UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 Quarter ended ~~September 30, 2004~~March 31, 2005

OR

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

0-28252
(Commission File Number)

BROADVISION, INC.

(Exact name of registrant as specified in its charter)

Delaware		94-3184303
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

585 Broadway, Redwood City, California		94063
(Address of principal executive offices)		(Zip code)

(650) 542-5100
(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)~~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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

As of ~~October 31, 2004~~May 2, 2005 there were ~~33,757,341~~34,181,112 shares of the Registrant’s Common Stock issued and outstanding.

BROADVISION, INC. AND SUBSIDIARIES
FORM 10-Q
Quarter Ended ~~September 30, 2004~~March 31, 2005

TABLE OF CONTENTS

PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed Consolidated Balance ~~Sheets - September 30, 2004~~Sheets-March 31, 2005 and December 31, ~~2003~~2004
		Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)-Three months ended March 31, 2005 and ~~Nine Months Ended September 30,~~ 2004 ~~and 2003~~
		Condensed Consolidated Statements of Cash ~~Flows-Nine Months Ended September 30,~~Flows-Three months ended March 31, 2005 and 2004 ~~and 2003~~
		Notes to Condensed Consolidated Financial Statements
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures About Market Risk
Item 4.		Controls and Procedures

PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings
Item 2.		~~Unregistered Sales of Equity~~Changes in Securities and Use of Proceeds
Item 3.		Defaults Upon Senior Securities
Item 4.		Submission of Matters to a Vote of Security Holders
Item 5.		Other Information
Item 6.		Exhibits and Reports on Form 8-K

SIGNATURES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BROADVISION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	September 30, 2004			December 31, 2003			March 31, 2005			December 31, 2004
	(unaudited)						(unaudited)
ASSETS
Current assets:
Cash and cash equivalents							$	37,218		$	41,851

Cash and cash equivalents	$	28,144		$	78,776
Accounts receivable, less allowance for doubtful accounts and reserves of $1,295 as of September 30, 2004 and $3,022 as of December 31, 2003	12,100			15,380
Restricted cash	19,163			—
Accounts receivable, less receivable reserves of $1,250 as of March 31, 2005 and $1,409 as of December 31, 2004							12,740			14,370
Restricted cash, current portion							3,156			21,933
Prepaids and other	4,098			5,346			2,509			2,232

Total current assets	63,505			99,502			55,623			80,386

Property and equipment, net	4,383			15,400			3,168			3,566
Restricted cash, net of current portion	1,797			19,827			1,997			2,323
Equity investments	574			1,565			338			574
Goodwill	53,421			53,421			56,434			56,434
Other intangibles, net	3,013			3,013
Other assets	1,753			2,354			1,282			1,370

Total assets	$	128,446		$	195,082		$	118,842		$	144,653

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Bank borrowings and current portion of long-term debt	$	15,774		$	27,977		$	33,116		$	25,566
Accounts payable	6,730			9,186			6,335			7,470
Accrued expenses	39,858			34,761			17,861			40,745
Warrant liability							2,382			4,899
Unearned revenue	4,297			7,596			3,107			3,870
Deferred maintenance	16,429			19,234			14,986			15,972

Total current liabilities	83,088			98,754			77,787			98,522

Long-term debt, net of current portion	503			969			276			7,443
Other noncurrent liabilities	14,100			87,409
Other non-current liabilities							7,036			8,278

Total liabilities	97,691			187,132			85,099			114,243

Commitments and Contingencies (Note 4)

Stockholders’ equity:
Preferred stock, $0.0001 par value; 10,000 shares authorized; none issued and outstanding	—			—
Common stock, $0.0001 par value; 2,000,000 shares authorized; 33,743 shares issued and outstanding as of September 30, 2004 and 33,198 shares issued and outstanding as of December 31, 2003	3			3
Convertible preferred stock, $0.0001 par value; 10,000 shares authorized; none issued and outstanding							—			—
Common stock, $0.0001 par value; 2,000,000 shares authorized; 34,178 shares issued and outstanding as of March 31, 2005 and 33,951 shares issued and outstanding as of December 31, 2004							3			3
Additional paid-in capital	1,214,273			1,212,727			1,214,989			1,214,619
Accumulated other comprehensive income (loss), net of tax	133			(105		)
Accumulated other comprehensive loss							(127		)	(172		)
Accumulated deficit	(1,183,654		)	(1,204,675		)	(1,181,122		)	(1,184,040		)
Total stockholders’ equity	30,755			7,950			33,743			30,410

Total liabilities and stockholders’ equity	$	128,446		$	195,082		$	118,842		$	144,653

See Accompanying Notes to Condensed Consolidated Financial Statements

BROADVISION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data; unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2004			2003			2004			2003			2005			2004

Revenues:
Software licenses	$	4,654		$	5,076		$	19,591		$	19,875		$	4,416		$	7,840
Services	12,570			13,493			38,650			44,954			11,951			13,049
Total revenues	17,224			18,569			58,241			64,829			16,367			20,889

Cost of revenues:
Cost of software licenses	256			666			1,147			1,549

Cost of (credit for) software licenses													(57		)	578
Cost of services	6,391			5,915			18,970			19,650			5,980			6,277

Total cost of revenues	6,647			6,581			20,117			21,199			5,923			6,855

Gross profit	10,577			11,988			38,124			43,630			10,444			14,034

Operating expenses:
Research and development	4,600			4,467			13,997			16,681			4,287			4,888
Sales and marketing	6,020			6,710			20,365			19,585			5,811			6,866
General and administrative	2,335			2,885			7,152			7,586			2,535			2,417
Litigation settlement costs	—			4,250			—			4,250
Goodwill and intangible amortization	—			—			—			887
Restructuring charge (credit)	(25,454		)	4,509			(24,205		)	13,361			(704		)	570
Total operating expenses (benefit)	(12,499		)	22,821			17,309			62,350
Total operating expenses													11,929			14,741

Operating income (loss)	23,076			(10,833		)	20,815			(18,720		)	(1,485		)	(707		)

Interest income, net	77			81			288			673
Other income, net	238			574			59			1,780
Interest (expense) income, net													(744		)	109
Other (expense) income, net													3,115			(133		)

Income (loss) before provision for income taxes	23,391			(10,178		)	21,162			(16,267		)	886			(731		)

Provision for income taxes	(11		)	(87		)	(141		)	(256		)
Benefit (provision) for income taxes													2,032			(136		)

Net income (loss)	$	23,380		$	(10,265	)	$	21,021		$	(16,523	)	$	2,918		$	(867	)

Basic earnings (loss) per share	$	0.70		$	(0.31	)	$	0.63		$	(0.51	)
Diluted earnings (loss) per share	$	0.69		$	(0.31	)	$	0.61		$	(0.51	)

Basic income (loss) per share													$	0.09		$	(0.03	)
Diluted income (loss) per share													0.07			(0.03		)
Shares used in computing:
Basic shares	33,599			32,906			33,459			32,706			33,971			33,300
Diluted shares	34,052			32,906			34,322			32,706			39,968			33,300

Comprehensive gain/(loss):
Comprehensive income (loss):
Net income (loss)	$	23,380		$	(10,265	)	$	21,021		$	(16,523	)	$	2,918		$	(867	)
Other comprehensive gain (loss), net of tax	188			(46		)	238			(83		)

Total comprehensive gain (loss)	$	23,568		$	(10,311	)	$	21,259		$	(16,606	)
Other comprehensive gain (loss), net of tax: Foreign currency translation adjustments													(45		)	—
Total comprehensive income (loss)													$	2,873		$	(867	)

See Accompanying Notes to Condensed Consolidated Financial Statements

BROADVISION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited)

Nine Months Ended September 30,

2004

2003

Cash flows from operating activities:

Net income (loss)

$21,021

$(16,523
)
Adjustments to reconcile net loss to net cash used for operating activities:

Depreciation and amortization

3,129

9,337

Credit for doubtful accounts and reserves

(1,722
)
(386
)
Amortization of prepaid royalties

494

973

Gain on disposal of assets

(96
)
(36
)
Unrealized (gain) loss on investments

50

(46
)
Loss on cost method investments

517

326

Amortization of other intangible assets

—

887

Stock-based compensation expense (income)

(15
)
279

Non-cash consideration in connection with facilities buyout

9,300

(382
)
Loss on revaluation of warrant

272

—

Changes in operating assets and liabilities:

Accounts receivable

5,002

12,224

Prepaids and other

754

3,458

Accounts payable and accrued expenses

1,128

(16,242
)
Unearned revenue and deferred maintenance

(6,105
)
(14,908
)
Other noncurrent assets

735

390

Other noncurrent liabilities

(73,308
)
1,841

Net cash used for operating activities

(38,844
)
(18,808
)

Cash flows from investing activities:

Purchase of property and equipment

(489
)
(131
)
Transfer to restricted cash

(1,132
)
(4,254
)
Proceeds from sale of assets

—

186

Purchase of long-term investments

(100
)
(2,729
)
Sales/maturity of long-term investments

574

3,403

Purchase of short-term investments

—

(2,917
)
Proceeds from dividends

277

—

Sales/maturity of short-term investments

—

26,288

Net cash provided by (used for) investing activities

(870
)
19,846

Cash flows from financing activities:

Proceeds from issuance of common stock, net

1,561

1,166

Proceeds from borrowings

69,076

2,000

Repayments of borrowings

(81,744
)
(970
)
Net cash provided by (used for) financing activities

(11,107
)
2,196

Effect of change in exchange rates on cash and cash equivalents

189

—

Net increase (decrease) in cash and cash equivalents

(50,632
)
3,234

Cash and cash equivalents at beginning of period

78,776

77,386

Cash and cash equivalents at end of period

$28,144

$80,620

Supplemental disclosures of cash flow information:

Cash paid for interest

$87

$170

Cash paid for income taxes

$227

$849

~~See Accompanying Notes to Condensed Consolidated Financial Statements~~

	Three Months Ended March 31,
	2005			2004
Cash flows from operating activities:
Net income (loss)	$	2,918		$	(867	)
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation and amortization	416			1,409
Stock-based compensation charge	—			15
Release of doubtful accounts and reserves	(159		)	(600		)
Amortization of prepaid royalties	—			176
Loss (gain) on cost method investments	(1,215		)	58
Loss on sale or abandonment of fixed assets	24			—
Release of income tax reserve	(2,032		)	—
Gain on revaluation of warrants	(2,517		)	—
Amortization of discount on debentures	633			—
Changes in operating assets and liabilities:
Accounts receivable	1,789			1,686
Prepaids and other	(277		)	1,003
Other non-current assets	88			68
Accounts payable and accrued expenses	(2,342		)	(3,040		)
Restructuring accrual	(20,886		)	—
Unearned revenue and deferred maintenance	(1,749		)	96
Other noncurrent liabilities	—			(3,735		)
Net cash used for operating activities	(25,309		)	(3,731		)

Cash flows from investing activities:
Purchase of property and equipment	(57		)	(144		)
Transfer from restricted cash	19,103			1,042
Purchase of long-term investments	—			(100		)
Proceeds from sale of cost method investments	350			—
Proceeds from dividends	1,101			—
Net cash provided by investing activities	20,497			798

Cash flows from financing activities:
Proceeds from bank line of credit	20,000			78
Repayments of bank line of credit and term debt	(20,250		)	(244		)
Proceeds from issuance of common stock, net	370			803
Net cash provided by financing activities	120			637
Effect of exchange rates on cash and cash equivalents	59			—
Net decrease in cash and cash equivalents	(4,633		)	(2,296		)
Cash and cash equivalents at beginning of period	41,851			78,776
Cash and cash equivalents at end of period	$	37,218		$	76,480

Supplemental disclosures of cash flow information:
Cash paid for interest	$	162		$	33
Cash paid (refunds received) for income taxes	$	(384	)	$	119

~~BROADVISION, INC. AND SUBSIDIARIES~~

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All quarterly data herein is unaudited)

Note 1. Organization and Summary of Significant Accounting Policies

Nature of Business

BroadVision, Inc. (collectively with its subsidiaries, the “Company”) was incorporated in the state of Delaware on May 13, 1993 and has been a publicly traded corporation since 1996. BroadVision ~~develops, markets~~solutions help customers rapidly increase revenues and ~~supports self-service web applications that enable companies to unify their e-business infrastructure and conduct both~~reduce costs by moving interactions and transactions ~~with employees, partners and customers through a~~to personalized self-service ~~model~~via the web. Our integrated self-service application suite—including process, commerce, portal and content–offers rich functionality out of the box, and is easily configured for each customer’s e-business environment.

Over 1,000 customers—including U.S. Air Force, Lockheed Martin, Netikos, Circuit City, Wal*Mart, Iberia L.A.E. and Vodafone-have licensed BroadVision solutions to power and personalize their mission-critical web initiatives.

As discussed more fully in Note 3 below, in November 2004, the Company entered into a definitive agreement for the private placement of up to $20.0 million of convertible debentures to five institutional investors. The Company issued an initial $16.0 million of debentures which will be convertible, at the holders’ option, into common stock at a conversion price of $2.76 per share. The Company is obligated to repay the principal amount of the initial $16.0 million of debentures in 15 equal monthly installments of $1.1 million, beginning in June 2005, and payments will likely increase to $2.1 million beginning in September 2005. Payments of principal and interest may be made in either cash or, upon receipt of stockholder approval and satisfaction of various other conditions set forth in the debentures, shares of the Company’s common stock. These other conditions include the requirement that ~~increases revenues, reduces costs~~the Company’s registration statement relating to the common shares issuable upon conversion of the debentures be declared effective by the SEC at least approximately 60 days prior to the payment due date (and remain effective during such approximately 60-day period) and ~~improves productivity.~~the requirement that the Company’s common stock continue to be designated for quotation on the NASDAQ National Market, and delisting or suspension shall not be pending or threatened, for the 120-day period prior to the payment due date. Due to unforeseen delays in having its registration statement on Form S-3 declared effective by the SEC, the Company currently anticipates having to use cash to satisfy its payment obligations under the debentures through at least September 2005. Cash payments to be made during this period are expected to total approximately $6.1 million.

The Company currently expects to fund its short-term working capital and operating resource expenditure requirements, for at least the next twelve months, from its existing cash and cash equivalents resources and its anticipated cash flows from subleases. However, these sources could be inadequate for the operation of the Company’s business for various reasons. These reasons include, but are not limited to, the following:

• If the Company’s stockholders do not approve the use of common stock for payments due under outstanding debentures at the Company’s annual meeting of stockholders scheduled for May 24, 2005, then all payments will be required to be made in cash until approximately 30 days after stockholder approval is subsequently obtained.

• If an event of default occurs under the debentures and is not cured within any applicable cure period, the debenture holders could accelerate the due date of the debentures such that the entire principal balance, interest and other obligations become immediately due and payable. If an event of default occurs but is cured within the applicable cure period, the Company will be required to make payments in cash for a period of no less than 120 days from the date of the cure of the default.

• If the Company’s registration statement is not declared effective by August 5, 2005, then the Company will be required to use cash in excess of the $6.1 million of anticipated cash repayments noted above to satisfy its repayment obligations.

The Company’s use of cash, rather than stock, to satisfy more of the payment obligations under the debentures than the Company presently anticipates will have a significantly unfavorable effect on the Company’s liquidity and will likely result in the Company’s cash resources falling below a level that is necessary for the operation of the Company’s business in the fourth quarter of 2005. In such circumstances, the Company may be unable to continue as a going concern.

We currently expect to fund our short-term working capital and operating resource expenditure requirements, for at least the next twelve months, from our existing cash and cash equivalents resources and our anticipated cash flows from subleases. However, these sources could be inadequate for the operation of our business for various reasons. For example, if our stockholders do not approve the use of our common stock for payments under outstanding debentures at our annual meeting of stockholders scheduled for May 24, 2005, or if the other terms of the debentures require us to use cash, rather than stock, for more of the debenture payments than we presently anticipate, then our cash resources are likely to fall below a level that is adequate for the operation of our business in the fourth quarter of 2005.

Basis of Presentation and Use of Estimates

The accompanying consolidated financial statements include the accounts of the Company and its ~~wholly-owned~~wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. In the Company’s opinion, the consolidated financial statements presented herein include all necessary adjustments, consisting of normal recurring adjustments, to fairly state the Company’s financial position, results of operations and cash flows for the periods indicated. The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make certain assumptions and estimates that affect reported amounts of assets and liabilities as of the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from estimates. The financial results and related information as of ~~September 30, 2004~~March 31, 2005 and for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~ are unaudited. The consolidated balance sheet at December 31, ~~2003~~2004 has been derived from the audited consolidated financial statements as of that date but does not necessarily reflect all of the informational disclosures previously reported in accordance with generally accepted accounting principles in the United States of America.

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included with the Company’s Form 10-K and other documents that have been filed with the Securities and Exchange Commission (“SEC”). The results of the Company’s operations for the interim periods presented are not necessarily indicative of operating results for the full fiscal year or any future periods.

Revenue Recognition

Overview

The Company’s revenue consists of fees for licenses of the Company’s software products, maintenance, consulting services and customer training. The Company generally charges fees for licenses of its software products either based on the number of persons registered to use the product or based on the number of Central Processing Units (“CPUs”) on the machine on which the product is installed. Licenses for software whereby fees charged are based upon the number of persons registered to use the product are differentiated between licenses for development use and licenses for use in deployment of the customer’s website. Licenses for software whereby fees charged are on a per-CPU basis do not differentiate between development and deployment usage. The Company’s revenue recognition policies are in accordance with Statement of Position (“SOP”) 97-2, as amended, SOP 98-9 and the ~~Securities and Exchange Commission’s~~SEC’s Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements(“SAB101”).

Software License Revenue

The Company licenses its products through its direct sales force and indirectly through resellers. In general, software license revenues are recognized when a non-cancelable license agreement has been signed and the customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered probable. Delivery is considered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs when media containing the licensed programs is provided to a common carrier. In case of electronic delivery, delivery occurs when the customer is given access to the licensed programs. For products that cannot be used without a licensing key, the delivery requirement is met when the licensing key is made available to the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Subscription-based license revenues are recognized ratably over the subscription period. The Company enters into reseller arrangements that typically provide for sublicense fees payable to the Company based upon a percentage of list price. The Company does not grant its resellers the right of return.

The Company recognizes revenue using the residual method pursuant to the requirements of SOP 97-2, as amended by SOP 98-9. Revenues recognized from multiple-element software arrangements are allocated to each element of the arrangement based on the fair values of the elements, such as licenses for software products, maintenance, consulting services or customer training. The determination of fair value is based on objective evidence, which is specific to the Company. The Company limits its assessment of objective evidence for each element to either the price charged when the same element is sold separately or the price established by management having the relevant authority to do so, for an element not yet sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.

The Company records unearned revenue for software license agreements when cash has been received from the customer and the agreement does not qualify for revenue recognition under the Company’s revenue recognition policy. The Company records accounts receivable for software license agreements when the agreement qualifies for revenue recognition but cash or other consideration has not been received from the customer.

Services Revenue

Consulting services revenues and customer training revenues are recognized as such services are performed. Maintenance revenues, which include revenues bundled with software license agreements that entitle the customers to technical support and future unspecified enhancements to the Company’s products, are deferred and recognized ratably over the related agreement period, generally twelve months.

The Company’s consulting services, which consist of consulting, maintenance and training, are delivered through the BroadVision Global Services (“BVGS”) organization. Services that the Company provides are not essential to the functionality of the software. The Company records reimbursement from its customers for out-of-pocket expenses as an increase to services revenues.

