shares for purposes of Israeli law.

PART I - FINANCIAL INFORMATION

RADVIEW SOFTWARE LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	March 31, 2005			December 31, 2004
ASSETS
Current Assets:
Cash and cash equivalents	$	1,111		$	2,163
Accounts receivable, net of reserves of $72 at March 31, 2005 and December 31, 2004	753			605
Prepaid expenses and other current assets	317			375
Total Current Assets	2,181			3,143

Property and Equipment, net	177			164
Other Assets	475			607

Total Assets	$	2,833		$	3,914

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable	$	250		$	239
Accrued expenses	1,219			1,141
Deferred revenue	1,604			1,905
Total Current Liabilities	3,073			3,285

Long-term Liabilities:
Accrued severance	557			713

Total Liabilities	3,630			3,998

Shareholders’ Deficit:
Ordinary shares, NIS 0.01 par value – Authorized – 40,000,000 shares; Issued – 20,659,682 shares at March 31, 2005 and December 31, 2004; Outstanding – 20,525,682 shares at March 31, 2005 and December 31, 2004	51			51
Treasury shares, at cost – 134,000 shares	(100		)	(100		)
Additional paid-in capital	56,843			56,813
Accumulated deficit	(57,591		)	(56,848		)
Total Shareholders’ Deficit	(797		)	(84		)

Total Liabilities and Shareholders’ Deficit	$	2,833		$	3,914

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

RADVIEW SOFTWARE LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended March 31,
	2005			2004
Revenues:
Software licenses	$	940		$	447
Services	567			533
Total Revenues	1,507			980

Cost of Revenues:
Software licenses	36			31
Services	57			80
Total Cost of Revenues	93			111

Gross Profit	1,414			869

Operating Expenses:
Sales and marketing	961			849
Research and development	710			669
General and administrative	476			505
Total Operating Expenses	2,147			2,023

Operating loss	(733		)	(1,154		)

Interest income (expense), net	(2		)	3
Other expense, net	(8		)	—

Net loss	$	(743	)	$	(1,151	)

Basic and diluted net loss per share	$	(0.04	)	$	(0.06	)

Weighted average number of shares used in computing basic and diluted net loss per share	20,526			17,796

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

RADVIEW SOFTWARE LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2005			2004
Cash Flows from Operating Activities:
Net loss	$	(743	)	$	(1,151	)
Adjustments to reconcile net loss to net cash used in operating activities—
Depreciation	16			76
Stock-based compensation	30			84
Accrued severance	(156		)	16
Changes in operating assets and liabilities—
Accounts receivable, net	(148		)	(48		)
Prepaid expenses and other current assets	58			44
Accounts payable	11			(115		)
Accrued expenses	78			(55		)
Deferred revenue	(301		)	295
Net cash used in operating activities	(1,155		)	(854		)

Cash Flows from Investing Activities:
Purchases of property and equipment	(29		)	(18		)
Decrease (increase) in other assets	132			(12		)
Net cash provided by (used in) investing activities	103			(30		)

Cash Flows from Financing Activities:
Proceeds from private placement of ordinary shares, net	—			1,831
Proceeds from exercise of stock options	—			3
Net cash provided by financing activities	—			1,834

Increase (decrease) in cash and cash equivalents	(1,052		)	950

Cash and cash equivalents, beginning of period	2,163			3,075
Cash and cash equivalents, end of period	$	1,111		$	4,025

Cash paid during period for interest	$	9		$	2

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

RADVIEW SOFTWARE LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Operations

RadView Software Ltd. (the “Company”) is an Israeli corporation. The Company develops, markets and supports software that enables organizations to verify the scalability, efficiency and reliability of web applications, and facilitates their rapid development.

The Company has a history of incurring net losses and had an accumulated deficit of approximately $57.6 million at March 31, 2005. The Company has funded these losses principally from proceeds from equity financing, including the private placement of its ordinary shares completed in March 2004 (see Note 4).

On March 28, 2005, the Company received a commitment letter for a one-year revolving line of credit facility with a bank for borrowings of up to $2.0 million. Advances under the facility will be limited to the lesser of $2.0 million or the sum of 75% of eligible accounts receivables plus $1.0 million. Under the terms of the commitment letter, borrowings under the facility will bear interest at the bank’s prime rate plus 1.25%. The Company would be required to maintain compliance with financial covenants consisting of a minimum cash balance of $1.0 million and specified net income (loss) levels based on its operating budget. Borrowings under the revolving line of credit facility are subject to the negotiation and execution of definitive agreements acceptable to the bank and the Company.

In connection with the facility, the commitment letter provides that the bank will receive warrants with an aggregate exercise price of $60,000 to purchase the Company’s ordinary shares at an exercise price equal to the market price on the date definitive agreements with respect to the facility are executed. If the closing had occurred on May 11, 2005, the Company would have been required to issue to the bank warrants to purchase approximately 353,000 of the Company’s ordinary shares at an exercise price of $0.17 per share. The fair value of these warrants, estimated to be approximately $45,000, would be charged to interest expense over the one-year term of the facility.

Management believes that existing cash and cash equivalents, along with borrowings that would be available under the revolving line of credit facility, will be adequate to fund operations through March 31, 2006.

2. Significant Accounting Policies

The Company’s condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The significant policies followed in the preparation of the condensed consolidated financial statements, applied on a consistent basis, are as follows.

(a) Use of Estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.

(b) Financial Statements in U.S. Dollars

The consolidated financial statements of the Company have been prepared in U.S. dollars because the currency of the primary economic environment in which the operations of the Company are conducted is the U.S. dollar. Substantially all of the Company’s sales are in U.S. dollars. Most purchases of materials, components and most marketing and management costs are denominated in U.S. dollars. Therefore, the functional currency of the Company is the U.S. dollar.

Transactions and balances denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are translated into U.S. dollars in accordance with the principles set forth in the Financial Accounting Standards Board of the United States (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 52, Foreign Currency Translation. Accordingly, items have been translated as follows:

• Monetary Items — At the exchange rate in effect on the balance sheet date.

• Nonmonetary Items — At historical exchange rates.

• Revenue and Expense Items — At the exchange rates in effect as of the date of recognition of those items (excluding depreciation and other items deriving from nonmonetary items).

All exchange gains and losses from the above-mentioned translation (which were immaterial for all periods presented) are reflected in the statements of operations. The representative rate of exchange was U.S. $1.00 to 4.361 New Israeli Shekel (“NIS”) at March 31, 2005, U.S. $1.00 to NIS 4.308 at December 31, 2004, and U.S. $1.00 to NIS 4.528 at March 31, 2004.

(c) Interim Financial Statements

The accompanying condensed consolidated balance sheet as of March 31, 2005, the condensed consolidated statements of operations for the three months ended March 31, 2005 and 2004, and the condensed consolidated statements of cash flows for the three months ended March 31, 2005 and 2004, are unaudited but, in the opinion of management, include all adjustments necessary for a fair presentation of results for these interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted, although the Company believes that the disclosures included are adequate to make the information presented not misleading. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results to be expected for the entire fiscal year. These financial statements should be read in conjunction with the annual consolidated financial statements for 2004 and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

(d) Research and Development Cost

The Company has evaluated the establishment of technological feasibility of its products in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed. The Company sells products in a market that is subject to rapid technological change, new product development and changing customer needs. Accordingly, the Company has concluded that technological feasibility is not established until the development stage of the product is nearly complete. The Company defines technological feasibility as the completion of a working model. The time period during which costs could be capitalized from the point of reaching technological feasibility until the time of general product release is very short. Consequently, the amounts that could be capitalized are not material to the Company’s financial position or results of operations. Therefore, the Company has charged all such costs to research and development expense in the period incurred.

(e) Revenue Recognition

The Company generates revenues mainly from licensing the rights to use its software products. The Company also generates revenues from support and maintenance services and, to a lesser extent, training and consulting services. The Company sells its products primarily through its direct sales force and, to a lesser extent, through resellers and distributors considered as end-users.