Employee Stock Option and Purchase Plans

The Company accounts for employee stock-based awards in accordance with the provisions of Accounting Principles Board (“APB”) Opinion 25 (“APB 25”), Financial Accounting Standards Board (“FASB”) Interpretation No. 44 ~~(FIN 44)~~(“FIN 44”), Accounting for Certain Transactions Involving Stock Compensation—an Interpretation of APB Opinion 25, and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Pursuant to Statement of Financial Accounting Standards (“~~SFAS 123”~~SFAS”), ~~Accounting for Stock Based Compensation~~, 123, the Company

discloses the pro forma effects of using the fair value method of accounting for stock-based compensation arrangements. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS 123 and Emerging Issues Task Force ~~(EITF)~~(“EITF”) 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees For Acquiring or in Conjunction with Selling Goods or Services.

The Company applies APB ~~Opinion~~ 25 and related interpretations when accounting for its stock option and stock purchase plans. In accordance with APB ~~Opinion~~ 25, we apply the intrinsic value method in accounting for employee stock options. Accordingly, the Company generally recognizes no compensation expense with respect to stock-based awards to employees.

During the ~~nine months~~quarter ended ~~September 30,~~March 31, 2004, the Company recorded net compensation ~~income of $15,000 as a result of a vesting modification for a stock option grant to a consultant. During the nine months ended September 30, 2003, the Company recorded compensation~~ expense of ~~$279,000~~$15,000. This charge was recorded as a result of granting a third party consultant ~~common stock in the Company and a vesting modification to a stock option grant for a terminated employee. These charges were calculated based upon the market value~~shares of ~~the underlying~~our common stock. The ~~charges were~~compensation charge was calculated using the Black-Scholes ~~model and~~model. The $15,000 was recorded in sales and marketing expense.

We have determined pro forma information regarding net income and ~~earnings~~earnings(Loss) per share as if we had accounted for employee stock options under the fair value method as required by SFAS ~~No.~~ 123, Accounting for Stock Compensation. The fair value of these stock-based awards to employees was estimated using the Black-Scholes option pricing model. Had compensation cost for our stock option plan and employee stock purchase plan been determined consistent with SFAS 123, our reported net ~~loss~~income (loss) and net ~~loss~~earnings (loss) per share would have been changed to the amounts indicated below (in thousands except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2004			2003			2004			2003			2005			2004
Net income (loss) as reported	$	23,380		$	(10,265)		$	21,021		$	(16,523)		$	2,918		$	(867	)
Add: Stock-based compensation expense (income) included in reported net loss, net of related tax effects	—			231			(15		)	279
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects													—			15
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(3,466		)	(2,734		)	(4,271		)	(6,739		)	(1,334		)	(2,814		)
Pro forma net income (loss)	$	19,914		$	(12,768	)	$	16,735		$	(22,983	)	$	1,584		$	(3,666	)

Income (loss) per share:
Basic—as reported	$	0.70		$	(0.31	)	$	0.63		$	(0.51	)	$	0.09		$	(0.03	)
Basic—pro forma	$	0.59		$	(0.39	)	$	0.50		$	(0.70	)	$	0.05		$	(0.11	)

Diluted—as reported	$	0.69		$	(0.31	)	$	0.61		$	(0.51	)	$	0.07		$	(0.03	)
Diluted—pro forma	$	0.58		$	(0.39	)	$	0.49		$	(0.70	)	$	0.04		$	(0.11	)

Earnings Per Share Information

Basic ~~earnings~~income (loss) per share is computed using the weighted-average number of shares of common stock outstanding less shares subject to repurchase. Diluted ~~earnings~~income (loss) per share is computed using the weighted-average number of shares of common stock outstanding and, when dilutive, common equivalent shares from outstanding stock options and warrants using the treasury stock method, potential common shares from the conversion of debt, and shares subject to repurchase. The following table sets forth the basic and diluted ~~earnings~~income (loss) per share computational data for the periods presented.

There were ~~127,938 and 136,825~~200,000 shares included in the diluted shares outstanding during the period ended March 31, 2005. There were 131,326 potential common shares excluded from the determination of diluted net loss per share for the three ~~and nine~~ months ended ~~September 30, 2003, respectively,~~March 31, 2004 as the effect of such shares iswas anti-dilutive.

Three Months Ended
September 30,

Nine Months Ended
September 30,

2004

2003

2004

2003

Net income (loss)

$
23,380

$
(10,265
)
$
21,021

$
(16,523
)

Weighted average common shares outstanding utilized for basic net earnings (loss) per share

33,599

32,906

33,459

32,706

Potential common shares

453

—

863

—

Weighted average common shares outstanding utilized for diluted net earnings (loss) per share

34,052

32,906

34,322

32,706

Basic net earnings (loss) per share

$
0.70

$
(0.31
)
$
0.63

$
(0.51
)
Diluted net earnings (loss) per share

$
0.69

$
(0.31
)
$
0.61

$
(0.51
)

	Three Months Ended March 31,
	2005		2004
Net income (loss)	$	2,918	$	(867	)

Weighted average common shares outstanding utilized for basic net loss per share	33,971		33,300
Potential common stock issued for debt	5,797		—
Potential common stock issued for options	200		—
Weighted average common shares outstanding utilized for diluted net loss per share	39,968		33,300
Basic net income (loss) per share	$	0.09	$	(0.03	)
Diluted net income (loss) per share	$	0.07	$	(0.03	)

Allowances and Reserves

Occasionally, the Company’s customers experience financial difficulty after the Company records the revenue but before payment has been received. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company’s normal payment terms are 30 to ~~120~~90 days from invoice date. If the financial condition of the Company’s customers was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Restructuring

Through ~~September 30, 2004,~~March 31, 2005, we have approved certain restructuring plans to, among other things, reduce our workforce and consolidate facilities. Restructuring and asset impairment charges were taken to align our cost structure with changing market conditions and to create a more efficient organization. Our restructuring charges ~~comprise primarily:~~are comprised primarily of: (i) severance and benefits termination costs related to the reduction of our workforce; (ii) lease termination costs and/or costs associated with permanently vacating our facilities; (iii) other incremental costs incurred as a direct result of the restructuring plan; and (iv) impairment costs related to certain long-lived assets abandoned. We account for each of these costs in accordance with ~~Staff Accounting Bulletin~~SAB No. 100, Restructuring and Impairment ~~Charges.~~Charges (“SAB 100”).

Severance and Termination Costs. We account for severance and benefits termination costs as follows:

• For exit or disposal activities initiated on or prior to December 31, 2002, we account for costs in accordance with EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring) (“EITF 94-3”). Accordingly, we record the liability related to these termination costs when the following conditions have been met: (i) management with the appropriate level of authority approves a termination plan that commits us to such plan and establishes the benefits the employees will receive upon termination; (ii) the benefit arrangement is communicated to the employees in sufficient detail to enable the employees to determine the termination benefits; (iii) the plan specifically identifies the number of employees to be terminated, their locations and their job classifications; and (iv) the period of time to implement the plan does not indicate changes to the plan are likely

• For exit or disposal activities initiated after December 31, 2002, we account for costs in accordance with SFAS No. 146, Accounting for Costs Associated with Exit Activities (“SFAS 146”). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred.

Excess Facilities Costs. We account for excess facilities costs as follows:

• For exit or disposal activities initiated on or prior to December 31, 2002, we account for lease termination and/or abandonment costs in accordance with EITF 88-10, Costs Associated with Lease Modification or Termination. Accordingly, we recorded the costs associated with lease termination and/or abandonment when the leased property had no substantive future use or benefit to us.

• For exit or disposal activities initiated after December 31, 2002, we account for lease termination and/or abandonment costs in accordance with SFAS ~~No.~~ 146, which requires that a liability for such costs be recognized and measured initially at fair value on the cease use date of the facility.

Severance and termination costs and excess facilities costs we record under these provisions are not associated with nor do they benefit continuing activities.

Inherent in the estimation of the costs related to our restructuring efforts are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. In determining the charges related to the restructurings to date, the majority of estimates made by management have related to charges for excess facilities. In determining the charges for excess facilities, we were required to estimate future sublease income, future net operating expenses of the facilities, and brokerage commissions, among other expenses. The most significant of these estimates have related to the timing and extent of future sublease income in which to reduce our lease obligations. We based our estimates of sublease income, in part, on the opinions of independent real estate experts, current market conditions and rental rates, an assessment of the time period over which reasonable estimates could be made, the status of negotiations with potential subtenants, and the location of the respective facility, among other factors. The Company has recorded the low-end of a range of assumptions modeled for restructuring charges, in accordance with SFAS No. 5, Accounting for ~~Contingencies. Further adjustments~~Contingencies (“SFAS 5”). Adjustments to the facilities accrual will be required ~~in future periods~~ if actual lease exit costs or sublease income differ from amounts currently expected. We will review the status of restructuring activities on a quarterly basis and, if appropriate, record changes to our restructuring obligations in current operations based on management’s most current estimates.

Legal Matters

The Company’s current estimated range of liability related to pending litigation is based on claims for which it is probable that a liability has been incurred and the Company can estimate the amount and range of loss. The Company has recorded the minimum estimated liability related to those claims, where there is a range of loss. Because of the uncertainties related to both the determination of the probability of an unfavorable outcome and the amount and range of loss in the event of an unfavorable outcome, the Company is unable to make a reasonable estimate of the liability that could result from the remaining pending litigation. As

additional information becomes available, the Company will assess the potential liability related to its pending litigation and revise its estimates, if necessary. Such revisions in the Company’s estimates of the potential liability could materially impact the Company’s results of operations and financial position.

On June 10, 2004, Metropolitan Life Insurance Company ~~as landlord under a lease for facilities located in EL Segundo, CA,~~(“MetLife”) filed a ~~lawsuit against~~complaint in the Superior Court of the State of California, County of Los Angeles, naming the Company as a defendant. The complaint alleged that the Company was liable for unlawful detainer of premises leased from the plaintiff. The plaintiff thereafter filed a First Amended Complaint alleging that the Company no longer held possession of the premises but was in breach of the lease. In February 2005, MetLife and the Company reached agreement and executed documents regarding a settlement of the pending lawsuit under which the Company will pay MetLife an aggregate of $1.9 million in consideration for termination of the lease, dismissal of the lawsuit and ~~is seeking recovery~~in full settlement of ~~lost rent~~approximately $3.1 million of past and ~~other damages. Trial~~future lease obligations. The first of three installment payments was made in February 2005, with the second due in May 2005 and the third due in September 2005.

that the Company cease and desist from committing or causing violations of specified provisions of the federal securities laws. The SEC found that a former executive in charge of professional services who left BroadVision in 2002 was responsible for the improper accounting. The restatement concerned revenue related to one software license agreement. Following receipt of payment in full by the customer, the Company recognized revenue on that agreement in its entirety in the third quarter of 2001. The Company subsequently determined that the revenue should instead be recognized ratably over the four-year life of the agreement, and announced on April 1, 2002 that it was restating the financial statements for the third quarter of 2001 to effect this change. The Company has been ~~set~~accounting for ~~May 2005.~~the revenue ratably in all periods since the third quarter of 2001.

Concentrations of Credit Risk

Financial assets that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents, ~~short-term investments,~~ and trade accounts receivable. The Company maintains its cash and cash equivalents ~~and short-term investments~~ with ~~four~~two separate financial institutions. The Company markets and sells its products throughout the world and performs ongoing credit evaluations of its customers. The Company maintains reserves for potential credit losses. For the ~~three~~quarters ended March 31, 2005 and ~~nine month periods ended September 30,~~March 31, 2004, ~~and 2003,~~ no ~~single~~one customer accounted for more than 10% of total revenue. ~~At September 30,~~As of March 31, 2005 and December 31, 2004, ~~one~~no customer individually accounted for ~~13%~~more than 10% of accounts receivable.

~~Equity Investment~~

In January 2000, the Company entered into a limited partnership agreement with Chengwei Ventures Fund I, L.P. (“Chengwei”), a venture capital firm, under which it was obligated to contribute capital based upon the periodic funding requirements. The total capital commitment was $2.0 million, of which approximately $1.2 million had been contributed to date. In September 2004, the Company sold its interest in Chengwei for approximately $576,000 in cash and recorded a loss of approximately $230,000. That loss is included in “Other income, net” in the accompanying Condensed Consolidated Statement of Operations. As a result of this sale, the Company’s obligation to make further capital contributions has been extinguished.

Foreign Currency Transactions

~~The~~During fiscal 2004, the Company changed the functional currencies of all foreign subsidiaries from the U.S. dollar to the local currency of the ~~Company’s foreign~~respective countries. Assets and liabilities of these subsidiaries isare translated into U.S. dollars at the ~~U.S. dollar.~~balance sheet date. Income and expense items are translated at average exchange rates for the period. Foreign exchange gains and losses resulting from the remeasurement of foreign currency assets and liabilities are included in ~~“Other~~other income ~~net”~~(expense), net in the ~~Condensed~~ Consolidated Statements of Operations.

Valuation of Long-Lived Assets

The Company periodically assesses the impairment of long-lived assets in accordance with the provisions of SFAS No. ~~144.~~144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company assesses the impairment of goodwill and identifiable intangible assets in accordance with SFAS No. 141, Business Combinations (“SFAS 141”) and SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The Company adopted the provisions of SFAS ~~No. 144~~142 as of January 1, 2002.

Reclassification

Certain reclassifications have been made to prior year balances in order to conform to the current period presentation. These

reclassifications do not have an effect on BroadVision’s consolidated financial condition, results of operation or cash flows.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, ~~short-term investments,~~ restricted cash, ~~long-term investments,~~ equity investments, accounts receivable, accounts payable and debt. The Company does not have any derivative financial instruments. The Company believes the reported carrying amounts of its financial instruments approximates fair value, based upon the maturities and nature of its cash equivalents, ~~short-term investments, long-term investments,~~ accounts receivable and payable, and based on the current rates available to it on similar debt issues. Additionally, the Company periodically evaluates the carrying value of all of its investments for other-than-temporary impairment when events and circumstances indicate that the book value of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amounts by which the carrying amount exceeds its fair market value. The Company’s equity investments ~~comprise~~are comprised of investments in public and non-public technology-related companies. The Company may record future

impairment charges due to continued economic decline and the potential resulting negative impact on these companies.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss), which consists of unrealized gains and losses on available-for-sale securities and cumulative translation adjustments. Total accumulated other comprehensive income (loss) is displayed as a separate component of stockholder’s equity in the accompanying Consolidated Balance Sheets. The accumulated balances for each classification of comprehensive income (loss) consist of the following, net of taxes (in thousands):

	Foreign Currency Translation			Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2004	$	(172	)	$	(172	)
Net change during period	45			45

Balance, March 31, 2005	(127		)	(127		)

New Accounting Pronouncements

In ~~January 2003,~~December 2004, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ~~Interpretation~~SFAS No. ~~46 (FIN 46)~~123 (revised 2004), ~~“Consolidation~~Share-Based Payment (“SFAS 123R”), which replaces SFAS 123 and supercedes APB 25. SFAS 123R requires all share-based payments to employees, including grants of ~~Variable Interest Entities.”~~ ~~FIN 46 expands upon and strengthens existing accounting guidance that addresses when a company should include~~employee stock options, to be recognized in ~~its~~the financial statements based on their fair values beginning with the ~~assets, liabilities~~first interim or annual period beginning after June 15, 2005, with early adoption encouraged. On April 14, 2005, the Securities and ~~activities~~Exchange Commission adopted a new rule that amends the compliance dates for SFAS 123(R). Under the new rule, the Company is required to adopt SFAS 123(R) in the first quarter of ~~another entity. A variable interest entity is a corporation, partnership, trust, or any other legal structure~~fiscal 2006, beginning January 2, 2006. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. Under SFAS 123R, we must determine the appropriate fair value model to be used for ~~business purposes~~valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. We have not yet determined the method of adoption or the effect of adopting SFAS 123R. We are assessing the requirements of SFAS 123R and expect that ~~either (i) does not~~its adoption will have ~~equity investors~~a material impact on the Company’s results of operations and earnings (loss) per share.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with ~~voting rights or (ii) has equity investors~~an exception for exchanges that do not ~~provide sufficient financial resources for~~have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to ~~support its activities. FIN 46~~

~~requires~~change significantly as a ~~variable interest entity to be consolidated by a company if that company is subject to a majority~~result of the ~~risk of loss from the variable interest entity’s activities or~~exchange. SFAS 153 is entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim periodeffective for periods beginning after ~~December~~June 15, ~~2003. Disclosure requirements apply to any financial statements issued after January 31, 2003. The~~2005. We do not expect that adoption of SFAS ~~146 has not had~~153 will have a material ~~impact~~effect on our consolidated financial position, consolidated results of operations, or ~~cash flows.~~

~~In May 2003, the FASB issued SFAS 150,~~ ~~“Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”~~ SFAS 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 has not had a material impact on our consolidated financial position, results of operations or cash flows.liquidity.

~~In November 2003, the EITF issued EITF No. 03-6~~ ~~“Participating Securities and the Two-Class Method under FASB Statement No. 128,”~~ which provides for a two-class method of calculating earnings per share computations that relate to certain securities that would be considered to be participating in conjunction with certain common stock rights. This guidance would be applicable to the Company starting with the third quarter beginning July 1, 2004. The adoption of EITF No. 03-6 has not had a material impact on our consolidated financial position, results of operations or cash flows.

Note 2. ~~Selective~~ Selected Balance Sheet Detail

Property and equipment consisted of the following (in thousands):

September 30,
2004

December 31,
2003

(unaudited)

Furniture and fixtures

$
6,125

$
8,030

Computers and software

49,119

49,041

Leasehold improvements

9,506

20,842

64,750

77,913

Less accumulated depreciation and amortization

(60,367
)
(62,513
)

$
4,383

$
15,400

	March 31, 2005			December 31, 2004
	(unaudited)
Furniture and fixtures	$	3,901		$	4,036
Computers and software	48,883			49,258
Leasehold improvements	6,117			6,086
	58,901			59,380
Less accumulated depreciation and amortization	(55,733		)	(55,814		)
	$	3,168		$	3,566

Accrued expenses consisted of the following (in thousands):

	September 30, 2004		December 31, 2003		March 31, 2005		December 31, 2004
	(unaudited)				(unaudited)
Employee benefits	$	1,541	$	1,511	$	1,508	$	1,253
Commissions and bonuses	748		1,519		889		1,334
Sales and other taxes	5,888		7,983		4,350		5,085
Restructuring (See Note 6)	23,953		18,549		6,648		26,292
Warrant liability	1,512		—
Other	6,216		5,199		4,466		6,781
	$	39,858	$	34,761	$	17,861	$	40,745

Other noncurrent liabilities consisted of the following (in thousands):

September 30,
2004

December 31,
2003

(unaudited)

Restructuring (See Note 6)

$
13,707

$
86,831

Other

393

578

$
14,100

$
87,409

	March 31, 2005		December 31, 2004
	(unaudited)
Restructuring (See Note 6)	$	6,629	$	7,871
Other	407		407
	$	7,036	$	8,278

Note 3. ~~Commercial Credit Facilities~~ Bank Borrowings, Long-Term Debt and Other Non-Current Liabilities

Bank borrowings and long-term debt consists of the following (in thousands):

	March 31, 2005			December 31, 2004
	(unaudited)
Convertible debentures, 6% coupon, due in various maturities beginning in June 2005 (or sooner under certain circumstances)	$	12,616		$	11,982
Bank borrowings	20,000			20,000
Term debt	776			1,027

	33,392			33,009
Less: Current portion of long-term debt	(33,116		)	(25,566		)

Long-term debt, net of current portion	$	276		$	7,443

In November 2004, the Company entered into a definitive agreement for the private placement of up to $20.0 million of convertible debentures to five institutional investors. The Company issued an initial $16.0 million of debentures which will be convertible, at the holders’ option, into common stock at a conversion price of $2.76 per share. The debentures bear interest at a rate of six percent per annum, and the Company is obligated to repay the principal amount of the initial $16.0 million of debentures in 15 equal monthly installments of $1.1 million, beginning in June 2005. Under the terms of the debentures, the monthly principal repayment obligation will increase to $2.1 million beginning in September 2005 if the Company’s cash balances as of June 30, 2005 fall below certain defined levels. This increase, which is likely, will have the effect of requiring the Company to repay the principal amount in nine installments through February 2006. Payments of principal and interest may be made in either cash or, upon receipt of stockholder approval and satisfaction of various other conditions set forth in the debentures, shares of the Company’s common stock. Subject to stockholder approval, the Company intends to use shares of its common stock for payments under the debentures to the maximum extent permitted by the conditions of the debentures. As a result of these

conditions, however, the Company anticipates having to use cash to satisfy its payment obligations through at least September 2005. Cash payments to be made during this period are expected to total approximately $6.1 million.