The Company recognizes revenue in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. Under SOP 97-2, revenues from software product licenses are recognized upon delivery of the software provided there is persuasive evidence of an agreement, the fee is fixed or determinable and collection of the related receivable is probable and no further obligations exist. Revenues under multiple-element arrangements, which may include software licenses, support and maintenance, and training and consulting services, are allocated to each element based on their respective fair values based on vendor-specific objective evidence. This objective

evidence represents the price of products and services when sold separately. When vendor-specific objective evidence of fair value exists for undelivered elements but does not exist for delivered elements of a software arrangement, the Company uses the residual method for recognition of revenues, when all other revenue recognition criteria are met. Under the residual method, the Company defers revenues related to the undelivered elements based on their vendor specific objective evidence of fair value and recognizes the remaining arrangement fee for the delivered elements. When vendor-specific objective evidence of fair value for undelivered elements does not exist, revenues from the entire arrangement are recognized over the term of the agreement.

Revenues from support and maintenance agreements are recognized ratably over the term of the maintenance period, which is typically one year. Revenues from training arrangements are recognized as the services are performed.

Revenue is recognized for software licenses sold to resellers or distributors at the time of shipment, provided that all revenue recognition criteria set forth in SOP 97-2 are fulfilled.

The Company generally does not grant a right of return to its customers. When a right of return exists, revenue is deferred until the right of return expires, at which time revenue is recognized provided that all other revenue recognition criteria are met.

Amounts collected or billed prior to satisfying the above revenue recognition criteria are reflected as deferred revenue. Deferred revenue represents deferred maintenance revenue, and to a lesser extent, deferred software license revenues.

(f) Employee Stock Options

In December 2004, the FASB issued SFAS No. 123R (Revised 2004) (“SFAS 123(R)”), Share-Based Payment, which replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R), as amended, requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first reporting period beginning after June 15, 2005. In April 2005, the SEC extended the adoption date for Statement 123(R) to the first annual reporting period beginning after June 15, 2005, which, for the Company, is the annual period that begins on January 1, 2006. Early adoption will be permitted in periods in which financial statements have not yet been issued.

SFAS 123(R) permits public companies to adopt its requirements using one of two methods:

• A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.

• A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company has elected to adopt early the provisions of SFAS 123(R) effective January 1, 2005. As permitted by SFAS 123(R), the Company has elected to follow the modified prospective method of adoption.

The Company has determined the fair value of share based-payments issued after January 1, 2005 and unvested options granted in prior periods using the Black-Scholes option valuation model, using the following weighted-average assumptions:

	Three Months Ended March 31,
	2005		2004

Expected life of option	4 years		4 years
Dividend yield	—		—
Expected volatility	110	%	110	%
Risk-free interest rate	3.4	%	3.4	%

For all periods presented before January 1, 2005, the Company elected to follow Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Options Issued to Employees, and FASB Interpretation (“FIN”) No. 44, Accounting for Certain Transactions Involving Stock Compensation, in accounting for its employee stock option plans. Under APB No. 25, when the exercise price of an employee stock option is equivalent to or above the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, which amended certain provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation, effective as of the beginning of the fiscal year.

Pro forma information regarding the Company’s net loss and net loss per share prior to the adoption of SFAS No. 123(R) has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS No. 123.

The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation prior to January 1, 2005.

	Three Months Ended March 31, 2004
	(In thousands)

Net loss, as reported	$	(1,151	)
Add: Stock-based compensation included in reported net loss	84
Deduct: Total stock-based compensation expense under fair value based methods	(142		)
Pro forma net loss	$	(1,209	)

Net loss per share:
As reported	$	(0.06	)
Pro forma	$	(0.07	)

The Company applies SFAS No. 123 and Emerging Issues Task Force No. 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”), with respect to options and warrants issued to non-employees. SFAS No. 123 and EITF 96-18 require the use of option valuation models to measure the fair value of the options and warrants at the measurement date.

(g) Reclassifications

Certain amounts in the accompanying consolidated financial statements have been reclassified to conform to the current period’s presentation.

3. Earnings Per Share

Basic and diluted net loss per share is presented in conformity with SFAS No. 128, Earnings Per Share, for all periods presented. Basic and diluted net loss per ordinary share was determined by dividing net loss attributable to ordinary shareholders by the weighted average ordinary shares outstanding during the period. Diluted net loss per ordinary share is the same as basic net loss per ordinary share for all periods presented, as the effects of the Company’s potential additional ordinary shares were antidilutive.

The calculation of diluted net loss per share excludes outstanding stock options, warrants and additional investment rights held by certain investors because their inclusion would be antidilutive, as set forth in the following table.

	March 31,
	2005	2004
	(In thousands)

Stock options	3,490	3,702
Warrants (See Note 4(b))	2,334	3,000
Additional investment rights held by certain investors (See Note 4(b))	3,333	3,333

4. Shareholders’ Equity

(a) Private Placement

On March 17, 2004, the Company completed a private placement (the “Private Placement”) of its ordinary shares, additional investment rights to purchase ordinary shares (“Additional Investment Rights”) and four series of warrants to purchase ordinary shares (“Warrants”) pursuant to a securities purchase agreement (the “Purchase Agreement”) between the Company and certain purchasers named therein (the “Purchasers”), in reliance on an exemption under Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.

The Company issued 3,333,331 ordinary shares to the Purchasers for a purchase price per share of $0.60, or aggregate gross proceeds of $2.0 million. The Company also issued Additional Investment Rights and Warrants to the Purchasers. The Company received net proceeds of $1.8 million from the Private Placement.

In accordance with the Purchase Agreement, the Company was required to register for resale on Form S-3 (the “Registration Statement”) the ordinary shares issued in the Private Placement and the ordinary shares issuable upon exercise of the Additional Investment Rights and Warrants. The Registration Statement was declared effective on June 17, 2004. The Company must maintain the effectiveness of the Registration Statement for a period of up to two years from the effective date of the Registration Statement.

(b) Warrants and Additional Investment Rights

In connection with the Private Placement, the Company issued to the Purchasers Additional Investment Rights to purchase 3,333,331 ordinary shares at an exercise price of $0.810 per share, exercisable from March 11, 2004 until June 17, 2005.

The Company also issued to the Purchasers four series of Warrants as follows:

Series	Term	Exercise Price			Number of Shares

Series A warrants	Four and a half years	$		0.992	1,000,000
Series B warrants	Two years	$	0.873		666,668
Series C warrants	Four and a half years	$	0.992		666,664
Series D warrants	Two years	$	0.873		666,664
					2,999,996

The Warrants were initially exercisable for the number of shares indicated above, subject to customary anti-dilution adjustments and, with respect to the Series C and D warrants, subject to the conditions indicated below. The Series A and Series B warrants became exercisable beginning September 11, 2004 for a term as noted in the table above. One half of the Series C and Series D warrants became exercisable on September 20, 2004, the date the Company’s ordinary shares were delisted from the Nasdaq SmallCap Market. Because the Additional Investment Rights were not exercised before the delisting event, the other one-half of the Series C and D warrants will not become exercisable.

The Company may require the Purchasers to exercise their right to purchase ordinary shares pursuant to the Additional Investment Rights or Warrants if the closing price of the ordinary shares on an eligible market exceeds the respective exercise prices of the Additional Investment Rights or any series of the Warrants by at least 100% for twenty consecutive trading days on which the average daily trading volume of the ordinary shares is at least 250,000 Ordinary Shares, excluding blocks of 25,000 or more ordinary shares.

Pursuant to an evaluation of the terms of the Purchase Agreement under the provisions of EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, the Company has classified all the above derivative financial instruments issued in connection with the private placement as equity.

5. Technology License Transaction

On July 7, 2004, the Company received $1,000,000 in cash from a technology license transaction for its WebLOAD product with Ixia, an original equipment manufacturer, pursuant to the exercise of an option by Ixia under the terms of a development, publishing and distribution agreement. As a result of the option exercise, the technology license provides Ixia with expanded license rights including the right to access and use source code for the WebLOAD product and the right to create derivative products. Under the terms of the original agreement, Ixia was required to continue to pay to the Company royalties on its sale of WebLOAD at a reduced rate through July 7, 2005. Ixia was also granted a right to make a single lump-sum payment of $250,000 to the Company in lieu of its reduced royalty obligations. In November 2004, Ixia exercised its right and made payment to the Company of $250,000. Accordingly, Ixia has no further license fee or royalty payment obligations to the Company pursuant to this arrangement.