Investors also received warrants to purchase approximately 1.7 million shares of the Company’s common stock at a price of $3.58 per share. The warrants will be exercisable beginning six months after the closing date, and have a term of five years. As of March 31, 2005 and December 31, 2004, a total of $16.0 million in face value convertible debentures was outstanding. These debentures are recorded on the Consolidated Balance Sheet at December 31, 2004, at the discounted amount of $12.0 million. The Company is recording the difference between the face value and discounted amount as additional interest expense over the estimated life of the debentures. As of March 31, 2005, the debentures were recorded at a discounted amount of $12.6 million.

The agreement provides for an additional $4.0 million of convertible debentures to be issued to the investors at the option of the investors or, under certain circumstances, at the Company’s option.

In February 2005, the Company ~~has various~~renewed and amended its revolving credit ~~facilities with a commercial lender which include a~~facility. The amount available under the revolving line of credit ~~term debt in~~is $20.0 million. Borrowings under the ~~form of notes payable, and an equipment line of credit.~~

~~The Company maintains a~~ revolving line of credit ~~which is~~are collateralized by all of the Company’s assets and ~~under which borrowings~~ bear interest at the bank’s prime ~~rate. Interest is due monthly~~rate (5.75% as of March 31, 2005 and ~~principal is due at expiration in February 2005. At September 30, 2004~~5.25% as of December 31, 2004). As of March 31, 2005 and December 31, ~~2003, $15.0~~2004, $20.0 million ~~and $27.0 million was~~remaining outstanding under the ~~line of~~Company’s revolving credit ~~respectively.~~ In September 2004, the Company entered into a renewed and amended loan and security agreement with the lender. The agreement requires the Company to maintain certain levels in unrestricted cash and cash equivalents (excluding equity investments), and to maintain certain levels on deposit with its commercial lender. The agreement also modified the financial covenants and reduced the revolving line of credit borrowing limit from $27.0 million to $15.0 million. As of September 30, 2004, the Company was not in compliance with the financial covenants of its commercial credit facilities and, as a result, cannot borrow funds under the revolving line of credit. Subsequent to September 30, 2004, the Company repaid the $15 million outstanding balance on the line of credit from existing cash.facility

As of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, outstanding term debt borrowings were approximately ~~$1.2 million~~$776,000 and ~~$1.9~~$1.0 million, respectively. Borrowings bear interest ~~between~~at the bank’s prime rate ~~(4.75%~~(5.75% as of ~~September 30, 2004~~March 31, 2005 and ~~4.00%~~5.25% as of December 31, ~~2003) and the bank’s prime rate~~2004) plus up to 1.25%. Principal and interest are due in monthly payments through maturity based on the terms of the facilities. Principal payments of ~~$244,000~~$386,000 are due ~~through~~for the remainder of ~~2004, $611,000 is due in~~ 2005, and ~~a final payment~~payments of ~~$357,000 is due in 2006.~~

During the first fiscal quarter of 2004, the Company entered into a $500,000 equipment line of credit with the commercial lender. Such line of credit is secured by all of the Company’s assets and under which borrowings bear interest at the banks prime rate (4.75% as of September 30, 2004) plus .75%. Principal payments$390,000 are due in 36 monthly payments. Principal payments of $6,428 are due through the remainder of 2004, $25,715 is due in 2005 and 2006, and a final payment of $6,429 is due in 2007. As of September 30, 2004, $64,288 was outstanding under the equipment loan.thereafter.

Commitments totaling ~~$21.0~~$5.2 million and ~~$19.8~~$24.3 million in the form of standby letters of credit were issued on the Company’s behalf from financial institutions as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, respectively, primarily in favor of the Company’s various landlords to secure obligations under the Company’s facility ~~leases or future lease termination costs (see Note 6).~~leases. Accordingly, ~~$21.0~~$5.2 million and ~~$19.8~~$24.3 million have been presented as restricted cash in the accompanying Condensed Consolidated Balance Sheets as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, respectively.

Note 4. Commitments and Contingencies

Warranties and Indemnification

The Company provides a warranty to its customers that its software will perform substantially in accordance with documentation typically for a period of 90 days following receipt of the software. The Company also indemnifies certain customers from third-party claims of intellectual property infringement relating to the use of its products. Historically, costs related to these guarantees have not been significant and the Company is unable to estimate the maximum potential impact of these guarantees on its future results of operations.

The Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer is, or was, serving in such capacity. The term of the indemnification period is for so long as such officer or director is subject to an indemnifiable event by reason of the fact that such person was serving in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is insignificant. Accordingly, the Company has no liabilities recorded for these agreements as of either ~~September 30, 2004~~March 31, 2005 or December 31, ~~2003.~~2004. The Company assesses the need for an indemnification reserve on a quarterly basis and there can be no guarantee that an indemnification reserve will not become necessary in the future.

Leases

The Company leases its headquarters facility and its other facilities under non-cancelable operating lease agreements expiring through the year 2010. Under the terms of the agreements, the Company is required to pay lease costs, property taxes, insurance and normal maintenance costs.

1214

A summary of total future minimum lease payments as of ~~September 30, 2004,~~March 31, 2005, under noncancelable operating lease agreements, including future minimum facilities payments, is as follows (in millions):

Years Ending December 31,	Operating Leases		Operating Leases
2004	$	2.3
2005	9.1		$	1.2
2006	6.5		0.7
2007	3.5		0.5
2008 and thereafter	1.4
2008			0.3
2009 and thereafter			0.4

Total minimum lease payments	$	22.8	$	3.1

As of September 30, 2004, the Company has accrued $36.7 million of estimated future facilities costs as a restructuring accrual (see Note 6). This accrual includes the above minimum lease payments that are related to excess and abandoned space under lease, a lease termination payment of $18.1 million due in January 2005 and certain lease related allowances, fees and expenses, partially offset by estimated future sublease income. The estimated sublease income netted against the restructuring accrual consists of the following (unaudited, in millions):

Sublease income to be received under non-cancelable sublease agreements signed prior to September 30, 2004

$
4.4

Estimated sublease income for sublease agreements yet to be negotiated

2.8

Total estimated sublease income

$
7.2

~~During the quarter ended September 30, 2004, the Company reached agreements with certain landlords to extinguish approximately $142 million of future real estate obligations,~~ See Note 6.6 of Notes to Condensed Consolidated Financial Statements for information about additional payments due under previously negotiated lease buyout transactions.

~~Equity Investment~~

~~Reclassification~~

~~Certain reclassifications have been made to prior year balances in order to conform to the current period presentation. These~~

~~reclassifications do not have an effect on BroadVision’s consolidated financial condition, results of operation or cash flows.~~

Standby Letter of Credit Commitments

As of ~~September 30, 2004,~~March 31, 2005, the Company had ~~$21.0~~$5.2 million of outstanding commitments in the form of standby letters of credit, primarily in favor of the Company’s various landlords to secure obligations under the Company’s facility leases.

Legal Proceedings

The Company is subject to various claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the Company’s business, financial condition or results of operations. Although management currently believes that the outcome of these outstanding legal proceedings, claims and litigation involving the Company will not have a material adverse effect on its business, results of operations or financial condition, litigation is inherently uncertain, and there can be no assurance that existing or future litigation will not have a material adverse effect on the Company’s business, results of operations or financial condition.

~~Metropolitan Life Insurance~~On June 10, 2004, MetLife filed a complaint in the Superior Court of the State of California, County of Los Angeles, naming the Company as ~~landlord under~~ a ~~lease~~defendant. The complaint alleged that the Company was liable for ~~facilities located in EL Segundo, CA,~~unlawful detainer of premises leased from the plaintiff. The plaintiff thereafter filed a ~~lawsuit against~~First Amended Complaint alleging that the Company ~~for~~no longer held possession of the premises but was in breach of the lease. In February 2005, MetLife and the Company reached agreement and executed documents regarding a settlement of the pending lawsuit under which the Company will pay MetLife an aggregate of $1.9 million in consideration for termination of the lease, dismissal of the lawsuit and ~~is seeking recovery~~in full settlement of ~~lost rent~~approximately $3.1 million of past and ~~other damages. Trial~~future lease obligations. The first of three installment payments was made in February 2005, with the second due in May 2005 and the third due in September 2005.

On January 7, 2005, the Company announced that it had reached agreement with the SEC to settle administrative proceedings in connection with the restatement of financial results for the third quarter of fiscal 2001. No fines or financial penalties were associated with the settlement. Without admitting or denying any wrongdoing, the Company consented to the SEC’s entry of an administrative order that included findings that it issued a false and misleading earnings press release and misleading quarterly report. The order requires that the Company cease and desist from committing or causing violations of specified provisions of the federal securities laws. The SEC found that a former executive in charge of professional services who left BroadVision in 2002 was responsible for the improper accounting. The restatement concerned revenue related to one software license agreement. Following receipt of payment in full by the customer, the Company recognized revenue on that agreement in its entirety in the third quarter of 2001. The Company subsequently determined that the revenue should instead be recognized ratably over the four-year life of the agreement, and announced on April 1, 2002 that it was restating the financial statements for the third quarter of 2001 to effect

this change. The Company has been ~~set~~accounting for ~~May 2005.~~the revenue ratably in all periods since the third quarter of 2001.

Note 5. Geographic, Segment and Significant Customer Information

The Company operates in one segment, electronic business commerce solutions. The Company’s reportable segment includes the Company’s facilities in North ~~and South~~ America (“Americas”), Europe and Asia Pacific and the Middle East (“Asia/Pacific”). The Company’s ~~chief operating decision maker is considered to be the Company’s~~ Chief Executive Officer (“CEO”). is the Company’s chief operating decision maker. The CEO

reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region and by product for purposes of making operating decisions and assessing financial performance.

The disaggregated revenue information reviewed by the CEO is as follows (unaudited, in thousands):

	Three months ended September 30,					Nine Months Ended September 30,				Three months ended March 31,
	2004		2003			2004		2003		2005			2004
Software licenses	$	4,654	$	5,076		$	19,591	$	19,875	$		4,416	$	7,840
Consulting services	5,013		4,692			15,105		17,038		5,147			4,911
Maintenance	7,557		8,801			23,545		27,916		6,804			8,138
Total revenues	$	17,224	$		18,569	$	58,241	$	64,829	$	16,367		$		20,889

The Company sells its products and provides services worldwide through a direct sales force and through a channel of independent distributors, VARs and ASPs. In addition, the licenses of the Company’s products are promoted through independent professional consulting organizations known as systems integrators. The Company provides services worldwide through its BroadVision Global Services Organization and indirectly through distributors, VARs, ASPs and systems integrators.

Disaggregated financial information regarding the Company’s geographic revenues and long-lived assets is as follows (in thousands):

	Three months ended September 30,				Nine Months Ended September 30,				Three months ended March 31,
	2004		2003		2004		2003		2005		2004
	(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)
Revenues:
Americas	$	9,269	$	9,073	$	27,772	$	32,750	$	8,638	$	9,651
Europe	6,134		7,997		25,210		25,966		5,918		10,093
Asia/Pacific	1,821		1,499		5,259		6,113		1,811		1,145
Total Company	$	17,224	$	18,569	$	58,241	$	64,829
Total revenues									$	16,367	$	20,889

	September 30, 2004		December 31, 2003		March 31, 2005		December 31, 2004
	(unaudited)				(unaudited)
Long-Lived Assets:
Americas	$	61,498	$	73,016	$	59,985	$	60,312
Europe	558		537		386		531
Asia/Pacific	514		635		513		527
Total Company	$	62,570	$	74,188
Total long-lived assets					$	60,884	$	61,370

During the three months ended March 31, 2005 and ~~nine month periods ended September 30,~~ 2004, ~~and 2003,~~ no single customer accounted for more than 10% of the Company’s revenues.

Note 6. Restructuring Charges

Through ~~September 30, 2004,~~March 31, 2005, the Company has approved certain restructuring plans to, among other things, reduce its workforce and consolidate facilities. Restructuring and asset impairment charges have been

taken to align our cost structure with changing market conditions and to create a more efficient organization. Our restructuring charges ~~comprise primarily:~~have been comprised primarily of: (i) severance and benefits termination costs related to the reduction of our workforce; (ii) lease termination costs and/or costs associated with permanently vacating our facilities; (iii) other incremental costs incurred as a direct result of the restructuring plan; and (iv) impairment costs related to certain long-lived assets abandoned. We account for each of these costs in accordance with ~~Staff Accounting Bulletin No.~~SAB 100, Restructuring and Impairment Charges.

For each of the periods presented herein, restructuring charges consist solely of:

• Severance and Termination Benefits — These costs represent severance, payroll taxes and COBRA benefits related to restructuring plans implemented prior to the date recognized.

• Excess Facilities — These costs represent future minimum lease payments related to excess and abandoned space under lease, net of estimated sublease income and planned company occupancy.

Activity related to restructuring plans initiated prior to December 31, 2002 is accounted for in accordance with EITF 94-3. Plans initiated subsequent to December 31, 2002 are accounted for in accordance with FAS 146, with the exception of amounts that were the result of changes in estimates to restructuring plans that were initiated prior to December 31, 2002. As of ~~September 30, 2004,~~March 31, 2005, the total restructuring accrual ~~was $37.7~~of $13.3 million ~~under EITF 94-3 and FAS 146, consisting~~consisted of the following (in millions):

	Current		Non-Current		Total		Current		Non-Current		Total
Severance and Termination	$	1.0	$	—	$	1.0	$	0.6	$	—	$	0.6
Excess Facilities	23.0		13.7		36.7		6.1		6.6		12.7

Total	$	24.0	$	13.7	$	37.7	$	6.7	$	6.6	$	13.3

The Company estimates that the ~~$1.0 million~~$600,000 severance and termination accrual will be paid in full by ~~March~~December 31, 2005. We expect to pay the excess facilities amounts related to restructured or abandoned leased space as follows (in millions):

Years ending December 31,			Total future minimum payments
2004	$	1.7
2005	23.6		$	5.6
2006	8.2		5.3
2007	2.2		0.8
2008 and thereafter (through October 2010)	1.0
2008			0.4
2009 and thereafter (through October 2010)			0.6

Total minimum facilities payments	$	36.7	$	12.7

Of this excess facilities accrual, ~~$11.5~~$5.6 million relates to payments due in fiscal 2005 under existing leases and lease termination agreements, and $7.1 million relates to future minimum lease payments, fees and expenses, net of estimated sublease income and planned company ~~occupancy,~~occupancy.

The following table summarizes the activity related to the restructuring plans initiated subsequent to December 31, 2002, and accounted for in accordance with FAS 146 (in thousands):

	Accrued restructuring costs beginning		Amounts charged to restructuring costs and other			Amounts paid or written off			Accrued restructuring costs, ending
Quarter Ended March 31, 2005
Lease cancellations and commitments	$	21,824	$	(631	)	$	(17,347	)	$	3,846
Termination payments to employees and related costs	365		(95		)	(155		)	115
	$	22,189	$	(726	)	$	(17,502	)	$	3,961

Quarter Ended March 31, 2004
Lease cancellations and commitments	$	21,683	$	—		$	—		$	21,683
Termination payments to employees and related costs	242		318			(465		)	95
	$	21,925	$	318		$	(465	)	$	21,778

The following table summarizes the ~~remaining $25.2 million relates~~activity related to ~~estimated allowances, fees~~the restructuring plans initiated on or prior to December 31, 2002, and ~~expenses. During the third quarter of 2004, the Company~~ ~~reached agreements~~accounted for in accordance with certain landlords to extinguish approximately $142 million of future real estate obligations. The Company made cash payments of $19.1 million during the third quarter, and is obligated to make an additional cash payment of $18.1 million in January 2005, which is included in the total restructuring accrual of $37.7 million.EITF 94-3 (in thousands):

	Accrued restructuring costs, beginning		Amounts charged to restructuring costs and other		Amounts paid or written off			Accrued restructuring costs, ending
Quarter Ended March 31, 2005
Lease cancellations and commitments	$	11,515	$	22	$	(2,666	)	$	8,871
Termination payments to employees and related costs	459		—		(14		)	445
	$	11,974	$	22	$	(2,680	)	$	9,316
Quarter Ended March 31, 2004
Lease cancellations and commitments	$	83,026	$	252	$	(4,986	)	$	78,292
Termination payments to employees and related costs	429		—		—			429
	$	83,455	$	252	$	(4,986	)	$	78,721

As mentioned above, ~~we have~~the Company has based ~~our~~its excess facilities accrual, in part, upon estimates of future sublease income. ~~We have~~The Company has used the following factors, among others, in making such estimates: opinions of independent real estate experts, current market conditions and rental rates, an assessment of the time period over which reasonable estimates could be made, the status of negotiations with potential subtenants, and the location of the respective facilities. The ~~estimated sublease income netted against the restructuring accrual consists of the following (in millions):~~

~~The~~ Company has recorded the low-end of a range of assumptions modeled for restructuring charges, in accordance with SFAS ~~No. 5,~~ ~~Accounting for Contingencies~~.5. Adjustments to the facilities accrual will be required if actual ~~lease exit costs or~~ sublease income ~~differ~~differs from amounts currently expected. WeThe Company will review the status of restructuring activities on a quarterly basis and, if appropriate, record changes to our restructuring obligations in current operations based on management’s most current estimates.