The Company is obligated to provide product updates and technical and engineering support to Ixia until July 2005. The Company is recognizing the $1,000,000 technology license fee as revenue over the 12-month period that commenced on July 7, 2004, over the term of the Company obligated to provide support services to Ixia. The Company is also recognizing as revenue the $250,000 payment in lieu of royalties over the same 12-month period.

Revenue recognized under this technology license transaction was $362,000 for the three months ended March 31, 2005, which has been classified as software licenses revenues in the consolidated statements of operations. There were no technology license revenues for the three months ended March 31, 2004.

Amounts collected but not recognized as revenues under this technology license transaction are included in deferred revenues and totaled $363,000 as of March 31, 2005.

6. Disclosures About Segments of an Enterprise

The Company has adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. The Company operates in one reportable segment (see Note 1 for a brief description of the Company’s business). The total revenues are attributed to geographic areas based on the location of the end-user customer as follows:

	Three months ended March 31,
	2005		2004
	(in thousands)

United States	$	1,046	$	661
Europe	131		124
Israel	257		118
Other	73		77
Total revenues	$	1,507	$	980

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements in this Quarterly Report on Form 10-Q concerning RadView’s business outlook or future performance; anticipated revenues, expenses or other financial items; product introductions and plans and objectives related thereto; and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters, are “forward-looking statements” as that term is defined under U. S. federal securities laws. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. These risks, uncertainties and factors include, but are not limited to: our history of losses; market acceptance of our products; our ability to develop new products and enhance existing products; impact of significant competition; and other factors detailed in RadView’s filings with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q.

Overview

We develop, market and support software that enables companies to assure the scalability, performance, efficiency and reliability of web applications. In May 2004, we introduced the TestView suite of products, which provides a comprehensive test management solution for test automation and reporting for web applications. The TestView suite efficiently integrates test management and automation with the functionality of our existing stand-alone products to include functional testing, load testing, and root-cause analysis.

We derive the majority of our software license revenues from perpetual licenses of our load testing products and, to a lesser extent, our functional testing and root-cause analysis products. We derive the majority of our services revenues from support and maintenance arrangements and, to a lesser extent, from training and consulting services. Substantially all of our revenues are denominated in U.S. dollars.

In the second half of 2004 and in the first quarter of 2005, a portion of our license revenues was derived from royalty fees and technology license fees from our OEM relationship with Ixia. We are recognizing the revenue from the technology license as a subscription arrangement over a 12-month period ending in June 2005. In December 2004, we entered into an OEM distribution agreement with Allen Systems Group, or ASG, for the distribution of our TestView suite using ASG’s private label in exchange for royalty fees to be paid to us. ASG also has an option to purchase by June 2005 a technology license to use the source code of our TestView suite for a license fee of $2.5 million payable in two annual installments. Part of our strategy is to increase our relationships with OEM distribution partners. If these partnerships are successful, we expect that software license fees will increase as a percentage of our total revenues resulting from increased royalty and technology license fee revenues. As of March 31, 2005, we have deferred revenues relating to technology license arrangements in an aggregate amount of $363,000 that will be recognized in full during the second quarter of 2005.

Our cash balance was $1.1 million as of March 31, 2005. In March 2005, we received a commitment letter for a one-year revolving line of credit facility with a bank for borrowings of up to $2.0 million. Advances under the facility would be limited to the lesser of $2.0 million or the sum of 75% of eligible accounts receivables plus $1.0 million. Borrowings under the revolving line of credit facility are subject to negotiation and execution of definitive agreements acceptable to the bank and us. We believe that our existing cash and cash equivalents, along with borrowings under the revolving line of credit facility, assuming the execution of definitive agreements related to this proposed borrowing, will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months.

Application of Critical Accounting Policies and Estimates

General

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of

assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. To fully understand and evaluate our reported financial results, we believe it is important to understand the significant estimates and judgments applied as they relate to our policies for revenue recognition, software development costs, restructuring costs and accounting for stock options. More detailed descriptions of these policies are provided in Note 2 to the consolidated financial statements.

Revenue Recognition

Our revenue recognition approach requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) is based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered, and the collectibility of those fees. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

Software Development Costs

Software development costs incurred from the point of reaching technological feasibility until the time of general product release should be capitalized. We define technological feasibility as the completion of a working model. The determination of technological feasibility requires the exercise of judgment by our management. Because we sell our products in a market that is subject to rapid technological change, new product development and changing customer needs, we have concluded that technological feasibility is not established until the development stage of the product is nearly complete. For us, the period in which we can capitalize software development costs is very short, so the amounts that could be capitalized are not material to our financial statements. Therefore, we have charged all such costs to research and development expense in the period incurred

Restructuring Charges

In prior years, we recorded significant restructuring charges. These restructuring charges included estimates pertaining to employee separation costs and the settlements of contractual obligations resulting from our actions. In addition, we have estimated the costs for certain under-utilized facilities and have made assumptions regarding a potential sub-lessee’s future rental rate, as well as the amount of time required to identify a sub-lessee. To date, our actual restructuring costs have approximated the estimated costs recorded; however, actual future costs of amounts not yet paid may differ from these estimates.

Accounting for Stock Options

Effective January 1, 2005, we have accounted for stock options issued to employees in accordance with SFAS No. 123R (Revised 2004) (“SFAS 123(R)”), Share-Based Payment. Under this approach all share based payments to employees, including grants of employee stock options, are required to be recognized in the financial statements based on their fair values, instead of providing the information in a pro forma disclosure in the notes to the financial statements. We have elected to use the modified prospective method of adoption as permitted under SFAS 123 (R), which requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123(R). We have determined the fair value of share based-payments issued after January 1, 2005 using the Black-Scholes option valuation model.

For reporting periods before January 1, 2005, we accounted for stock options using the intrinsic method in accordance with Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees. Under this approach we did not record any expense at the time the options were granted unless the exercise price of a granted option is below the fair market price of our ordinary shares on the date of grant. For reporting periods before January 1, 2005, we have provided disclosures of impact to our reported net loss and net loss per share if we had applied the fair value method.

The determination of fair value of stock options, whether for actual expense reporting under SFAS 123(R) or for pro forma disclosures, requires the application of estimates, such as estimated expected life of the options and estimated market volatility for our ordinary shares. These estimates are based on management’s review of historical option lives and computations of market volatility for our ordinary shares.

Results of Operations

The following table sets forth, as a percentage of total revenues, consolidated statement of operations data for the periods indicated:

	Three Months Ended March 31,
	2005		2004
Revenues:
Software licenses	62.4	%	45.6	%
Services	37.6	%	54.4	%
Total revenues	100.0	%	100.0	%

Cost of revenues:
Software licenses	2.4	%	3.2	%
Services	3.8	%	8.1	%
Total cost of revenues	6.2	%	11.3	%

Gross profit	93.8	%	88.7	%

Operating expenses:
Sales and marketing	63.8	%	86.6	%
Research and development	47.1	%	68.3	%
General and administrative	31.6	%	51.5	%
Total operating expenses	142.5	%	206.4	%

Loss from operations	(48.7	)%	(117.8	)%

Other income:
Interest income (expense), net	(0.1	)%	0.3	%
Other expense, net	(0.5	)%	(0.0	)%

Net loss	(49.3	)%	(117.5	)%

Three Months Ended March 31, 2005 and 2004

Revenues

Total Revenues. Total revenues were $1.5 million for the three months ended March 31, 2005 and $980,000 for the same period in 2004, which represents an increase of 53.8%. This increase resulted primarily from an increase in software licenses revenues.

Software Licenses. Software license revenues were $940,000 for the three months ended March 31, 2005 and $447,000 for the same period in 2004, which represents an increase of $493,000, or 110%. Software license revenues increased as a result of $362,000 of additional technology license revenues from our agreement with Ixia, and an increase of $131,000 in software licenses sold to customers attributable to increased average deal size and improved international performance.