~~The following table summarizes the activity related to the restructuring plans initiated subsequent to December 31, 2002, and accounted for in accordance with FAS 146 (in thousands):~~

Accrued
restructuring costs
at Jun. 30, 2004

Amounts charged to
restructuring costs
and other

Amounts paid
or written off

Accrued
restructuring costs
at Sep. 30, 2004

Three months ended September 30, 2004

Lease cancellations and commitments

$
12,394

$
9,643

$
(340
)
$
21,697

Termination payments to employees and related costs

164

582

(175
)
571

Write-off on disposal of assets and related costs

9,289

(1,193
)
(8,096
)
—

$
21,847

$
9,032

$
(8,611
)
$
22,268

Accrued
restructuring costs
at Dec. 31, 2003

Amounts charged to
restructuring costs
and other

Amounts paid
or written off

Accrued
restructuring costs
at Sep. 30, 2004

Nine months ended September 30, 2004

Lease cancellations and commitments

$
11,894

$
9,643

$
160

$
21,697

Termination payments to employees and related costs

242

1,058

(729
)
571

Write-off on disposal of assets and related costs

9,789

(1,193
)
(8,596
)
—

$
21,925

$
9,508

$
(9,165
)
$
22,268

~~The following table summarizes the activity related to the restructuring plans initiated on or prior to December 31, 2002, and accounted for in accordance with EITF 94-3 (in thousands):~~

Accrued
restructuring
costs
at June 30, 2003

Amounts charged to
restructuring costs
and other

Amounts reversed
to restructuring
costs and other

Amounts paid
or written off

Accrued
restructuring
costs at
September 30,
2003

Three months ended September 30, 2003

Lease cancellations and commitments

$
89,216

$
3,269

$
—

$
(5,335
)
$
87,150

Termination payments to employees and related costs

1,000

1,240

—

(979
)
1,261

Write-off on disposal of assets and related costs

40

—

—

(40
)
—

$
90,256

$
4,509

$
—

$
(6,354
)
$
88,411

Accrued
restructuring
costs
at June 30,
2004

Amounts charged to
restructuring costs
and other

Amounts reversed
to restructuring
costs and other

Amounts paid
or written off

Accrued
restructuring
costs at
September 30,
2004

Three months ended September 30, 2004

Lease cancellations and commitments

$
71,707

$
(34,477
)
$
—

$
(23,629
)
$
13,601

Termination payments to employees and related costs

429

—

—

—

429

Write-off on disposal of assets and related costs

1,486

(9
)
—

(115
)
1,362

$
73,622

$
(34,486
)
$
—

$
(23,744
)
$
15,392

Accrued
restructuring
costs
December 31,
2002

Amounts charged to
restructuring costs
and other

Amounts reversed
to restructuring
costs and other

Amounts paid
or written off

Accrued
restructuring
costs,
September 30,
2003

Nine months ended September 30, 2003

Lease cancellations and commitments

$
94,691

$
11,887

$
—

$
(19,428
)
$
87,150

Termination payments to employees and related costs

1,425

1,500

—

(1,664
)
1,261

Write-off on disposal of assets and related costs

79

(26
)
—

(53
)
—

$
96,195

$
13,361

$
—

$
(21,145
)
$
88,411

Accrued
restructuring
costs December
31, 2003

Amounts charged to
restructuring costs
and other

Amounts reversed
to restructuring
costs and other

Amounts paid
or written off

Accrued
restructuring
costs
September 30,
2004

Nine months ended September 30, 2004

Lease cancellations and commitments

$
81,143

$
(33,704
)
$
—

$
(33,838
)
$
13,601

Termination payments to employees and related costs

429

—

—

—

429

Write-off on disposal of assets and related costs

1,883

(9
)
—

(512
)
1,362

$
83,455

$
(33,713
)
$
—

$
(34,350
)
$
15,392

~~During the third quarter of 2004, the Company~~ reached agreements with certain landlords to extinguish approximately $142 million of future real estate obligations. The Company made cash payments of $19.1 million during the third quarter, and is obligated to make an additional cash payment of $18.1 million in January 2005. Standby letters of credit of $18.1 million were issued on our behalf from financial institutions as of September 30, 2004 in favor of our landlord to secure the January 2005 payment. Accordingly, $18.1 million has been included in restricted cash in the accompanying Condensed Consolidated Balance Sheets at September 30, 2004. The Company also transferred ownership of certain furniture, fixtures, and leasehold improvements with a net book value of $8.1 million to the previous landlord. The Company currently has a residual lease obligation beginning in 2007 and will make a further cash payment of $4.5 million if it exercises an option to terminate the residual lease obligation prior to the commencement of the lease term. This option to terminate the residual lease obligation is accounted for in accordance with SFAS 146 and is a part of our computation of the restructuring gain. In addition, the Company issued a warrant to purchase approximately 700,000 shares of our common stock at an exercise price of $5.00 per share after a one-year period. In connection with the lease termination agreements, the Company recorded a restructuring gain of $26.0 million in the quarter ended September 30, 2004. The total amount of the net restructuring gain, after inclusion of amounts accrued for employee termination costs, was $25.5 million for the quarter ended September 30, 2004.

~~The warrant issued in connection with the real estate agreements~~ ~~and the shares of the Company’s common stock issuable on the exercise of the warrant~~ ~~were initially not registered under federal securities laws. In accordance with EITF 00-19,~~ ~~“Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,~~” the warrants have been included as a short-term liability and valued at fair value on the date of issuance. The warrants are revalued each period until the warrants are exercised. The change in fair value from the date of issuance to September 30, 2004 of $272,000 has been recorded as a component of the restructuring charge. The warrants will be transferred to permanent equity when the warrants are exercised.

Note 7. Goodwill and Other Intangible Assets

~~Goodwill and other intangibles consist of the following (in thousands):~~

September 30,
2004

December 31,
2003

(unaudited)

Goodwill

$
437,206

$
437,206

Less: Accumulated amortization

(383,785
)
(383,785
)
Goodwill, net

53,421

53,421

Other intangibles

22,732

22,732

Less: Accumulated amortization

(19,719
)
(19,719
)
Other intangibles, net

3,013

3,013

On January 1, 2002, the Company adopted SFAS ~~No.~~ 142~~Goodwill and Intangible Assets.~~. Under SFAS ~~No.~~ 142, goodwill and intangible assets with indefinite lives are no longer subject to amortization but are tested for impairment at least annually using a fair value approach, and whenever there is an impairment indicator. Other intangible assets continue to be valued and amortized over their estimated lives.

Pursuant to SFAS ~~No.~~ 142, the Company is required to test its goodwill for impairment upon adoption and annually or more often if events or changes in circumstances indicate that the asset might be impaired. While there was no accounting charge to record upon adoption, at September 30, 2002, the Company concluded that, based on the existence of impairment indicators, including a decline in its market value, it would be required to test goodwill for impairment. SFAS No. 142 provides for a two-stage approach to determining whether and by how much goodwill has been impaired. Since the Company has only one reporting unit for purposes of applying SFAS No. 142, the first stage requires a comparison of the fair value of the Company to its net book value. If the fair value is greater, then no impairment is deemed to have occurred. If the fair value is less, then the second stage must be completed to determine

1718

~~the amount, if any, of actual impairment.~~ The Company completed the first stage and has determined that its fair value at September 30, 2002 exceeded its net book value on that date, and as a result, no impairment of goodwill was recorded in the consolidated financial statements. The Company obtained an independent appraisal of fair value to support its conclusion. Additionally, the Company concluded that, based upon the market value of its stock in relation to the Company’s net book value at ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, there was no additional impairment of goodwill warranted.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. In estimating the fair value of the Company, the Company made estimates and judgments about future revenues and cash flows. The Company’s forecasts were based on assumptions that are consistent with the plans and estimates the Company is using to manage the business. Changes in these estimates could change the Company’s conclusion regarding impairment of goodwill and potentially result in a non-cash goodwill impairment charge for all or a portion of the goodwill balance at ~~September 30, 2004.~~March 31, 2005.

~~Upon adoption of SFAS No. 142, on January 1, 2002, the Company no longer amortizes goodwill.~~ Additionally, upon adoption of SFAS ~~No.~~ 141 and SFAS 142, the Company no longer amortizes its non-technology based intangible asset, or assembled workforce. ~~The remaining other intangible assets have~~As of December 31, 2003, completed technology intangibles had been fully ~~amortized as of September 30, 2004.~~amortized.

Note 88.~~Comprehensive Income (Loss)~~ Warrants

~~SFAS No. 130,~~ ~~“Reporting Comprehensive Income,”~~ ~~requires~~As of March 31, 2005, the ~~disclosure of comprehensive income~~following warrants to ~~reflect changes~~purchase the Company’s common stock were outstanding:

Description	Underlying Shares	Excercise Price per Share

Issued to landlord in real estate buyout transaction in August 2004	700,000	$	5.00
Issued to convertible debenture investors in November 2004	1,739,130	3.58
Other issued in connection with revenue transactions in 1997 and 2000	9,628	Various

The warrant issued in ~~equity that result from transactions and economic events from non-owner sources. Other comprehensive income (loss) for the periods presented represents foreign currency translation items associated~~connection with the ~~Company’s international operations. Comprehensive income (loss) includes net income (loss), unrealized gains (losses) on available-for-sale securities~~real estate transaction has a term of five years and ~~foreign currency translation adjustments.~~is exercisable beginning in August 2005. The warrant issued in connection with the convertible debentures also has a term of five years and is exercisable beginning in May 2005.

~~Comprehensive income (loss) is comprised~~In accordance with EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, the warrants have been included as a short-termliability and were originally valued at fair value on the date of issuance. The warrants are revalued each period until and unless the ~~following (in thousands):~~warrants are exercised. For the three-month period ended March 31, 2005, the Company recorded gains related to the revaluation of warrants to the landlord and debenture holders of $753,000 and $1.8 million, respectively. These gains are included as a component of Restructuring Charges and of Other Income (Expense), net, respectively, in the accompanying Condensed Consolidated Statements of Operations. If the warrants are exercised prior to their termination, their carrying value will be transferred to equity.

Three Months Ended
September 30,

Nine Months Ended
September 30,

2004

2003

2004

2003

Net income (loss)

$
23,380

$
(10,265
)
$
21,021

$
(16,523
)
Other comprehensive income (loss):

Change in accumulated foreign currency translation adjustments

189

189

Change in accumulated unrealized gain (loss) on available-for-sale securities

(1
)
(46
)
49

(83
)
Total comprehensive income (loss)

$
23,568

$
(10,311
)
$
21,259

$
(16,606
)

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

This report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. These forward-looking statements are generally identified by words such as “expect,” “anticipate,” “intend,” “believe,” “hope,” “assume,” “estimate,” “plan,” “will” and other similar words and expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements as a result of certain factors, including those described herein and in the Company’s most recently filed Annual Report on Form 10-K and other documents filed with the ~~Securities and Exchange Commission.~~SEC. We undertake no obligation to publicly release any revisions to the forward-looking statements or to reflect events and circumstances after the date of this document.

Overview

We develop, market and support a suite of personalized self-service web applications that enable organizations to unify their e-business infrastructure and conduct both interactions and transactions with employees, partners and customers. Our integrated suite of process, commerce, portal and contentBroadVision solutions ~~helps organizations~~help customers rapidly increase revenues and reduce ~~costs.~~costs by moving interactions and transactions to personalized self service via the web. Our integrated self-service application suite—including process, commerce, portal and content—offers rich functionality out of the box, and is easily configured for each customer’s e-business environment.

~~As of September 30, 2004, more than~~Over 1,000 ~~companies~~customers—including U.S. Air Force, Lockheed Martin, Netikos, Circuit City, Wal*Mart, Iberia L.A.E. and ~~government entities around the globe are using our applications~~Vodafone—have licensed BroadVision solutions to power and personalize their mission-critical web initiatives.

Worldwide demand for enterprise software has declined significantly over the past several ~~quarters.~~years. The decline in venture

capital spending has resulted in fewer new companies with funding to, among other things, build an on-line business. Established companies have scaled back, delayed or cancelled web-based initiatives. As a result of these reasons and others, we have seen significant declines in our revenue over the past ~~three~~four fiscal years.

Our objective is to further our position as a leading supplier of web-based, self-service applications. This will require us to continue to build in new functionality to our applications that offer our customers a compelling value proposition to license our products rather than design and build custom solutions.

We generate revenue from fees for licenses of our software products, maintenance, consulting services and customer training. We generally charge fees for licenses of our software products either based on the number of persons registered to use the product or based on the number of CPUs on the machine on which the product is installed. Payment terms are generally thirty days from the date the products are delivered or the services are provided.

From 2001 to date, we have incurred significant losses and negative cash flows from operations. In fiscal year 2004, we entered into a series of agreements to terminate significant excess lease obligations that were contributing to that negative cash flow. Under the terms of these agreements, we have incurred an obligation to pay $45 million, and our future cash outflows will be reduced by over $4 million per quarter. We believe that these transactions are an important step towards our goal of generating consistent positive cash flows, although we make no assurances about our ability to generate positive cash flows in future periods.

We strive to anticipate changes in the demand for our services and aggressively manage our labor force appropriately. Through our thorough budgeting process, cross-functional management participates in the planning, reviewing and managing of our business plans. This process allows us to adjust our cost structures to changing market needs, competitive landscapes and economic factors. Our emphasis on cost control helps us manage our margins even if revenues generated fall short of what we anticipated.

Recent Events

In November 2004, we entered into a definitive agreement for the private placement of up to $20.0 million of convertible debentures to five institutional investors. We issued an initial $16.0 million of debentures, which will be convertible, at the holders’ option, into common stock at a conversion price of $2.76 per share. The ~~Company has~~debentures bear interest at a rate of six percent per annum, and we are obligated to repay the principal amount of the initial $16.0 million of debentures in 15 equal monthly installments of $1.1 million,

beginning in June 2005. Under the terms of the debentures, our monthly principal repayment obligation will increase to $2.1 million beginning in September 2005 if our cash balances as of June 30, 2005 fall below certain defined levels. This increase, which is likely, will have the effect of requiring us to repay the principal amount in nine installments through February 2006. Payments of principal and interest may be made in either cash or, upon receipt of stockholder approval and satisfaction of various other conditions set forth in the debentures, shares of our common stock. Subject to stockholder approval, we intend to use shares of our common stock for payments under the debentures to the maximum extent permitted by the conditions of the debentures. As a result of these conditions, however, we anticipate having to use cash to satisfy our payment obligations through at least September 2005. Cash payments to be made during this period are expected to total approximately $6.1 million. The agreement provides for an additional $4.0 million of convertible debentures to be issued to the investors at the option of the investors or, under certain circumstances, at our option. Investors also received warrants to purchase approximately 1.7 million shares of our common stock at a price of $3.58 per share. The warrants will be exercisable beginning six months after the closing date, and have a term of five years.

We have various credit facilities with a commercial lender, which include term debt in the form of notes payable, a revolving line of credit and an equipment line of credit. In ~~September 2004, the Company~~February 2005, we entered into a renewed and amended loan and security agreement with the lender. The agreement requires ~~the Company~~us to maintain certain levels inof unrestricted cash and cash equivalents (excluding equity investments), and to maintain certain levels on deposit with ~~its commercial~~the lender. ~~The agreement also modified the financial covenants and reduced the revolving line of credit borrowing limit from $27.0 million to $15.0 million.~~ At ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003, $15.0 million and $27.0~~2004, $20.0 million was outstanding under the line of ~~credit respectively.~~credit. Borrowings under the line of credit are collateralized by all of our assets and bear interest at the bank’s prime rate. Interest is due monthly and principal is due at the expiration in February ~~2005.~~ As of September 30, 2004, the Company was not in compliance with the financial covenants of its commercial credit facilities and, as a result, cannot borrow funds under the revolving line of credit. Subsequent to September 30, 2004, the Company repaid the $15 million outstanding balance on the line of credit from existing cash.2006.

During the third ~~quarter~~and fourth quarters of 2004, ~~the Company~~ we reached agreements with certain landlords to extinguish approximately ~~$142~~$155.0 million of future real estate obligations. ~~The Company~~We made cash payments of ~~$19.1~~$20.7 million ~~during the third quarter,~~in 2004, and ~~is obligated to make~~ an additional cash payment of ~~$18.1~~$21.9 million in ~~January~~the first quarter of 2005. ~~Standby letters of credit of $18.1 million were issued on our behalf from financial institutions as of~~ September 30, 2004 in favor of our landlord to secure the January 2005 payment. Accordingly, $18.1 million has been included in restricted cash in the accompanying Condensed Consolidated Balance Sheets at September 30, 2004. The Company also transferred ownership of certain furniture, fixtures, and leasehold improvements with a net book value of $8.1 million to the previous landlord. In addition, we issued to one of the ~~Company issued~~landlords a five-year warrant to purchase approximately 700,000 shares of our common stock at an exercise price of $5.00 per share, ~~after~~exercisable beginning in August 2005.

As a component of the settlement of one ~~year period. The Company currently has~~of the previous leases, we have a residual lease obligation beginning in 2007 ~~and will~~of approximately $9.1 million. We may make ~~a further~~an additional cash payment of $4.5 million if ~~it exercises~~we exercise an option to terminate ~~the~~this residual real estate ~~obligation.~~obligation prior to the lease term, which commences in January 2007. This option to terminate the residual lease obligation, discounted to net present value, is accounted for in accordance with SFAS 146 and is part of ~~our computation~~the non-current restructuring accrual of ~~the restructuring gain. In connection with these agreements, the Company recorded a restructuring gain~~$6.6 million as of $26.0 million in the quarter ended September 30, 2004. The total amount of the net restructuring gain, after inclusion of amounts accrued for employee termination costs, was $25.5 million for the quarter ended September 30, 2004.March 31, 2005.

Critical Accounting Policies

This management’s discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. In preparing these financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to doubtful accounts, product returns, investments, goodwill and intangible assets, income taxes and restructuring, as well as contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates using different assumptions or conditions. We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

Overview — Our revenue consists of fees for licenses of our software products, maintenance, consulting services and customer training. We generally charge fees for licenses of our software products

either based on the number of persons registered to use the product or based on the number of ~~Central Processing Units (“CPUs”)~~CPUs on the machine on which the product is installed. Licenses for software whereby fees charged are based upon the number of persons registered to use the product are differentiated between licenses for development use and licenses for use in deployment of the customer’s website. Licenses for software whereby fees charged are on a per-CPU basis do not differentiate between development and deployment usage. Our revenue recognition policies comply with the provisions of Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, as amended; SOP No. 98-9, Software Revenue Recognition, With Respect to Certain Transactions and ~~the Securities and Exchange Commission’s Staff Accounting Bulletin No.~~SAB 101~~Revenue Recognition in Financial Statements.~~.

Software License Revenue

We license our products through our direct sales force and indirectly through resellers. In general, software license revenues are recognized when a non-cancelable license agreement has been signed and the customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and

determinable and collection is considered probable. Delivery is considered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs when media containing the licensed programs is provided to a common carrier. In case of electronic delivery, delivery occurs when the customer is given access to the licensed programs. For products that cannot be used without a licensing key, the delivery requirement is met when the licensing key is made available to the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Subscription-based license revenues are recognized ratably over the subscription period. We enter into reseller arrangements that typically provide for sublicense fees payable to the us based upon a percentage of list price. We do not grant ~~its~~ resellers the right of return.

We recognize revenue using the residual method pursuant to the requirements of SOP No. 97-2, as amended by SOP No. 98-9. Revenues recognized from multiple-element software arrangements are allocated to each element of the arrangement based on the fair values of the elements, such as licenses for software products, maintenance, consulting services or customer training. The determination of fair value is based on objective evidence, which is specific to us. We limit its assessment of objective evidence for each element to either the price charged when the same element is sold separately or the price established by management having the relevant authority to do so, for an element not yet sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.

We record unearned revenue for software license agreements when cash has been received from the customer and the agreement does not qualify for revenue recognition under our revenue recognition policy. We record accounts receivable for software license agreements when the agreement qualifies for revenue recognition but cash or other consideration has not been received from the customer.

Services Revenue

Consulting services revenues and customer training revenues are recognized as such services are performed. Maintenance revenues, which include revenues bundled with software license agreements that entitle the customers to technical support and future unspecified enhancements to our products, are deferred and recognized ratably over the related agreement period, generally twelve months.

Our consulting services, which consist of consulting, maintenance and training, are delivered through the BroadVision Global Services (“BVGS”) organization. Services that we provide are not essential to the functionality of the software. We record reimbursement from our customers for out-of-pocket expenses as an increase to services revenues.

Allowances and Reserves

Occasionally, our customers experience financial difficulty after we record the revenue but before we are paid. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our normal payment terms are 30 to ~~120~~90 days from invoice date. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Impairment Assessments

We adopted ~~Statement of Financial Accounting Standard (“SFAS”) No.~~SFAS 142~~“Goodwill and Other Intangible Assets,”~~ on January 1, 2002. This standard requires that goodwill no longer be amortized, and instead, be tested for impairment on a periodic basis.

Pursuant to SFAS ~~No.~~ 142, we are required to test goodwill for impairment upon adoption and annually or more often if events or changes in circumstances indicate that the asset might be impaired. While there was no accounting charge to record upon adoption, at September 30, 2002, we concluded that, based on the existence of impairment indicators, including a decline in our market value, we would be required to test goodwill for impairment. SFAS ~~No.~~ 142 provides for a two-stage approach to determining whether and by how much goodwill has been impaired. Since we have only one reporting unit for purposes of applying SFAS ~~No.~~ 142, the first stage requires a comparison of the fair value of the Company to its net book value. If the fair value is greater, then no impairment is deemed to have occurred. If the fair value is less, then the second stage must be completed to determine the amount, if any, of actual impairment. We completed the first stage and determined that our fair value at September 30, 2002 exceeded our net book value on that date and, as a result, no impairment of goodwill was recorded in the consolidated financial statements. We obtained an independent appraisal of fair value to support our conclusion. We also determined that our fair value exceeded our net book value

as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003~~2004 and, therefore, no additional impairment was warranted.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. In estimating our fair value, we made estimates and judgments about future revenues and cash flows. Our forecasts were based on

assumptions that are consistent with the plans and estimates we are using to manage our business. Changes in these estimates could change our conclusion regarding impairment of goodwill and potentially result in a non-cash goodwill impairment charge, for all or a portion of the goodwill balance at ~~September 30, 2004.~~March 31, 2005. For long-lived assets, accounting standards dictate that assets become impaired when the undiscounted future cash flows expected to be generated by them are less than their carrying amounts. When that occurs, the affected assets are written down to their estimated fair value.

Deferred Tax Assets

We analyze our deferred tax assets with regard to potential realization. We have established a valuation allowance on our deferred tax assets to the extent that we determined that it is more likely than not that some portion or all of the deferred tax assets will not be realized based upon the uncertainty of their realization. We have considered estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance.

Accounting for Stock-Based Compensation

We apply ~~Accounting Principles Board (“APB”) Opinion Number~~APB 25~~Accounting for Stock Issued to Employees~~, and related interpretations when accounting for our stock option and stock purchase plans. In accordance with APB ~~No.~~ 25, we apply the intrinsic value method in accounting for employee stock options. Accordingly, we generally recognize no compensation expense with respect to stock-based awards to employees.

During the three ~~month period~~months ended ~~September 30,~~March 31, 2004, the Company ~~did not record~~recorded compensation expense of $15,000 as a result of granting common stock to consultants. During the three months ended September 30, 2003, the Company recorded compensation expense of $231,000. During the nine months ended September 30, 2004, and 2003, the Company recorded compensation (income) expense of ($15,000) and $279,000. The compensation in all periods came as a ~~result of granting common stock options to consultants. The~~third party consultant. These charges were calculated based upon the ~~fair~~ market value of the underlying stock.

We have determined pro forma information regarding net loss and net loss per share as if we had accounted for employee stock options under the fair value method as required by SFAS ~~Number 123,~~ ~~Accounting for Stock Compensation~~.123. The fair value of these stock-based awards to employees was estimated using the Black-Scholes option pricing model. Had compensation cost for the Company’s stock option plan and employee stock purchase plan been determined consistent with SFAS ~~No.~~ 123, the Company’s reported net income (loss) and net income (loss) per share would have been changed to the amounts indicated below (in thousands, except per share ~~data)~~data, unaudited):

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2004			2003			2004			2003			2005			2004
Net income (loss) as reported	$	23,380		$	(10,265	)	$	21,021		$	(16,523	)	$	2,918		$	(867	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects	—			231			(15		)	279
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects													—			15
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(3,466		)	(2,734		)	(4,271		)	(6,739		)	(1,334		)	(2,814		)
Pro forma net income (loss)	$	19,914		$	(12,768	)	$	16,735		$	(22,983	)
Pro forma net loss													$	1,584		$	(3,666	)

Earnings (loss) per share:
Income (loss) per share:
Basic—as reported	$	0.70		$	(0.31	)	$	0.63		$	(0.51	)	$	0.09		$	(0.03	)
Basic—pro forma	$	0.59		$	(0.39	)	$	0.50		$	(0.70	)	$	0.05		$	(0.11	)

Diluted—as reported	$	0.69		$	(0.31	)	$	0.61		$	(0.51	)	$	0.07		$	(0.03	)
Diluted—pro forma	$	0.58		$	(0.39	)	$	0.49		$	(0.70	)	$	0.04		$	(0.11	)

Restructuring Charges

Through ~~September 30, 2004, the Company has~~March 31, 2005, we have approved ~~certain~~ restructuring plans to, among other things, reduce ~~its~~our workforce and consolidate facilities. Restructuring and asset impairment charges ~~have been~~were taken to align our cost structure with changing market conditions and to create a more efficient organization. Our restructuring charges ~~have been~~are comprised primarily of: (i) severance and benefits termination costs related to the reduction of our workforce; (ii) lease termination costs and/or costs associated with permanently vacating our facilities; (iii) other incremental costs incurred as a direct result of the restructuring plan;

and (iv) impairment costs related to certain long-lived assets abandoned. We account for each of these costs in accordance with ~~Staff Accounting Bulletin No.~~SAB 100~~Restructuring and Impairment Charges.~~.

~~For each of the periods presented herein, restructuring charges consist solely of:~~Severance and Termination Costs. We account for severance and benefits termination costs as follows:

• ~~Severance and Termination Benefits~~ ~~— These costs represent severance, payroll taxes and COBRA benefits related to restructuring plans implemented prior to the date recognized.~~

•~~Excess Facilities~~ ~~— These costs represent future minimum lease payments related to excess and abandoned space under lease, net of estimated sublease income and planned company occupancy.~~

~~Activity related to restructuring plans~~For exit or disposal activities initiated on or prior to December 31, 2002, ~~is accounted~~we account for costs in accordance with EITF 94-3. ~~Plans~~Accordingly, we record the liability related to these termination costs when the following conditions have been met: (i) management with the appropriate level of authority approves a termination plan that commits us to such plan and establishes the benefits the employees will receive upon termination; (ii) the benefit arrangement is communicated to the employees in sufficient detail to enable the employees to determine the termination benefits; (iii) the plan specifically identifies the number of employees to be terminated, their locations and their job classifications; and (iv) the period of time to implement the plan does not indicate changes to the plan are likely.

• For exit or disposal activities initiated ~~subsequent~~after December 31, 2002, we account for costs in accordance with SFAS 146. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred.

Excess Facilities Costs. We account for excess facilities costs as follows:

• For exit or disposal activities initiated on or prior to December 31, 2002, ~~are accounted~~we account for lease termination and/or abandonment costs in accordance with ~~FAS 146,~~EITF 88-10, Costs Associated with Lease Modification or Termination. Accordingly, we recorded the ~~exception of amounts that were~~costs associated with lease termination and/or abandonment when the ~~result of changes in estimates~~leased property had no substantive future use or benefit to ~~restructuring plans that were~~us.

• For exit or disposal activities initiated ~~prior to~~after December 31, ~~2002.~~ 2002, we account for lease termination and/or abandonment costs in accordance with SFAS 146, which requires that a liability for such costs be recognized and measured initially at fair value on the cease use date of the facility.

Severance and termination costs and excess facilities costs we record under these provisions are not associated with nor do they benefit continuing activities.

Inherent in the estimation of the costs related to our restructuring efforts are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. In determining the charges related to the restructurings to date, the majority of estimates made by management have related to charges for excess facilities. In determining the charges for excess facilities, we were required to estimate future sublease income, future net operating expenses of the facilities, and brokerage commissions, among other expenses. The most significant of these estimates have related to the timing and extent of future sublease income in which to reduce our lease obligations. We based our estimates of sublease income, in part, on the opinions of independent real estate experts, current market conditions and rental rates, an assessment of the time period over which reasonable estimates could be made, the status of negotiations with potential subtenants, and the location of the respective facility, among other factors. The Company has recorded the low-end of a range of assumptions modeled for restructuring charges, in accordance with SFAS 5. Adjustments to the facilities accrual will be required if actual lease exit costs or sublease income differ from amounts currently expected. We will review the status of restructuring activities on a quarterly basis and, if appropriate, record changes to our restructuring obligations in current operations based on management’s most current estimates.

As of ~~September 30, 2004,~~March 31, 2005, the total restructuring accrual ~~was $37.7~~of $13.3 million ~~under EITF 94-3 and FAS 146, consisting~~consisted of the following (in millions):

	Current		Non- Current		Total		Current		Non-Current		Total
Severance and Termination	$	1.0	$	—	$	1.0	$	0.6	$	—	$	0.6
Excess Facilities	23.0		13.7		36.7		6.1		6.6		12.7

Total	$	24.0	$	13.7	$	37.7	$	6.7	$	6.6	$	13.3

~~The Company estimates~~We estimate that the ~~$1.0 million~~$600,000 severance and termination accrual will be paid in full by ~~March~~December 31, 2005. We expect to pay the excess facilities amounts related to restructured or abandoned leased space as follows (in millions):

Years Ending December 31,
2004	$	1.7
Years ending December 31,			Total future minimum payments
2005	23.6		$	5.6
2006	8.2		5.3
2007	2.2		0.8
2008 and thereafter (through October 2010)	1.0
2008			0.4
2009 and thereafter (through October 2010)			0.6

Total minimum facilities payments	$	36.7	$	12.7

The following table summarizes the activity related to the restructuring plans initiated subsequent to December 31, 2002, and accounted for in accordance with FAS 146 (in thousands):

	Accrued restructuring costs beginning		Amounts charged to restructuring costs and other			Amounts paid or written off			Accrued restructuring costs, ending
Quarter Ended March 31, 2005
Lease cancellations and commitments	$	21,824	$	(631	)	$	(17,347	)	$	3,846
Termination payments to employees and related costs	365		(95		)	(155		)	115
	$	22,189	$	(726	)	$	(17,502	)	$	3,961

Quarter Ended March 31, 2004
Lease cancellations and commitments	$	21,683	$	—		$	—		$	21,683
Termination payments to employees and related costs	242		318			(465		)	95
	$	21,925	$	318		$	(465	)	$	21,778

The following table summarizes the ~~remaining $25.2 million relates~~activity related to ~~estimated allowances, fees~~the restructuring plans initiated on or prior to December 31, 2002, and ~~expenses. Actual future cash requirements may differ materially from the accrual at September 30, 2004, particularly if actual sublease income is significantly different from prospective estimates.~~accounted for in accordance with EITF 94-3 (in thousands):

	Accrued restructuring costs, beginning		Amounts charged to restructuring costs and other		Amounts paid or written off			Accrued restructuring costs, ending
Quarter Ended March 31, 2005
Lease cancellations and commitments	$	11,515	$	22	$	(2,666	)	$	8,871
Termination payments to employees and related costs	459		—		(14		)	445
	$	11,974	$	22	$	(2,680	)	$	9,316
Quarter Ended March 31, 2004
Lease cancellations and commitments	$	83,026	$	252	$	(4,986	)	$	78,292
Termination payments to employees and related costs	429		—		—			429
	$	83,455	$	252	$	(4,986	)	$	78,721

As mentioned above, we have based our excess facilities accrual, in part, upon estimates of future sublease income. We have used the following factors, among others, in making such estimates: opinions of independent real estate experts, current market conditions and rental rates, an assessment of the time period over which reasonable estimates could be made, the status of negotiations with potential subtenants, and the location of the respective facilities. ~~The estimated sublease income netted against the restructuring accrual consists of the following (in millions):~~

~~The Company has~~We recorded the low-end of a range of assumptions modeled for restructuring charges, in accordance with SFAS ~~No. 5,~~ ~~Accounting for Contingencies~~.5. Adjustments to the facilities accrual will be required if actual ~~lease exit costs or~~ sublease income ~~differ~~differs from amounts currently expected. We will review the status of restructuring activities on a quarterly basis and, if appropriate, record changes to our restructuring obligations in current operations based on management’s most current estimates.

~~The following table summarizes the activity related to the restructuring plans initiated subsequent to December 31, 2002, and accounted for in accordance with FAS 146 (in thousands):~~

~~The following table summarizes the activity related to the restructuring plans initiated on or prior to December 31, 2002, and accounted for in accordance with EITF 94-3 (in thousands):~~

Accrued
restructuring costs
at June 30, 2003

Amounts charged to
restructuring costs
and other

Amounts reversed
to restructuring
costs and other

Amounts paid
or written off

Accrued
restructuring
costs at
September 30,
2003

Three months ended September 30, 2003

Lease cancellations and commitments

$
89,216

$
3,269

$
—

$
(5,335
)
$
87,150

Termination payments to employees and related costs

1,000

1,240

—

(979
)
1,261

Write-off on disposal of assets and related costs

40

—

—

(40
)
—

$
90,256

$
4,509

$
—

$
(6,354
)
$
88,411

Accrued
restructuring
costs at June 30,
2004

Amounts charged to
restructuring costs
and other

Amounts reversed
to restructuring
costs and other

Amounts paid
or written off

Accrued
restructuring
costs at
September 30,
2004

Three months ended September 30, 2004

Lease cancellations and commitments

$
71,707

$
(34,477
)
$
—

$
(23,629
)
$
13,601

Termination payments to employees and related costs

429

—

—

—

429

Write-off on disposal of assets and related costs

1,486

(9
)
—

(115
)
1,362

$
73,622

$
(34,486
)
$
—

$
(23,744
)
$
15,392

~~During the third quarter of 2004, the Company~~ reached agreements with certain landlords to extinguish approximately $142 million of future real estate obligations. The Company made cash payments of $19.1 million during the third quarter, and is obligated to make an additional cash payment of $18.1 million in January 2005. Standby letters of credit of $18.1 million were issued on our behalf from financial institutions as of September 30, 2004 in favor of our landlord to secure the January 2005 payment. Accordingly, $18.1 million has been included in restricted cash in the accompanying Condensed Consolidated Balance Sheets at September 30, 2004. The Company also transferred ownership of certain furniture, fixtures, and leasehold improvements with a net book value of $8.1 million to the previous landlord. In addition, the Company issued a warrant to purchase approximately 700,000 shares of our common stock at an exercise price of $5.00 per share after a one-year period. The Company currently has a residual lease obligation beginning in 2007 and will make a further cash payment of $4.5 million if it exercises an option to terminate the residual lease obligation prior to the commencement of the lease term. This option to terminate the residual lease obligation is accounted for in accordance with SFAS 146 and is a part of our computation of the restructuring gain. In connection with these agreements, the Company recorded a restructuring gain of $26.1 million in the quarter ended September 30, 2004. The total amount of the net restructuring gain, after inclusion of amounts accrued for employee termination costs, was $25.5 million for the quarter ended September 30, 2004.

The warrant issued in connection with the real estate agreements and the shares of the Company’s common stock issuable on the exercise of the warrant were initially not registered under federal securities laws. In accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” the warrants have been included as a short-term liability and valued at fair value on the date of issuance. The warrants are revalued each period until the warrants are exercised. The change in fair value from the date of issuance to September 30, 2004 of $272,000 has been recorded as a component of the restructuring charge. The warrants will be transferred to permanent equity when the warrants are exercised..

Legal Matters

~~The Company~~Our current estimated range of liability related to pending litigation is ~~party to various litigation matters in the normal course of its business. For each pending matter~~based on claims for which ~~the Company~~it is probable that a liability has been incurred and we can estimate the amount and range of ~~potential loss,~~loss. We have recorded the minimum estimated liability ~~has been recorded. For the remaining matters, the Company~~related to those claims, where there is ~~unable to make~~ a ~~reasonable estimate~~range of ~~the liability that could result because~~loss. Because of the uncertainties related to both the determination of the probability of an unfavorable outcome and the amount and range of loss in the event of an unfavorable ~~outcome.~~outcome, we are unable to make a reasonable estimate of the liability that could result from the remaining pending litigation. As additional information becomes available, ~~the Company~~we will assess the potential liability related to its pending litigation and revise ~~its~~our estimates, if necessary. Such revisions in ~~the Company’s~~our estimates of the potential liability could materially impact ~~the Company’s~~our results of operations and financial position.

On June 10, 2004, MetLife filed a complaint in the Superior Court of the State of California, County of Los Angeles, naming us as a defendant. The complaint alleged that we were liable for unlawful detainer of

premises leased from the plaintiff. The plaintiff thereafter filed a First Amended Complaint alleging that we no longer held possession of the premises but was in breach of the lease. In February 2005, MetLife reached agreement with us and executed documents regarding a settlement of the pending lawsuit under which we will pay MetLife an aggregate of $1.9 million in consideration for termination of the lease, dismissal of the lawsuit and in full settlement of approximately $3.1 million of past and future lease obligations. The first of three installment payments was made in February 2005, with the second due in May 2005 and the third due in September 2005.

On January 7, 2005, we announced that we had reached agreement with the SEC to settle administrative proceedings in connection with the restatement of our financial results for the third quarter of fiscal 2001. No fines or financial penalties were associated with the settlement. Without admitting or denying any wrongdoing, we consented to the SEC’s entry of an administrative order that included findings that we issued a false and misleading earnings press release and misleading quarterly report. The order requires that we cease and desist from committing or causing violations of specified provisions of the federal securities laws. The SEC found that a former executive in charge of professional services who left BroadVision in 2002 was responsible for the improper accounting. The restatement concerned revenue related to one software license agreement. Following receipt of payment in full by the customer, we recognized revenue on that agreement in its entirety in the third quarter of 2001. We subsequently determined that the revenue should instead be recognized ratably over the four-year life of the agreement, and announced on April 1, 2002 that we were restating our financial statements for the third quarter of 2001 to effect this change. We have been accounting for the revenue ratably in all periods since the third quarter of 2001.

Results of Operations

Revenues

Total revenues decreased 7%22% during the quarter ended ~~September 30, 2004~~March 31, 2005 to ~~$17.2~~$16.4 million as compared to ~~$18.6~~$20.9 million for the quarter ended ~~September 30, 2003. Total revenues decreased 10% during the nine months ended September 30, 2004 to $58.2 million as compared to $64.8 million for the nine months ended September 30, 2003.~~March 31, 2004. A summary of our revenues by geographic region is as follows (dollars in thousands, unaudited):

Software
Licenses

%

Services

%

Total

%

Three Months Ended:

September 30, 2004

Americas

$
2,111

45
%
$
7,159

57
%
$
9,270

54
%
Europe

1,884

41

4,250

34

6,134

36

Asia Pacific

659

14

1,161

9

1,820

10

Total

$
4,654

100
%
$
12,570

100
%
$
17,224

100
%

September 30, 2003

Americas

$
2,058

41
%
$
7,015

52
%
$
9,073

49
%
Europe

2,404

47

5,593

41

7,997

43

Asia Pacific

614

12

885

7

1,499

8

Total

$
5,076

100
%
$
13,493

100
%
$
18,569

100
%

	Software Licenses		%		Services		%		Total		%		Software Licenses		%		Services		%		Total		%
Nine Months Ended:
Three Months Ended:

September 30, 2004
March 31, 2005
Americas	$	6,711	34	%	$	21,061	54	%	$	27,772	48	%	$	1,914	43	%	$	6,724	56	%	$	8,638	53	%
Europe	10,598		54		14,612		38		25,210		43		1,706		39		4,212		35		5,918		36
Asia Pacific	2,282		12		2,977		8		5,259		9		796		18		1,015		9		1,811		11
Total	$	19,591	100	%	$	38,650	100	%	$	58,241	100	%	$	4,416	100	%	$	11,951	100	%	$	16,367	100	%

September 30, 2003
March 31, 2004
Americas	$	8,879	45	%	$	23,871	53	%	$	32,750	51	%	$	2,590	33	%	$	7,061	54	%	$	9,651	46	%
Europe	7,492		38		18,474		41		25,966		40		4,896		62		5,197		40		10,093		48
Asia Pacific	3,504		17		2,609		6		6,113		9		354		5		791		6		1,145		6
Total	$	19,875	100	%	$	44,954	100	%	$	64,829	100	%	$	7,840	100	%	$	13,049	100	%	$	20,889	100	%

The Company operates in a competitive industry. There have been declines in both the technology industry and in general economic conditions since the beginning of 2001. These declines may continue. Financial comparisons discussed herein may not be indicative of future performance.