Services. Services revenues consist primarily of revenue from annual support and maintenance contracts and, to a lesser extent, training and consulting services. Services revenues were $567,000 for the three months ended March 31, 2005 and $533,000 for the same period in 2004. Services revenues increased primarily due to increases in both support maintenance revenues and training related services.

Cost of Revenues

Cost of Software Licenses. Cost of software licenses consists principally of direct product costs, such as product media and packaging, as well as royalties due to third parties. Cost of software licenses was $36,000, or 3.8% of software license revenues, for the three months ended March 31, 2005 and $31,000, or 6.9% of software license revenues, for the same period in 2004. The decrease in cost of revenues as a percentage of software license revenues resulted from an increase in software licenses revenue attributable to technology licenses for which we incurred no material incremental direct costs.

Cost of Services. Cost of services consists principally of personnel-related costs associated with customer support and training. Cost of services was $57,000, or 10.1% of services revenues, for the three months ended March 31, 2005 and $80,000, or 15.0% of services revenues, for the same period in 2004. These decreases were due to lower personnel costs for support and maintenance services resulting from staff reallocations made in late 2004.

Operating Expenses

Sales and Marketing. Sales and marketing expenses consist principally of salaries and commissions earned by sales personnel, travel and marketing program costs such as trade shows, advertising and product promotion. Sales and marketing expenses were $961,000, or 63.8% of total revenues, for the three months ended March 31, 2005 compared to $849,000, or 86.6% of total revenues, for the same period in 2004. The increase these expenses was due primarily to sales training costs, and increases in salaries and commissions in addition to staff reallocations made in late 2004. The decrease of these expenses as a percentage of total revenues was due to the increase in total revenues, partially offset by the increase in sales and marketing expenses.

Research and Development. Research and development expenses consist principally of salaries and related expenses required to develop and enhance the Company’s products. Research and development expenses increased to $710,000, or 47.1% of total revenues, for the three months ended March 31, 2005 compared to $669,000, or 68.3% of total revenues, for the same period in 2004. The increase in these expenses was due primarily to increases in salary related costs attributable to termination and recruiting costs, in addition to increased use of consulting services. The decrease as a percentage of total revenues was due to the increase in total revenues, partially offset by the increase in research and development expenses.

General and Administrative. General and administrative expenses consist principally of finance, executive and administrative salaries and related expenses, professional fees and other costs associated with being a public company. General and administrative expenses were $476,000, or 31.6% of total revenues, for the three months ended March 31, 2005 compared to $505,000, or 51.5% of total revenues, for the same period in 2004. These decreases were due primarily to lower professional fees incurred during the first quarter of 2005.

Interest Income (Expense), Net. Interest income (expense), net consists principally of interest earned on cash investments, offset by bank fees and charges. Interest expense, net was $2,000 for the three months ended March 31, 2005 compared to interest income, net of $3,000 for the same period in 2004. The change in interest income (expense), net, resulted from lower invested cash balances in 2005 as compared to 2004.

Other Expense, Net. Other expense, net consists principally of currency translation gains and losses. Other expense, net was $8,000 for the three months ended March 31, 2005. There was no other expense, net for the same period in 2004. The change in other expense, net was due to exchange rate fluctuations.

Income Taxes. We have estimated net operating loss carryforwards for Israeli tax purposes totaling approximately $20.6 million through March 31, 2005 that would reduce future Israeli income taxes, if any. These net operating losses may be carried forward indefinitely and offset against future taxable business income. We expect

that during the period these losses are utilized, our income would be substantially tax exempt. Accordingly, there will be no tax benefit available from these losses and no deferred income taxes have been included in our consolidated financial statements.

Our U.S. subsidiary has estimated net operating loss carryforwards for U.S. Federal and state tax purposes totaling approximately $31.6 million through March 31, 2005. These losses are available to offset any future U.S. taxable income of the U.S. subsidiary and will expire between 2012 and 2025. The Company has recorded a full valuation allowance against its deferred tax asset due to the uncertainty surrounding the ability and the timing of the realization of these tax benefits.