Software license revenues decreased 8%44% during the quarter ended ~~September 30, 2004~~March 31, 2005 to ~~$4.7~~$4.4 million as compared to ~~$5.1~~$7.8 million for the quarter ended ~~September 30, 2003. Software license~~March 31, 2004. License revenue ~~decreased 1% during the nine months ended September 30, 2004 to $19.6 million as compared to $19.9 million for the nine months ended September 30, 2003.~~

Americas license revenues increased 3% for the three months ended September 30, 2004 to slightly in excess of $2.1 million as compared to slightly below $2.1 million for the three months ended September 30, 2003. Americas license revenues decreased 24% for the nine months ended September 30, 2004 to $6.7 million as compared to $8.9 million for the nine months ended September 30, 2003. Americas license revenues declined in the ~~nine month period~~Americas and Europe declined due to ~~a North American sales force reorganization and continued softness in the North American market~~softening demand for enterprise ~~software.~~

European license revenues decreased 22% for the three months ended September 30, 2004 to $1.9 million as compared to $2.4 million for the three months ended September 30, 2003. European license revenues decreased for the three month period mainly due to a decline in license transactions and related revenue from new customers and increased customer controls over the purchasing approval processes. European license revenues increased 41% for the nine months ended September 30, 2004 to $10.6 million as compared to $7.5 million for the nine months ended September 30, 2003. European license revenue increased for the nine month period mainly due to a larger number of follow-on licenses with European customers that are expanding the use of our technology.

software applications. Asia Pacific ~~license~~ revenue increased 7% for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003 due to an increased focus on sales in this region, which included adding headcount within the sales department. Asia Pacific license revenue decreased 35% for the nine months ended September 30, 2004 to $2.3 million as compared to $3.5 million for the nine months ended September 30, 2003 primarily due to a single large license transaction that occurred in the first quarter of fiscal ~~2003~~2005 that did not ~~recur~~occur in the first quarter of fiscal 2004.

2527

Services revenues consisting of consulting revenues, customer training revenues and maintenance revenues ~~and consulting training expense revenue~~ decreased 7%8% during the quarter ended ~~September 30, 2004~~March 31, 2005 to ~~$12.6~~$12.0 million as compared to ~~$13.5~~$13.0 million for the quarter ended ~~September 30, 2003. Services revenues~~March 31, 2004. This decrease was attributable to lower maintenance revenue, which decreased ~~14% during the nine months ended September 30, 2004 to $38.7 million as compared to $45.0 million for the nine months ended September 30, 2003.~~

~~Consulting services revenues increased 7%~~16% for the three months ended ~~September 30, 2004~~March 31, 2005 to ~~$5.0~~$6.8 million as compared to ~~$4.7~~$8.1 million for the three months ended ~~September 30, 2003. The increase during the current quarter was~~March 31, 2004. Maintenance revenue decreased due to additional consulting services being performed for customers. Consulting services revenues decreased 11% for the nine months ended September 30, 2004 to $15.1 million as compared to $17.0 million for the nine months ended September 30, 2003. Thea decline in ~~the nine month period was attributable to declines in license transactions~~customer licenses and ~~related revenues from new customers.~~

Maintenance revenues decreased 14% for the three months ended September 30, 2004 to $7.6 million as compared to $8.8 million for the three months ended September 30, 2003. Maintenance revenues decreased 16% for the nine months ended September 30, 2004 to $23.5 million as compared to $27.9 million for the nine months ended September 30, 2003. The declines in both periods were primarily due to certain existing customers declining the renewal of annual maintenance services.

Cost of Revenues

Cost of software license revenues includes the costs of product media, duplication, packaging and other manufacturing costs, as well as royalties payable to third parties for software that is either embedded in, or bundled and licensed with, our products.

Cost of services consists primarily of employee-related costs, third-party consultant fees incurred on consulting projects, post-contract customer support and instructional training services. A summary of our cost of revenues is as follows (dollars in thousands, unaudited):

	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended March 31,
	2004		%		2003		%		2004		%		2003		%		2005			%		2004		%
Cost of software licenses (1)	$	256	6	%	$	666	13	%	$	1,147	6	%	$	1,549	8	%
Cost of (credit for) software licenses (1)																	$	(57	)	(1	)%	$	578	7	%
Cost of services (2)	6,391		51		5,915		44		18,970		49		19,650		44		5,980			50		6,277		48

Total cost of revenues (3)	$	6,647	39	%	$	6,581	35	%	$	20,117	35	%	$	21,199	33	%	$	5,923		36	%	$	6,855	33	%

(1) Percentages are calculated based on total software license revenues for the period indicated

(2) Percentages are calculated based on total services revenues for the period indicated

(3) Percentages are calculated based on total revenues for the period indicated

Cost of (credit for) software licenses decreased ~~7% as a percentage of software license revenues~~in absolute dollar terms during the ~~three months~~quarter ended ~~September 30, 2004~~March 31, 2005 to 6%$(57,000) as compared to ~~13%~~$578,000 for the ~~three months~~quarter ended September 30, 2003. The cost of software licenses decreased 2% as a percentage of software license revenues during the nine months ended September 30, 2004 to 6% as compared to 8% for the nine months ended September 30, 2003. The declines for both periods wereMarch 31, 2004. This decrease was primarily due to ~~fewer royalty-bearing, third-party products being incorporated into~~a credit recorded in the ~~Company’s products in 2004.~~most recent quarter due to a vendor settlement and declining royalty obligations.

Cost of services decreased 5% in absolute dollar terms during the quarter ended March 31, 2005 to $6.0 million as ~~a percentage of revenue remained between 44% and 51% of services revenue~~compared to $6.3 million for ~~both~~ the ~~three and nine months~~quarter ended ~~September 30, 2004 and September 30, 2003. The year-over-year increases in cost of services as a percentage of services revenue were due~~March 31, 2004. This decline was attributable to lower ~~maintenance revenue due to~~consulting headcount in Europe and the Middle East regions and lower customer ~~attrition.~~support headcount in the Americas. This was partially offset by an increase in consulting spending in the Americas.

Operating Expenses and Other Income, net

Operating expenses consists of the following:

• Research and development expenses consist primarily of salaries, employee-related benefit costs and consulting fees incurred in association with the development of our products. Costs incurred for the research and development of new software products are expensed as incurred until such time that technological feasibility, in the form of a working model, is established at which time such costs are capitalized and recorded at the lower of unamortized cost or net realizable value. The costs incurred subsequent to the establishment of a working model but prior to general release of the product have not been significant. To date, we have not capitalized any costs related to the development of software for external use.

• Sales and marketing expenses consist primarily of salaries, employee-related benefit costs, commissions and other incentive compensation, travel and entertainment and marketing ~~program-related expenditures such as collateral~~

2628

program-related expenditures such as collateral materials, trade shows, public relations, advertising, and creative services.

• General and administrative expenses consist primarily of salaries, employee-related benefit costs, provisions and credits related to uncollectible accounts receivable and professional service fees.

• Other intangible amortization represents costs to amortize other intangible assets, generally on a straight-line basis. As described in Note 7 in the Notes to Condensed Consolidated Financial Statements, as of January 1, 2002, we no longer amortize goodwill or the assembled workforce as we have identified the assembled workforce as an intangible asset which does not meet the criteria of a recognizable intangible asset as defined by ~~SFAS 142.~~

SFAS142.

• Restructuring charges represent costs incurred to restructure company operations. These charges, including charges for excess facilities, severance and certain non-cash items, were recorded under the provisions of EITF 94-3, and SFAS 146.

A summary of operating expenses ~~(benefit)~~ is set forth in the following table. The percentage of expenses ~~(benefit)~~ is calculated based on total revenues ~~(in thousands)~~(dollars in thousands, unaudited):

Three Months Ended September 30,

Nine Months Ended September 30,

2004

% (1)

2003

% (1)

2004

% (1)

2003

% (1)

Research and development

$
4,600

27
%
$
4,467

24
%
$
13,997

24
%
$
16,681

26
%
Sales and marketing

6,020

35

6,710

36

20,365

35

19,585

30

General and administrative

2,335

13

2,885

16

7,152

12

7,586

12

Litigation settlement costs

—

—

4,250

23

—

—

4,250

6

Goodwill and intangible amortization

—

—

—

—

—

—

887

1

Restructuring charge

(25,454
)
(142
)
4,509

24

(24,205
)
(42
)
13,361

21

Impairment of assets

—

—

—

—

—

—

—

—

Total operating expenses (benefit)

$
(12,499
)
(73
%)
$
22,821

123
%
$
17,309

30
%
$
62,350

96
%

~~(1)~~ ~~Expressed as a percent of total revenues for the period indicated~~

	Three Months Ended March 31,
	2005			%		2004		%
Research and development	$	4,287		26	%	$	4,888	23	%
Sales and marketing	5,811			36		6,866		33
General and administrative	2,535			15		2,417		12
Restructuring charges (credit)	(704		)	(4	)	570		3
Total operating expenses	$	11,929		73	%	$	14,741	71	%

Research and development expenses ~~increased 3%~~decreased 12% during the quarter ended ~~September 30, 2004~~March 31, 2005 to ~~$4.6~~$4.3 million as compared to ~~$4.5~~$4.9 million for the quarter ended ~~September 30, 2003. This increase was due to the Company recording a one-time credit of $0.9 million~~March 31, 2004. The decrease in the quarter ended September 30, 2003, related to funding recognized under a third-party development arrangement, offset by lower depreciation costs in the quarter ended September 30, 2004 as assets had been fully depreciated in prior quarters.

~~Research~~research and development ~~decreased 16% during the nine months ended September 30, 2004 to $14.0 million as compared to $16.7 million for the nine months ended September 30, 2003. The decrease for the nine month period~~expenses was primarily attributable to ~~lower depreciation costs for fully depreciated assets and~~reduced headcount ~~reductions~~ as a result of ~~our cost-cutting efforts. Partially offsetting these declines were incremental engineering~~natural attrition and ~~quality assurance spending in the first quarter of fiscal 2004 related to the launch of the Company’s BroadVision Process™ product.~~lower overhead allocations.

Sales and marketing expenses decreased ~~10%~~15% during the quarter ended ~~September 30, 2004~~March 31, 2005 to ~~$6.0~~$5.8 million as compared to ~~$6.7~~$6.9 million for the quarter ended ~~September 30, 2003~~. March 31, 2004. The decrease ~~during the three month period~~ was primarily attributable to turnover in the sales organization combined with lower commissions ~~paid as a result of~~on lower license ~~revenues. Sales and~~revenue. Partially offsetting these declines was increased marketing increased 4% during the nine months ended September 30, 2004 to $20.4 million as compared to $19.6 million for the nine months ended September 30, 2003. The increase for the nine month period was due to costs associated with the launch of BroadVision’s newest product, BroadVision Process including the Energizing E-Business World Tour completed during the second quarter of 2004.campaign spending.

General and administrative expenses ~~decreased 19%~~increased 5% during the quarter ended ~~September 30, 2004~~March 31, 2005 to ~~$2.3~~$2.5 million as compared to ~~$2.9~~$2.4 million for the quarter ended ~~September 30, 2003. General and administrative expenses decreased 6% during the nine months ended September 30,~~March 31, 2004, ~~to $7.2 million as compared to $7.6 million for the nine months ended September 30, 2003. The decrease during the nine month period was~~ due to ~~lower legal services, offset by higher accounting~~increased contractor costs related to ~~the implementation of certain provisions of~~finance special projects. This was offset by a reduction in accounting fees related to the Sarbanes-Oxley Act of 2002.

~~Litigation Settlement Costs~~ During the third quarter of 2003, the Company settled outstanding litigation which resulted in a charge of $4.3 million. The settlement involved a third-quarter payment for past royalties and certain legal expenses and license fee payments that are due and payable in future quarters. As of September 30, 2004, all payments due under the settlement agreement have been made.

~~Other intangible amortization.~~ As described in Note 7 in the Notes to the Condensed Consolidated Financial Statements above, we no longer amortize goodwill on the assembled workforce as we have identified the assembled workforce as an intangible asset which does not meet the criteria of recognizable intangible asset as defined by SFAS No. 142. The remaining other intangible assets have been fully amortized as of September 30, 2004. We periodically assess goodwill and other intangibles for impairment as discussed in Note 7 of Notes to the Condensed Consolidated Financial Statements. The remaining intangible assets that are being amortized are a result of the acquisition of Interleaf, Inc. that was completed in April of 2000. We have accounted for the acquisition as a purchase business combination. It is possible that we may continue to expand our business through acquisitions and internal development. Any additional acquisitions or impairment of goodwill and other purchased intangibles could result in additional merger and acquisition related expenses.

Restructuring ~~charges~~.charges. Through ~~September 30, 2004,~~March 31, 2005, the Company has approved restructuring plans to, among other things, reduce its workforce and consolidate facilities. Restructuring and asset impairment charges were taken to align the Company’s cost structure with changing market conditions and to create a more efficient organization. Our restructuring charges ~~comprise primarily:~~are comprised primarily of: (i) severance and benefits termination costs related to the reduction of our workforce; (ii) lease termination costs and/or costs associated with permanently vacating our facilities; (iii) other incremental costs incurred as a direct result of the restructuring plan; and (iv) impairment costs related to certain long-lived assets abandoned. We account for each of these costs in accordance with ~~Staff Accounting Bulletin No.~~SAB 100~~Restructuring and Impairment Charges.~~.

Restructuring charges ~~(gains)~~(credits) consisted of the following (in ~~thousands)~~thousands, unaudited):

Three Months Ended
September 30,

Nine Months Ended
September 30,

2004

2003

2004

2003

Facilities

$
(26,036
)
$
3,269

$
(25,263
)
$
11,887

Severance and other

582

1,240

1,058

1,474

Total

$
(25,454
)
$
4,509

$
(24,205
)
$
13,361

	Three Months Ended March 31,
	2005			2004
Excess Facilities	$	(609	)	$	252
Severance and Termination Costs	(95		)	318
Total	$	(704	)	$	570

The excess facilities ~~gain~~credit for the ~~three and nine months~~three-months ended ~~September 30, 2004,~~March 31, 2005 related primarily to ~~settlements reached between the Company and certain landlords for elimination~~an adjustment of ~~future lease obligations (see Note 6~~ $753,000 to fair value of the ~~Notes~~warrant issued to ~~Condensed Consolidated Financial Statements).~~a previous landlord as part of a lease settlement in 2004. The excess facilities charge for the ~~three and nine month period~~three-months ended ~~September 30, 2003,~~March 31, 2004, primarily related to ~~adjustments to underlying sublease assumptions.~~the adjustment of accrued interest on excess facilities obligations that were discounted under SFAS 146. The severance and termination costs for ~~all~~both periods reflect adjusted severance, payroll taxes and COBRA benefits related to restructuring plans implemented prior to the end of the period. The Company recorded these charges at the low-end of a range of assumptions modeled for the restructuring charges, in accordance with SFAS ~~No. 5,~~ ~~Accounting for Contingencies~~.5. Adjustments to the restructuring accruals will be made in future periods, if necessary, based upon the then current actual events and circumstances.

Interest income, ~~net.~~net ~~Interest income, net decreased 5% to $77,000~~ for the three months ended ~~September 30, 2004~~March 31, 2005 was an expense of $744,000 as compared to ~~$81,000~~income of $109,000 for the three months ended ~~September 30, 2003.~~March 31, 2004. Interest ~~income decreased 57%~~expense increased during the ~~nine months ended September 30, 2004~~first quarter of 2005 due to ~~$288,000 as compared to $673,000 for~~ the ~~nine months ended September 30, 2003.~~debentures issued in November 2004. Interest income has declined year-over-year due to lower cash balances and lower interest rates being earned on invested funds.

Other (expense) income, ~~net.~~net, ~~We recorded other income of $238,000~~ for the three months ended ~~September 30, 2004~~March 31, 2005 was a net income of $3.1 million as compared to ~~other income~~expenses of ~~$574,000~~$133,000 for the three months ended ~~September 30, 2003. During~~March 31, 2004. The increase in income in the ~~nine months ended September 30, 2004 we recorded other income~~first quarter of ~~$59,000 as compared to income of $1.8 million for the nine months ended September 30, 2003. The decrease for the three and nine month period~~2005 was primarily due to ~~foreign currency gains in~~a $1.4 million gain on the ~~periods ended September 30, 2003~~disposition of equity investments, and ~~foreign currency losses in~~a $1.8 million gain on the ~~periods ended September 30, 2004. Our preliminary results announced by a press release dated October 20, 2004, classified~~revaluing of common stock warrants for warrants issued ~~as a part of a lease termination agreement as equity based upon the valuation on the date of issuance. The charge associated~~in connection with the ~~issuance~~debenture offering in November 2004 to fair value as of these warrants was included in other income, net. Pursuant to certain accounting provisions, we have reclassified the warrants as debt, resulting in a charge of $272,000 included in the restructuring charges in the quarter ended September 30, 2004, related to the revaluation of the debt from the date of issuance to September 30, 2004.March 31, 2005.

Income ~~taxes.~~Taxes. During the ~~three months~~quarter ended ~~September 30, 2004,~~March 31, 2005, we recorded a tax ~~provision~~benefit of ~~$11,000~~$2.0 million as compared to a ~~provision~~tax expense of ~~$87,000~~$136,000 for quarter ended March 31, 2004. The tax benefit from the ~~three months~~first quarter of fiscal 2005 was primarily due to the reversal of certain income tax accruals determined during the first quarter to be no longer required. For the quarter ended ~~September 30, 2003. During the nine months ended September 30,~~March 31, 2004, ~~we recorded a~~ tax ~~provision~~expense of ~~$141,000 as compared~~$76,000 relates to ~~a provision of $256,000 for the nine months ended September 30, 2003. Amounts consist primarily of estimates for~~ income taxes in ~~our~~ foreign ~~jurisdictions.~~jurisdictions that are not available to credit against US income taxes. The ~~decreases in tax provisions from the prior year were due~~remaining $60,000 was attributable to ~~reduced foreign revenues during the periods ended September 30, 2004.~~state franchise taxes.

Liquidity and Capital Resources (in thousands)

~~Overview~~

	March 31, 2005			December 31, 2004
	(unaudited)
Cash and cash equivalents	$	37,218		$	41,851
Restricted cash	$	5,153		$	24,256
Working capital (deficit)	$	(22,164	)	$	(18,136	)
Working capital ratio	0.72			0.82

As of ~~September 30, 2004,~~March 31, 2005, cash, cash equivalents, and restricted cash and investments totaled ~~$49.1~~$42.4 million, which represents a decrease of ~~$49.5~~$23.7 million as compared to a balance of ~~$98.6~~$66.1 million on December 31, ~~2003.~~2004. This decrease was ~~primarily~~ attributable to net cash used for operations ~~payments related to settlement of outstanding lease obligations,~~ and payment of lease settlement obligations during the quarter.

In November 2004, we entered into a ~~portion~~definitive agreement for the private placement of up to $20.0 million of convertible debentures to five institutional investors. We issued an initial $16.0 million of debentures, which will be convertible, at the holders’ option, into common stock at a conversion price of $2.76 per share. The debentures bear interest at a rate of six percent per annum, and we are obligated to repay the principal amount of the ~~outstanding balance~~initial $16.0 million of debentures in 15 equal monthly installments of $1.1 million, beginning in June 2005. Under the terms of the debentures, our monthly principal repayment obligation will increase to $2.1 million beginning in September 2005 if our cash balances as of June 2005 fall below certain defined levels. This increase, which is likely, will have the effect of requiring us to repay the principal amount in nine installments through February 2006. Payments of principal and interest may be made in either cash or, upon receipt of stockholder approval and satisfaction of various other conditions set forth in the debentures, shares of our ~~revolving line~~common stock. These conditions include, among others, the requirement that the registration statement relating to our common shares issuable upon conversion of ~~credit.~~our debentures be declared effective by the SEC for a period of no fewer than approximately sixty days prior to the repayment due date and the requirement that our common stock continue to be traded on an eligible market. Subject to stockholder approval and the satisfaction of these other conditions we intend to use shares of our common stock for payments under the debentures to the maximum extent permitted by the conditions of the debentures. Due to unforeseen delays in having our Registration Statement declared effective by the SEC we anticipate having to use cash to satisfy our payment obligations through at least September 2005. Cash payments to be made during this period are expected to total approximately $6.1 million. The agreement provides for an additional $4.0 million of convertible debentures to be issued to the investors at the option of the investors or, under certain circumstances, at our option. Investors also received warrants to purchase approximately 1.7 million shares of our common stock at a price of $3.58 per share. The warrants will be exercisable beginning six months after the closing date, and have a term of five years.

September 30,
2004

December 31,
2003

Cash and cash equivalents

$
28,144

$
78,776

Restricted cash

$
20,960

$
19,827

Working capital (deficit)

$
(19,583
)
$
748

Working capital ratio

0.8

1.0

On May 9, 2005, by agreement between us and the holders of a majority of the debentures, one of the agreements governing the debentures was amended to extend by 120 days the time within which we are required to obtain effectiveness of a registration statement covering the resale of the shares of our common stock that may be issued in respect of the debentures.

We ~~had~~have various credit facilities with a commercial lender ~~that~~which include ~~a revolving line of credit,~~ term debt in the form of notes payable, a revolving line of credit and an equipment line of credit.

We maintain a revolving line of credit, which is collateralized by all of our assets and under which borrowings bear interest at the bank’s prime rate. Interest is due monthly and principal is due at expiration in In February 2005. During the third quarter of 2004, we repaid a net $12.0 million on the line of credit as a part of our entering into an amended loan agreement with the lender. At September 30, 2004 and December 31, 2003, $15.0 million and $27.0 million was outstanding under the line of credit, respectively. ~~In September 2004,~~2005, we entered into a renewed and amended loan and security agreement with the lender. The agreement requires us to maintain certain levels inof unrestricted cash and cash equivalents (excluding equity investments), and to maintain certain levels on deposit with ~~our commercial~~the lender. ~~The agreement also modified the financial covenants~~At March 31, 2005 and ~~reduced the borrowing limit for the revolving line of credit from $27.0 to $15.0 million. As of September 30,~~December 31, 2004, ~~we were not in compliance with the financial covenants of the commercial credit facility and, as a result, we cannot borrow funds~~$20.0 million was outstanding under the ~~revolving~~ line of credit. ~~Subsequent to September 30, 2004, we repaid the $15 million outstanding balance on~~Borrowings under the line of credit ~~from existing cash.~~

~~As of September 30, 2004~~ and December 31, 2003, outstanding term debt borrowings were approximately $1.2 million and $1.9 million, respectively. Borrowings bear interest between the bank’s prime rate (4.75% as of September 30, 2004 and 4.00% as of December 31, 2003) and the bank’s prime rate plus 1.25%. Principal and interest are due in monthly payments through maturity based on the terms of the facilities. Principal payments of $244,000 are due through the remainder of 2004, $611,000 is due in 2005, and a final payment of $357,000 is due in 2006.

~~During the first quarter of 2004, we entered into a $500,000 equipment line of credit with the commercial lender. Such line of credit is secured~~collateralized by all of our assets and ~~under which borrowings~~ bear interest at the ~~banks~~bank’s prime ~~rate (4.75% as~~rate. Interest is due monthly and principal is due at the expiration in February 2006.

During the third and fourth quarters of ~~September 30,~~ 2004,~~) plus .75%. Principal payments are due in 36 monthly payments. Principal~~ we reached agreements with certain landlords to extinguish approximately $155.0 million of future real estate obligations. We made cash payments of ~~$6,428 are due through~~$20.7 million in 2004 and additional cash payments of $21.9 million in the ~~remainder 2004, $25,715 is due~~first quarter of 2005. In addition, we issued to one of the landlords a five-year warrant to purchase approximately 700,000 shares of our common stock at an exercise price of $5.00 per share, exercisable beginning in ~~2005 and 2006, and~~August 2005.

As a ~~final~~component of the settlement of one of the previous leases, we have a residual lease obligation beginning in 2007 of approximately $9.1 million. We may make an additional cash payment of ~~$6,429~~$4.5 million if we exercise an option to terminate this residual real estate obligation prior to the commencement of the lease term (January 2007). This option to terminate the residual lease obligation is ~~due~~accounted for in ~~2007. As~~accordance with SFAS 146 and is part of ~~September 30, 2004, $64,288 was outstanding under~~ the ~~equipment loan.~~restructuring credit of $23.5 million recorded in the year ended December 31, 2004.

Commitments totaling ~~$21.0~~$5.2 million and ~~$19.8~~$24.3 million in the form of standby letters of credit were issued on our behalf from financial institutions as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, respectively, primarily in favor of our various landlords to secure obligations under our facility ~~leases or future lease termination costs.~~leases. Accordingly, ~~$21.0~~$5.2 million and ~~$19.8~~$24.3 million have been presented as restricted cash in the accompanying Condensed Consolidated Balance Sheets at ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, respectively.

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We had no derivative financial instruments as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003.~~2004. We place our investments in instruments that meet high credit quality standards and the amount of credit exposure to any one issue, issuer and type of instrument is limited. Our interest rate risk related to borrowings historically has been minimal as interest expense related to adjustable rate borrowings has been immaterial for the three ~~and nine~~ months ended ~~September 30, 2004~~March 31, 2005 and ~~2003.~~2004.

Cash ~~Flows from~~Provided By (Used For) Operating Activities

~~Net~~Cash used for operating activities was $25.3 million for the three months ended March 31, 2005. The primary reason for the net cash used by operating activities was due to the payment of accrued liabilities related to restructuring of $20.9 million, offset by net income of $2.9 million. Other significant adjustments to reconcile net income to cash used for operating activities included the non-cash gain on sale of cost method investments of $1.2 million, the non-cash release of income tax reserves of $2.0 million, and the gain on revaluation of warrants to fair value of $2.5 million. Cash used for operating activities was $3.7 million for the three months ended March 31, 2004. The primary reason for the net cash used for operating activities was ~~$38.8 million for the nine months ended September 30, 2004. Net cash used for operating activities for the nine month period ended September 30, 2004 was primarily attributable~~due to the net loss of ~~$3.5 million (before extraordinary gains~~$867,000 and decreases in accrued expenses and non-current liabilities, primarily related to ~~real estate transactions) and changes in balance sheet accounts related to the settlement~~excess facilities costs. Partially offsetting these uses of ~~long term lease obligations. The accrued liabilities related to restructuring costs for excess leased facilities decreased from $104.7~~cash were $1.4 million

~~at December 31, 2003 to $36.7 million as~~ of September 30, 2004. As a result of the settlement of future lease obligations during the third quarter, we recorded a $26.0 million gain and paid $19.1 million in cash to extinguish future real estate obligations, and agreed to pay a further $18.1 million in January 2005, and were granted an option to terminate the remaining lease obligations for $4.5 million. Offsetting these activities related to the lease settlements during the period were several non-cash items, including non-cash depreciation and amortization expense ~~of $3.1 million,~~ and ~~changes to balance sheet accounts, including~~ a decrease in accounts receivable of ~~$5.0~~$1.7 million due to ~~reduced revenues, offset by a decrease in unearned revenue and deferred maintenance of $6.1 million.~~lower revenue.

Net cash used for operating activities during the nine months ended September 30, 2003 was $18.8 million, primarily due to the net loss of $16.5 million, decreases in accounts payable and accrued expenses of $16.2 million, and a decrease in unearned revenue and deferred maintenance of $14.9 million. Offsetting these uses of cash was $11.0 million of net non-cash items, such as depreciation expense, amortization of prepaid royalties, and amortization of intangibles, as well as other changes in balance sheet accounts, including a decrease in accounts receivable of $12.2 million and a decrease in prepaids and other assets of $3.5 million.31

Cash ~~Flows from~~Provided By Investing Activities

~~Net cash used for~~Cash provided by investing activities was ~~$0.9~~$20.5 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and was primarily due to transfers from restricted cash of $19.1 million and proceeds from dividends of $1.1 million. Cash provided by investing activities was $798,000 for the three months ended March 31, 2004 and was primarily due to transfers tofrom restricted cash. ~~Net cash provided by investing activities was $19.8 million for the nine months ended September 30, 2003, and was primarily due to net sales/maturities of investments of $24.0 million.~~ Capital expenditures were ~~$489,000~~$57,000 and ~~$131,000~~$144,000 during the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004, ~~and 2003,~~ respectively. Our capital expenditures consisted of purchases of operating resources to manage our operations and consisted primarily of computer hardware and software.

Cash ~~Flows from~~Provided By Financing Activities

~~Net cash used in~~Cash provided by financing activities was ~~$11.1 million~~$120,000 for the ~~nine~~three months ended ~~September 30, 2004,~~March 31, 2005, consisting of ~~$1.6 million~~$370,000 in proceeds from the issuance of common stock ~~and $12.7 million~~offset by $250,000 used for repayment of borrowings, net of new borrowings. ~~Net cash~~Cash provided by financing activities was ~~$2.2 million~~$637,000 for the ~~nine~~three months ended ~~September 30, 2003,~~March 31, 2004, consisting of ~~$1.2 million~~$803,000 in proceeds from the issuance of common stock ~~in addition to $1.0 million provided~~offset by ~~new~~$166,000 used for repayment of borrowings, net of ~~repayments of~~new borrowings.

Leases and Other Contractual Obligations

We lease our headquarters facility and our other facilities under non-cancelable operating lease agreements expiring through the year 2010. Under the terms of the agreements, we are required to pay lease costs, property taxes, insurance and normal maintenance costs.

We expect to incur significant operating expenses for the foreseeable future in order to execute our business plan. A summary of total future minimum lease payments as of ~~September 30, 2004,~~March 31, 2005, under ~~non-cancelable~~noncancelable operating lease agreements, ~~together with amounts included in restructuring reserves~~ is as follows (in millions):

Years Ending December 31,

Operating
Leases

2004

$
2.3

2005

9.1

2006

6.5

2007

3.5

2008 and thereafter

1.4

Total minimum lease payments

$
22.8

Years ending December 31,	Total future minimum payments
2005	$	1.2
2006	0.7
2007	0.5
2008	0.3
2009 and thereafter (through October 2010)	0.4

Total minimum facilities payments	$	3.1

As of September 30, 2004, we have accrued $36.7 million of estimated future facilities costs as a restructuring accrual. This accrual includes the above minimum lease payments that are related to excess and abandoned space under lease, a lease termination payment of $18.1 million due in January 2005 and certain lease related allowances fees and expenses, partially offset by estimated future sublease income (SeeSee Note 6 ~~in the~~of Notes to Condensed Consolidated Financial ~~Statements).~~Statements for information about additional payments due under previously negotiated lease buyout transactions.

~~The estimated sublease income netted against the restructuring accrual consists of the following (unaudited, in millions):~~

The following table summarizes our letters of credit and the effect such letters of credit could have on our liquidity and cash flows in future periods if the letters of credit were drawn upon (in ~~thousands)~~millions):

Less than 1 year	$	19,163	$	3.2
1-3 years	—		1.0
4-5 years	797		—
Over 5 years	1,000		1.0
Total	$	20,960	$	5.2

Restricted cash represents collateral for these letters of credit.

~~During the third quarter of 2004, the Company~~ reached agreements with certain landlords to extinguish approximately $142 million of future real estate obligations. The Company made cash payments of $19.1 million during the third quarter, and is obligated to make an additional cash payment of $18.1 million in January 2005. Standby letters of credit of $18.1 million were issued on our behalf from financial institutions as of September 30, 2004 in favor of our landlord to secure the January 2005 payment. Accordingly, $18.1 million has been included in restricted cash in the accompanying Condensed Consolidated Balance Sheets at September 30, 2004. The Company also transferred ownership of certain furniture, fixtures, and leasehold improvements with a net book value of $8.1 million to the previous landlord. In addition, the Company issued a warrant to purchase approximately 700,000 shares of our common stock at an exercise price of $5.00 per share exercisable after a one-year period. The Company currently has a residual lease obligation beginning in 2007 and will make a further cash payment of $4.5 million if it exercises an option to terminate the residual real estate obligation prior to the commencement of the lease term. This option to terminate the residual lease obligation is accounted for in accordance with SFAS 146 and is part of our computation of the restructuring gain.32

~~Factors That May Affect Future Liquidity~~

~~The following table summarizes our contractual obligations and the effect such obligations are expected to have on our liquidity and cash flows in~~Our net future ~~years. Restricted cash represents the collateral for our letters of credit.~~

Total

Less than
1 year

1-3 years

4-5 years

Over
5 years

(in millions)

Letters of credit

$
21.0

$
19.2

$
—

$
0.8

$
1.0

Long-term debt

1.3

0.7

0.6

—

—

SVB Facility

15.0

15.0

—

—

—

Non-cancelable operating leases

22.8

11.4

10.0

1.4

—

$
60.1

$
46.3

$
10.6

$
2.2

$
1.0

~~We anticipate that future operating expenses and capital expenditures, will constitute a material use of our existing cash resources. As a result, our net~~ cash flows will depend heavily on the level of future revenues, the amount of cash we are required to use for payment under the debentures, our ability to ~~further~~ restructure operations successfully and our ability to manage infrastructure costs.

We currently expect to fund our short-term working capital and operating resource expenditure requirements, for at least the next twelve months, from our existing cash and cash equivalents ~~and short-term investment~~ resources, our anticipated cash flows from operations and anticipated cash flows from subleases. However, wethese sources could ~~experience unforeseen~~be inadequate for the operation of our business for various reasons. These reasons include, but are not limited to, the following:

• If an event of default occurs under the debentures and is not cured within any applicable cure period, the debenture holders could accelerate the due date of the debentures such that the entire principal balance, interest and other obligation become immediately due and payable. If an event of default occurs but is cured within the applicable cure period, the Company will be required to make payments in cash for a period of no less than 120 days from the date of the cure of the default.

• If the Company is not declared effective by August 5, 2005, then the Company will be required to use cash in excess of the $6.1 million of anticipated cash repayments noted above to satisfy its repayment obligations.

Such circumstances will have a significantly unfavorable effect on the Company’s liquidity and will likely result in the Company’s cash resources falling below a level that is necessary for the operation of the Company’s business in the fourth quarter of 2005. In such circumstances, the Company may be unable to continue as a ~~worsening economic downturn, lease settlements and less than anticipated cash inflows from operations, invested assets, and subleases that may increase~~going concern.

Factors That May Affect Future Operating Results

Our capital resources could be inadequate for the operation of our business for various reasons. For example, if our stockholders do not approve the use of ~~available~~common stock for payments under our outstanding debentures, or if the other terms of the debentures require us to use cash, orrather than stock, for more of the debenture payments than we presently anticipate, then our cash resources are likely to fall below a level that is adequate for the operation of our business in the fourth quarter of 2005. We may need to ~~obtain~~raise additional ~~financing. Also, we may find it necessary~~funds in the future to ~~obtain additional equity or debt financing in order to support a more rapid expansion,~~repay outstanding indebtedness, fund operations, develop new ~~or enhanced products or services,~~technologies, respond to competitive pressures, acquire complementary businesses or ~~technologies or respond to unanticipated requirements.~~

for other reasons. We may seek to raise additional funds through private or public sales of securities, strategic relationships, bank debt, financing under leasing arrangements or otherwise. If additional funds are raised through the issuance of equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to develop our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could have a material adverse effect on our business, financial condition ~~and~~or future operating results.

~~Factors That May Affect Future Operating Results~~

We may experience significant fluctuations in quarterly operating results that may be caused by many factors including, but not limited to, those discussed below and herein, as set out in Items 7 and 7A in our annual report on Form 10-K for the year ended December 31, ~~2003~~2004 and elsewhere therein and as disclosed in other documents filed with the Securities and Exchange Commission.

Significant fluctuations in future quarterly operating results may be caused by many factors including, among others, the timing of introductions or enhancements of products and services by us or our competitors, market acceptance of new products, the mix of our products sold, changes in pricing policies by us or our competitors, our ability to retain customers, changes in our sales incentive plans, budgeting cycles of our customers, customer order deferrals in anticipation of new products or enhancements by us or our competitors, ~~non-renewal~~nonrenewal of maintenance agreements, product life cycles, changes in strategy, seasonal trends, the mix of distribution channels through which our products are sold, the mix of international and domestic sales, the rate at which new sales people become productive, changes in the level of operating expenses to support projected growth and general economic conditions. We anticipate that a significant portion of our revenues will be derived from a limited number of orders, and the timing of receipt and fulfillment of any such orders is expected to cause material fluctuations in our operating results, particularly on a quarterly basis. Due to the foregoing factors, quarterly revenues and operating results are difficult to forecast, and we

believe that period-to-period comparisons of our operating results will not necessarily be meaningful and should not be relied upon as any indication of future performance. It is likely that our future quarterly operating results from time to time will not meet the expectations of market analysts or investors, which may have an adverse effect on the price of our common stock.

We are continuing efforts to reduce and control our expense structure. We believe strict cost containment and expense reductions are essential to achieving positive cash flow and profitability. A number of factors could preclude us from successfully bringing costs and expenses in line with our revenues, including unplanned uses of cash, the inability to accurately forecast business activities and further deterioration of our revenues. If we are not able to effectively reduce our costs and achieve an expense structure

commensurate with our business activities and revenues, we may have inadequate levels of cash for operations or for capital requirements, which could significantly harm our ability to operate our business.