Liquidity and Capital Resources

Cash and cash equivalents totaled $1.1 million as of March 31, 2005 and $2.2 million as of December 31, 2004.

Cash used in operating activities was $1.2 million for the three months ended March 31, 2005 and $854,000 for the same period in 2004. Cash used in operating activities for the three months ended March 31, 2005 was due primarily to a net loss of $743,000 combined with an increase of $148,000 in accounts receivable, a decrease in of $301,000 in deferred revenues, and a decrease of $156,000 in accrued severance, partially offset by an increase of $89,000 in accounts payable and accrued expenses. Accounts receivable increased as a result of increased software license order bookings. Deferred revenues decreased as a result of the recognition of technology license revenues from Ixia during the first quarter of 2005. Accrued severance decreased as a result of payments made to terminated employees during the quarter in accordance with Israel employment practices. Accrued expenses increased as a result of increased compensation related accruals and professional fees.

Cash provided by investing activities was $103,000 for the three months ended March 31, 2005 and cash used in investing activities was $30,000 for the three months ended March 31, 2004. The cash provided by investing activities in 2005 resulted from a decrease of $132,000 in other assets, partially offset by the purchase of $29,000 in property and equipment. Other assets decreased as a result of the release of deposits to certain terminated employees in accordance with Israel employment practices.

There was no cash provided by financing activities for the three months ended March 31, 2005. Cash provided by financing activities was $1.8 million in the same period of 2004.

In March 2005, we received a commitment letter for a one-year revolving line of credit facility with a bank for borrowings of up to $2.0 million. Advances under the facility would be limited to the lesser of $2.0 million or the sum of 75% of eligible accounts receivables plus $1.0 million. Borrowings under the revolving line of credit facility are subject to negotiation and execution of definitive agreements acceptable to the bank and us.

We expect that operating expenses and, to a lesser extent, our planned capital expenditures, will constitute a material use of our cash resources. We believe that our existing cash and cash equivalents, along with borrowings under the revolving line of credit facility, assuming the execution of definitive agreements related to this proposed borrowing, will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. We may find it necessary to obtain additional equity or debt financing. In the event additional financing is required, we may not be able to complete financing on acceptable terms or at all.

Contractual Obligations

We lease all of our office facilities under noncancellable operating leases that expire over varying terms through 2009. As of March 31, 2005, our contractual obligations were as follows:

	Payments due by Period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(In Thousands)

Operating leases	$	457	$	170	$	248	$	39	$	—
Severance pay (1)	557		—		—		—		557
Total	$	1,014	$	170	$	248	$	39	$	557

(1) Severance pay relates to accrued severance obligations to our Israeli employees as required under Israeli labor laws. These obligations are payable only upon the termination of the respective employee and may be reduced if the employee’s termination is voluntary.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not use derivative financial instruments in its investing portfolio. The Company places its investments in instruments that meet high credit quality standards such as money market funds, government securities, and commercial paper. The Company limits the amount of credit exposure to any one issuer. The Company does not expect any material loss with respect to its investment portfolio.

The Company conducts business in various foreign currencies, primarily in Europe and Israel. As a result, the Company is exposed to the effect of foreign currency exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated revenues and expenses. The Company does not use foreign exchange forward contracts to hedge its foreign currency denominated receivables. Looking forward, there can be no assurance that changes in foreign currency rates, relative to the U.S. dollar, will not materially adversely affect the consolidated results of the Company.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Securities Exchange Act of 1934 and the SEC rules thereunder.

Changes in internal controls

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation.

PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements:

	Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004

	Notes to Condensed Consolidated Financial Statements

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

Item 3.	Qualitative and Quantitative Disclosures About Market Risk

Item 4.	Controls and Procedures

	PART II. OTHER INFORMATION

Item 6.	Exhibits

	Signatures

	Certifications

31.1*		Certification by Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification by Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32*		Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	RADVIEW SOFTWARE LTD.


Date: May 13, 2005	/s/ CHRISTOPHER DINEEN
	Christopher Dineen
	Chief Financial Officer