We renewed and amended our ~~commercial line of~~revolving credit facility during the ~~third~~first quarter of fiscal ~~2004.~~2005. The ~~SVB Facility~~facility is secured by substantially all of our owned assets. ~~At September 30, 2004 $15.0 million was outstanding under the line of credit. Interest is due monthly and principal is due at expiration in February 2005.~~ The primary financial covenant under the ~~SVB Facility~~facility obligates us to maintain certain levels of available cash, cash equivalents, short-term investments and long-term investments (excluding equity investments). Falling below such levels would be an event of default for which ~~Silicon Valley Bank~~the bank may, among other things, accelerate the payment of the facility.As of September 30, 2004, we were not in compliance with certain financial covenants of the commercial credit facilities and, as a result, cannot borrow funds under the SVB Facility. Subsequent to September 30, 2004, we repaid the $15 million outstanding balance on the line of credit from existing cash.

Our success depends largely on the skills, experience and performance of key personnel. If we lose one or more key personnel, our business could be harmed. Our future success depends on our ability to continue attracting and retaining highly skilled personnel. We may not be successful in attracting, assimilating and retaining qualified personnel in the future. Furthermore, the significant downturn in our business environment had a negative impact on our operations. We are currently restructuring our operations and have taken actions to reduce our workforce and implement other cost containment activities. These actions could lead to disruptions in our business, reduced employee morale and productivity, increased attrition and problems with retaining existing employees and recruiting future employees and increased financial costs.

~~We face a number~~Some of these risks and uncertainties relate to the rapidly evolving nature of the markets in which we operate. These related market risks include, among other things, the evolution of the online commerce market, the dependence of online commerce on the development of the Internet and its related infrastructure, the uncertainty pertaining to widespread adoption of online commerce and the risk of government regulation of the Internet. Other risks and uncertainties relate to our ability to, among other things, successfully implement our marketing strategies, respond to competitive developments, continue to develop and upgrade our products

and technologies more rapidly than our competitors, and commercialize our products and services by incorporating these enhanced technologies. There can be no assurance that we will succeed in addressing any or all of these risks.

There has been a general downturn in the Unites States of America and global ~~economy for the past several years.~~economy. If the economic environment continues to decline or if the current global slowdown worsens or becomes ~~more~~ prolonged, our future results may be significantly impacted. We believe that the current economic decline has increased the average length of our sales cycle and our operating results could suffer and our stock price could decline if we do not achieve the level of revenues we expect. Financial comparisons discussed herein may not be indicative of future performance.

Like other U.S. companies, our business and operating results are subject to uncertainties arising out of the terrorist attacks on the United States, including the economic consequences of military actions or additional terrorist activities and associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce. Such uncertainties could also lead to delays or cancellations of customer orders, a general decrease in corporate spending or our inability to effectively market and sell our products. Any of these results could substantially harm our business and results of operations, causing a decrease in our revenues.

~~Related Party Transactions~~

BroadVision has an investment of 19.9% in Roundarch, a Customer Relationship Management, or CRM services company. We have a reseller relationship with Roundarch whereby Roundarch is an implementation partner who integrates our software products with other third-party software products into CRM customer installations. During the three months ended September 30, 2003, transactions involving Roundarch represented $17,000 of our revenue. For the nine months ended September 30, 2004 and 2003, revenues from Roundarch were $6,900 and $219,000, respectively.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We had no derivative financial instruments as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003.~~2004. We place our investments in instruments that meet high credit quality standards and the amount of credit exposure to any one issue, issuer and type of instrument is limited. Our interest rate risk related to borrowings historically has been minimal as interest expense related to adjustable rate borrowings has been immaterial for the three months ended March 31, 2005 and ~~nine-month periods ended September 30, 2004 and 2003.~~2004.

AsDuring the first quarter of ~~September 20, 2004,~~fiscal 2005, we ~~had $15.0~~drew down $20.0 million ~~outstanding~~ on our revolving line of credit. Interest is payable monthly at the bank’s prime rate with a floor minimum of 4.25% (5.75% annually as of

March 31, 2005) and principal is due in full in February ~~2005.~~2006. Additionally, we have two outstanding term loans and an equipment line of credit as of ~~September 30, 2004 totaling $1.2 million in principal.~~March 31, 2005. Interest on those ~~term~~ loans are ~~between~~at the bank’s prime rate ~~(4.75%~~(5.75% as of ~~September 30, 2004)~~March 31, 2005) and ~~the banks~~ prime rate plus 1.25%.

Cash and Cash Equivalents ~~Short-Term Investments~~

We consider all debt and equity securities with maturities of three months or less at the date of purchase to be cash equivalents. Our short-term investments consist of debt and equity securities that are classified as available-for-sale. Our debt securities are carried at fair value with related unrealized gains or losses reported as other comprehensive income (loss), net of tax.

All short-term investments have a remaining maturity of twelve months or less. Total short-term and investment unrealized gains (losses) were $49,000 and $(83,000) for the nine months ended September 30, 2004 and 2003, respectively.

Our cash, and cash equivalents, at cost, which approximates fair value, consisted of the following as of ~~September 30, 2004~~March 31, 2005 (in ~~thousands):~~thousands, unaudited)

Amortized
costs

Unrealized
gains

Unrealized
losses

Fair
value

Cash

$
49,101

$
—

$
—

$
49,101

Money market

3

—

—

3

Corporate notes/bonds

—

—

—

—

49,104

—

—

49,104

	Fair value
Cash and certificates of deposits	$	33,450
Money market	8,921
Total cash and equivalents	$	42,371

Included in the table above in cash and cash equivalents are ~~$21.0~~$2.0 million of non-current restricted ~~cash and investments.~~cash.

Our cash and cash equivalents, at cost, which approximates fair value, consisted of the following as of December 31, ~~2003~~2004 (in thousands):

Amortized
costs

Unrealized
gains

Unrealized
losses

Fair
value

Cash

$
65,592

$
—

$
—

$
65,592

Money market

32,602

—

—

32,602

Corporate notes/bonds

458

—

(49
)
409

$
98,652

$
—

$
(49
)
$
98,603

	Fair value
Cash and certificates of deposits	$	55,240
Money market	10,867
Total cash and equivalents	$	66,107

Included in the table above in cash and cash equivalents are non-current restricted cash ~~and investments~~ of ~~$19.8~~$2.3 million.

Concentrations of Credit Risk

Financial assets that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents, ~~short-term investments~~ and trade accounts receivable. We maintain our cash and cash equivalents ~~and short-term investments~~ with ~~four~~two separate financial institutions. We market and sell our products throughout the world and perform ongoing credit evaluations of our customers. We maintain reserves for potential credit losses. For the three ~~and nine month periods~~months ended ~~September 30, 2004 and 2003~~,March 31, 2005, no ~~single~~one customer accounted for more than 10% of total revenue. At ~~September 30, 2004,~~For the three months ended March 31, 2005, no one customer accounted for ~~13%~~more than 10% of accounts receivable.

Fair Value of Financial Instruments

Our financial instruments consist of cash equivalents, ~~short-term investments,~~ accounts receivable, ~~long-term investments,~~ accounts payable and debt. We do not have any derivative financial instruments. We believe the reported carrying amounts of its financial instruments approximates fair value, based upon the short maturity of cash equivalents, ~~short-term investments, long-term investments,~~ accounts receivable and payable, and based on the current rates available to it on similar debt issues.

Foreign Currency

We license our products and maintain significant operations in foreign countries. Fluctuations in the value of foreign currencies, principally the Euro, relative to the United States dollar have impacted our operating results in the past and may do so in the future. We expect that international license, maintenance

and consulting revenues will continue to account for a significant portion of our total revenues in the future. We pay the expenses of our international operations in local currencies and do not currently engage in hedging transactions with respect to such obligations.

Equity Investments

Our equity investments consist of investments in public and non-public companies that are accounted for under the cost method of accounting. Equity investments are accounted for under the cost method of accounting when we have a minority interest and do not have the ability to exercise significant influence. These investments are classified as available for sale and are carried at fair value when readily determinable market values exist or at cost when such market values do not exist. Adjustments to fair value are recorded as a component of other comprehensive income unless the investments are considered permanently impaired in which case the adjustment is recorded as a component of other income (expense), net in the condensed consolidated statement of operations.

The total fair value of our cost method long-term equity investments in public and non-public companies as of ~~September 30, 2004~~March 31, 2005 was ~~approximately $574,000.~~$338,000. There were not any “other than temporary write-down” during the three months ended March 31, 2005 related to long-term equity investments.

ITEM 4. Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended) for our company. Based on their evaluation of our disclosure controls and procedures (as defined in the rules promulgated under the Securities Exchange Act of 1934), our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of ~~September 30, 2004,~~March 31, 2005, the end of the period covered by this report.

Changes in Internal Control ~~Over~~over Financial Reporting

~~The Company is currently undergoing a comprehensive effort to ensure compliance with Section 404~~We reported three material weaknesses as of ~~the Sarbanes-Oxley Act of 2002 for the year ending~~ December 31, 2004. ~~This effort includes~~During the three-month period ended March 31, 2005, in part to remediate those weaknesses, we implemented the following changes in our internal control ~~documentation and review under the direction of senior management. During the course of these activities, the Company has identified certain~~over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control ~~issues which management believes need to be improved. The review has not identified any material weakness in internal control as defined~~over financial reporting. We:

34• reviewed with senior management and the audit committee of its board of directors the issues which led to the three material weaknesses;

• promoted an experienced member of our finance staff to the position of Director of Accounting overseeing all North American general accounting activities;

• made enhancements to account reconciliations to provide more thorough account analyses;

• established clear responsibilities among our accounting personnel and increased their formal interaction and coordination;

• increased our chief financial officer’s responsibilities for overseeing more routine accounting matters until all open positions are filled;

• strengthened controls to ensure that the director of treasury reviews cash accounts on a monthly basis for completeness;

• developed a detailed database of worldwide maintenance revenues by contract and developed key reports from that data. The reports have been designed to detect errors or omissions related to key maintenance data. Further, we have trained the revenue accounting team on how to carefully analyze the reports to ensure that inaccuracies are detected and corrected.

byWe believe the ~~Public Company Accounting Oversight Board. However,~~corrective steps described herein enable management to conclude that the ~~Company has made improvements in its~~ internal controls over our financial reporting ~~as a result of its review efforts. These improvements include~~are effective. We will continue our efforts to identify, assess and correct any additional documentation of policies and procedures, implementation of analytical review procedures, additional calendar scheduling and checklists for the preparation of consolidated financial statements and other consolidated financial information, in-depth review to determine the adequacy of the accounting organization to meet the needs of the Company, improved segregation of duties, and additional monitoring controls. Management intends to continue to review, revise, and improve ourmaterial weaknesses in internal controls ~~over financial reporting.~~that may arise.

Limitations on the Effectiveness of Controls

Section 404 of the Sarbanes-Oxley Act of 2002 requires that management document and test internal controls over financial reporting and to assert in our Annual Report on Form 10-K for the year ending December 31, 2004 whether the internal controls over financial reporting at December 31, 2004 are effective. Any material weakness in internal controls over financial reporting existing at that date will preclude management from making a positive assertion. At this time, there is some degree of uncertainty regarding whether management will be able to implement new policies and procedures to improve the internal controls over financial reporting and to sufficiently document and test the revised internal controls procedures in order to make a positive assertion as to the effectiveness of internal controls over financial reporting by December 31, 2004.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our Chief Executive Officer and the Chief Financial Officer have concluded that these controls and procedures are effective at the “reasonable assurance” level.

35PART II. OTHER INFORMATION

~~PART II. OTHER INFORMATION~~Item 1.

~~Item 1.~~	Legal Proceedings

	The Company is subject to various claims and legal actions arising from time to time in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the Company has adequate defenses for each of the claims and actions, and we do not expect their ultimate disposition to have a material effect on our business, financial condition or results of operations. Although management currently believes that the outcome of other outstanding legal proceedings, claims and litigation involving us will not have a material adverse effect on our business, results of operations or financial condition, litigation is inherently uncertain, and there can be no assurance that existing or future litigation will not have a material adverse effect on our business, results of operations or financial condition.

	Metropolitan Life Insurance Company, as landlord under a lease for facilities located in EL Segundo, CA, filed a lawsuit against the Company for breach of the lease and is seeking recovery of lost rent and other damages. Trial has been set for May 2005.

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

	~~Not applicable.~~

~~Item 3.~~	~~Defaults Upon Senior Securities~~

	~~Not applicable.~~

~~Item 4.~~	~~Submission of Matters to a Vote of Security Holders~~

	~~Not applicable.~~

~~Item 5.~~	~~Other Information~~

	~~Not applicable.~~

~~Item 6.~~	~~Exhibits~~

	~~Exhibits~~	~~Description~~

	~~3.1 (1)~~	~~Amended and Restated Certificate of Incorporation~~
	~~3.2 (2)~~	~~Certificate of Amendment of Certificate of Incorporation~~
	~~3.3 (1)~~	~~Amended and Restated Bylaws~~
	~~4.1 (1)~~	~~References are hereby made to Exhibits 3.1 to 3.2~~
	~~4.3 (1)~~	~~Seconded Amended and Restates Investor’s Rights Agreement dated April 15, 1996 among the Company and certain of its stockholders~~
	~~31.1~~	~~Certification of the Chief Executive Officer of BroadVision~~
	~~31.2~~	~~Certification of the Chief Financial Officer of BroadVision~~
	~~32.1~~	~~Certification of the Chief Executive Officer and Chief Financial Officer of BroadVision pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~

		(1) Incorporated by reference to the Company’s Registration Statement on Form S-1 filed on April 19, 1996 as amended by Amendment No. 1 filed on May 9, 1996, Amendment No. 2 filed on May 29, 1996 and Amendment No. 3 filed on June 17, 1996.

		~~(2) Incorporated by reference to the Company’s Proxy Statement filed on May 14, 2002.~~

~~SIGNATURES~~

~~Pursuant~~The Company is subject to various other claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the Company has adequate defenses for each of the claims and actions, and believes that their ultimate disposition is not expected to have a material effect on our business, financial condition or results of operations. Although management currently believes that the outcome of other outstanding legal proceedings, claims and litigation involving us will not have a material adverse effect on our business, results of operations or financial condition, litigation is inherently uncertain, and there can be no assurance that existing or future litigation will not have a material adverse effect on our business, results of operations or financial condition.

On June 10, 2004, MetLife filed a complaint in the Superior Court of the State of California, County of Los Angeles, naming the Company as a defendant. The complaint alleged that the Company was liable for unlawful detainer of premises leased from the plaintiff. The plaintiff thereafter filed a First Amended Complaint alleging that the Company no longer held possession of the premises but was in breach of the lease. In February 2005, MetLife and the Company reached agreement and executed documents regarding a settlement of the pending lawsuit under which the Company will pay MetLife an aggregate of $1.9 million in consideration for termination of the lease, dismissal of the lawsuit and in full settlement of approximately $3.1 million of past and future lease obligations. The first of three installment payments was made in February 2005, with the second due in May 2005 and the third due in September 2005.

		~~BROADVISION, INC.~~

~~Date: November 9, 2004~~	~~By:~~	~~/s/ Pehong Chen~~
		~~Pehong Chen~~
		~~Chairman of the Board, President and Chief Executive Officer~~ ~~(Principal Executive Officer)~~

~~Date: November 9, 2004~~	~~By:~~	~~/s/ William E. Meyer~~
		~~William E. Meyer~~
		~~Executive Vice President and Chief Financial Officer~~ ~~(Principal Financial and Accounting Officer)~~

federal securities laws. The SEC found that a former executive in charge of professional services who left BroadVision in 2002 was responsible for the improper accounting. The restatement concerned revenue related to one software license agreement. Following receipt of payment in full by the customer, the Company recognized revenue on that agreement in its entirety in the third quarter of 2001. The Company subsequently determined that the revenue should instead be recognized ratably over the four-year life of the agreement, and announced on April 1, 2002 that it was restating the financial statements for the third quarter of 2001 to effect this change. The Company has been accounting for the revenue ratably in all periods since the third quarter of 2001.

~~BROADVISION, INC. QUARTERLY REPORT ON FORM 10-Q SEPTEMBER 30, 2004~~Item 2. Changes in Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

~~INDEX TO EXHIBITS~~(a) Exhibits

Exhibits		Description

3.1 (1)		Amended and Restated Certificate of ~~Incorporation~~Incorporation.
3.2 (2)		Certificate of Amendment of Certificate of ~~Incorporation~~Incorporation.
3.3 ~~(1)~~(3)		Amended and Restated ~~Bylaws~~Bylaws.
4.1 (1)		References are hereby made to Exhibits 3.1 to ~~3.2~~3.2.
~~4.3 (1)~~4.5 (4)		~~Seconded~~ Amended and ~~Restates Investor’s~~Restated Registration Rights Agreement dated April ~~15, 1996~~5, 2005, among the Company and certain ~~of its stockholders~~investors listed on Exhibit A thereto.
4.6		Amendment to Amended and Restated Registration Rights Agreement dated May 9, 2005
31.1		Certification of the Chief Executive Officer of ~~BroadVision~~BroadVision.
31.2		Certification of the Chief Financial Officer of ~~BroadVision~~BroadVision.
32.1		Certification of the Chief Executive Officer and Chief Financial Officer of BroadVision pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) Incorporated by reference to the Company’s Registration Statement on Form S-1 filed on April 19, 1996 as amended by Amendment No. 1 filed on May 9, 1996, Amendment No. 2 filed on May 29, 1996 and Amendment No. 3 filed on June 17, 1996.

(2) Incorporated by reference to the Company’s Proxy Statement filed on May 14, 2002.

(3) Incorporated by reference to the Company’s Form 10-Q for the quarter ended March 31, 2004 filed on May 10, 2004.

(4) Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 6, 2005.

SIGNATURES

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

		BROADVISION, INC.

Date: May 10, 2005	By:	/s/ Pehong Chen
		Pehong Chen
		Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)

Date: May 10, 2005	By:	/s/ William E. Meyer
		William E. Meyer

Sublease income to be received under non-cancelable sublease agreements signed prior to September 30, 2004	$	4.4
Estimated sublease income for sublease agreements yet to be negotiated	2.8
Total estimated sublease income	$	7.2

	Accrued restructuring costs at Jun. 30, 2004		Amounts charged to restructuring costs and other			Amounts paid or written off			Accrued restructuring costs at Sep. 30, 2004
Three months ended September 30, 2004
Lease cancellations and commitments	$	12,394	$	9,643		$	(340	)	$	21,697
Termination payments to employees and related costs	164		582			(175		)	571
Write-off on disposal of assets and related costs	9,289		(1,193		)	(8,096		)	—
	$	21,847	$	9,032		$	(8,611	)	$	22,268

	Accrued restructuring costs at June 30, 2003		Amounts charged to restructuring costs and other		Amounts reversed to restructuring costs and other		Amounts paid or written off			Accrued restructuring costs at September 30, 2003
Three months ended September 30, 2003
Lease cancellations and commitments	$	89,216	$	3,269	$	—	$	(5,335	)	$	87,150
Termination payments to employees and related costs	1,000		1,240		—		(979		)	1,261
Write-off on disposal of assets and related costs	40		—		—		(40		)	—
	$	90,256	$	4,509	$	—	$	(6,354	)	$	88,411

	Total		Less than 1 year		1-3 years		4-5 years		Over 5 years
	(in millions)

Letters of credit	$	21.0	$	19.2	$	—	$	0.8	$	1.0
Long-term debt	1.3		0.7		0.6		—		—
SVB Facility	15.0		15.0		—		—		—
Non-cancelable operating leases	22.8		11.4		10.0		1.4		—
	$	60.1	$	46.3	$	10.6	$	2.2	$	1.0

	Amortized costs		Unrealized gains		Unrealized losses		Fair value
Cash	$	49,101	$	—	$	—	$	49,101
Money market	3		—		—		3
Corporate notes/bonds	—		—		—		—
	49,104		—		—		49,104